Sri Lanka must urgently accelerate reforms in its land, labour, and capital markets the three critical factor markets that drive investment while maintaining fiscal discipline to curb domestic debt growth, University of Peradeniya Economics Professor Wasantha Athukorala said this week.
Commenting through the Department of Government Communication, Prof. Athukorala noted that improved fiscal management has helped stabilise the country’s borrowing trajectory after years of excessive debt expansion. “The increase in total public debt since January 2025 has been minimal, showing signs of stabilisation,” he said.
As of June 2025, Sri Lanka’s total public debt stood at Rs. 29,634 billion, comprising Rs. 18,806 billion in domestic debt and Rs. 10,800 billion in external debt. However, he cautioned that comparing domestic and external debt in the same currency terms often leads to misleading conclusions. “Either both must be expressed in rupees or both in foreign currency. Mixing the two distorts the real picture due to exchange rate effects,” he explained.
Prof. Athukorala pointed out that domestic debt growth, which had previously risen at alarming rates, has now slowed significantly. Between 2019 and 2024, domestic borrowing surged by more than Rs. 100 billion per month on average, peaking at Rs. 327 billion per month in 2022. “In contrast, during the first six months of 2025, monthly growth has moderated to about Rs. 49–50 billion a welcome trend,” he added.
Domestic debt expanded by nearly Rs. 4 trillion in 2022 and Rs. 2 trillion in 2023, before slowing to Rs. 1.25 trillion in 2024. By mid-2025, it had increased by only Rs. 296 billion. “This must come down further,” he urged, warning that unchecked domestic borrowing could increase the future tax burden and destabilise the economy.
Since Sri Lanka’s 2022 debt default, access to international capital markets remains closed, forcing the government to rely on multilateral and limited bilateral lending. Prof. Athukorala said maintaining restraint on domestic debt and disciplined external borrowing could pave the way for greater macroeconomic stability.
Turning to investment, he observed that foreign direct investment (FDI) inflows have consistently fallen short, barely reaching US$ 1 billion annually. He attributed this weakness to structural inefficiencies in the land, labour, and capital markets, and Sri Lanka’s poor performance in global ease-of-doing-business rankings.
Nonetheless, recent trends show promise. Between January and August 2025, the Board of Investment (BOI) approved 81 projects worth US$ 861 million, expected to create over 20,000 jobs. Of these, 57% were in manufacturing, 14% in construction, 9% in garment manufacturing, and 4% in the knowledge economy. India accounted for 55% of FDI approvals, followed by Singapore (27%), China (10%), and the United States.
“If this momentum continues, Sri Lanka’s FDI inflows could exceed US$ 1 billion in 2025,” Prof. Athukorala said. However, he emphasised that this remains inadequate for sustainable growth. “Over the next five years, the country should target annual FDI of around US$ 5 billion, particularly in emerging technologies and IT. The Government must act swiftly to remove barriers and attract quality investments,” he stressed.
