By: Staff Writer
September 30, Colombo (LNW): Sri Lanka’s debt restructuring may be nearing completion, but the International Monetary Fund (IMF) has warned that the country’s recovery remains fragile without strict fiscal discipline and stronger public finance institutions.
A September 2025 IMF working paper titled “Sri Lanka’s Sovereign Debt Restructuring: Lessons from Complex Processes” paints a mixed picture one of cautious optimism shadowed by risks of relapse if fiscal management falters.
The paper highlights significant progress since Sri Lanka’s historic 2022 default. International bond spreads have narrowed to post-restructuring levels, and credit rating agencies have begun upgrading sovereign ratings.
Treasury Bill yields, which hovered above 20% during the crisis, have now fallen to around 8.5% by March 2025 and as of 28 August 2025, the 91-day Treasury Bill yield stood at 7.58 % and the 182-day Bill yield was 7.89 % . The government has shifted toward longer-term Treasury Bonds, easing short-term refinancing risks. Meanwhile, private credit has started to expand, signaling a gradual revival in confidence.
These gains, the IMF notes, stem largely from the combination of debt restructuring, improved monetary stability, and the introduction of fiscal laws such as the Public Finance Management Act and the Public Debt Management Act.
Together, these are intended to impose greater accountability and transparency in government spending. Yet the IMF cautions that “there is no room for slippage on the fiscal front,” urging policymakers to resist populist pressures as elections loom and growth remains subdued.
However, the IMF’s insistence on tight fiscal rules comes with economic trade-offs. For a country still grappling with fragile growth and recovering livelihoods, fiscal consolidation can weigh heavily on domestic demand.
According to the latest fiscal position report by the Ministry of Finance, the 2025 budget targets a deficit of about 6.7% of GDP looser than IMF recommendations but still challenging amid slowing revenue growth. Moody’s has warned that this slower pace of consolidation could limit investor confidence, while the IMF itself notes that 80% of expected revenue gains hinge on a single new measure leaving the fiscal plan vulnerable if collections fall short.
The Fund’s report also acknowledges that institution building will be a long, uncertain process. While legislation has been passed, the capacity of public agencies to conduct independent audits, cost-risk analyses, and transparent procurement remains limited. “Restructuring alone will not guarantee stability,” the paper stresses, calling for lasting reforms that embed fiscal prudence in day-to-day governance.
Early 2025 data suggests some stabilization, with the Central Bank’s February report noting a unified policy rate of 8% to support normalization. Yet growth remains modest, and any external shock such as a spike in oil prices or global financial tightening could upend fiscal forecasts. The IMF’s rigid conditions leave limited flexibility for countercyclical spending, which could be crucial if the economy faces renewed headwinds.
Negotiations with creditors also revealed structural weaknesses in coordination and transparency. Disputes over comparability of treatment and the design of state-contingent instruments delayed agreements, underscoring the complexity of Sri Lanka’s debt mix. While the domestic debt operation launched in 2023 helped ease immediate pressures, the IMF warns that sustaining debt sustainability will require consistent policy execution over several years.
In essence, Sri Lanka’s recovery under the IMF program rests on a delicate balance. The Fund’s directives have stabilized markets, lowered yields, and anchored expectations, but the price has been a loss of policy flexibility. With fiscal room tightening and growth still fragile, the challenge for Colombo is to prove that discipline need not mean austerity.
If the government can pair IMF-backed reforms with credible institution building, Sri Lanka may finally exit its cycle of boom and bust. But if revenue projections falter or fiscal discipline weakens, the very rules designed to save the economy could end up constraining its ability to grow
