By: Staff Writer
March 22, Colombo (LNW): Sri Lanka’s fragile economic recovery is facing renewed test as global instability particularly tensions in the Middle East threatens to expose deep structural weaknesses in the country’s financial system.
According to W. A. Wijewardena, the island nation is entering a dangerously vulnerable phase where debt sustainability, interest rate pressures, and growth prospects are increasingly tied to forces beyond its control.
At the core of this concern lies Sri Lanka’s continued reliance on borrowing. The Government’s fiscal model depends heavily on rolling over existing debt while securing fresh financing to meet obligations.
Wijewardena likens this to a household surviving on a revolving credit card functional in the short term, but risky if lenders lose confidence. If refinancing avenues tighten, the consequences could be immediate and severe.
This risk is amplified by global uncertainty. The ongoing Middle East crisis has the potential to disrupt financial markets, tighten liquidity, and push up global interest rates. For Sri Lanka, which is still rebuilding after its recent economic collapse, such shifts could significantly raise borrowing costs and restrict access to external funding.
Although the Government currently manages to service interest payments through its revenue, the real challenge lies in refinancing maturing debt. That process depends not only on domestic liquidity but also on foreign investor appetite—both of which can shift rapidly under global stress.
Complicating matters further is the role of the Central Bank of Sri Lanka. With inflation recently falling to near zero after peaking at crisis levels in 2023, the Central Bank has enjoyed a period of relatively low interest rates. However, Wijewardena warns that this “honeymoon” may soon end. External shocks—such as rising oil prices—could push inflation upward, forcing the Central Bank to tighten monetary policy.
Higher interest rates would directly impact Government borrowing costs, undermining fiscal stability. At the same time, limited fiscal space restricts the Government’s ability to respond with expansionary policies, weakening coordination between monetary and fiscal strategies.
The broader issue is stagflation a scenario where economic growth slows while inflation rises. Such a combination would have serious social consequences, including higher unemployment and worsening poverty levels. Supply-side disruptions, particularly in essential imports, could further strain production and consumption.
Exchange rate pressures are also expected to intensify. With foreign inflows uncertain and inflation risks rising, the Sri Lankan rupee is likely to depreciate in the coming months. This would increase the cost of imports, widen trade deficits, and place additional strain on both fiscal and external accounts.
Ultimately, Sri Lanka faces a dual challenge: managing its immediate financing needs while navigating an increasingly hostile global environment. As Wijewardena emphasizes, the margin for policy error is крайне narrow. In a system so dependent on external borrowing, even small shocks can have outsized consequences leaving the economy exposed at a critical moment.