Sri Lanka’s next phase of debt restructuring hinges not only on technical completion but on the successful implementation of newly issued performance-linked sovereign bonds an ambitious financial instrument tied directly to macroeconomic and governance benchmarks under the International Monetary Fund (IMF) programme.
Treasury Secretary Dr. Harshana Suriyapperuma has assured International Sovereign Bond (ISB) holders that the Government will strictly adhere to IMF targets under its 17th programme. Yet, beneath these assurances lie significant structural and operational challenges that could test the credibility of the reform process.
The newly issued Macro-Linked Bonds (MLBs) and Governance-Linked Bonds introduce performance triggers tied to debt-to-GDP ratios, revenue mobilisation and fiscal benchmarks. While baseline projections already assume activation of the first MLB threshold, sustaining compliance through 2032 when debt is targeted to fall to 95% of GDP requires consistent primary surpluses and controlled gross financing needs.
One major obstacle is revenue generation. Although fiscal consolidation has improved markedly since the 2022 crisis, maintaining surplus levels depends heavily on strengthened tax administration, VAT reforms and politically sensitive revenue adjustments scheduled for 2027. Any slippage could activate higher coupon payments on governance-linked instruments beginning in 2028, increasing debt servicing costs.
State-owned enterprise reform remains another critical vulnerability. The unbundling of the Ceylon Electricity Board (CEB) into five entities is a core IMF benchmark aimed at improving governance and eliminating quasi-fiscal losses through cost-reflective pricing. However, electricity tariff adjustments have historically triggered public resistance, creating political risk that could delay reform timelines.
External risks further complicate implementation. Cyclone Ditwah, which caused an estimated $4.1 billion in damage, underscores climate-related fiscal exposure. While recovery costs have been integrated into the 2026 Budget transparently, reconstruction spending could strain fiscal discipline if revenue underperforms.
On the legal front, unresolved litigation with holdout creditor Hamilton Reserve Bank introduces uncertainty, even though 98% of ISB holders accepted the exchange. Court outcomes could influence investor confidence in the new bond structure.
Despite these challenges, over 92% of Sri Lanka’s external debt has been restructured, and agreements cover nearly 99% of total exposure. Credit rating upgrades to CCC+ and resumed multilateral disbursements signal restored credibility—but only conditional on continued reform momentum.
The issuance of these new bonds marks a turning point: success depends less on negotiation and more on disciplined execution over the next decade.
