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

By: Staff Writer

September 30, Colombo (LNW): Sri Lanka’s natural rubber sector, a key foreign exchange earner and rural employer, is facing what industry leaders call an “existential threat” following the government’s decision to abolish the Simplified Value Added Tax (SVAT) scheme from 1 October.

The Colombo Rubber Traders’ Association (CRTA) has warned that the move made without a fully tested refund mechanism could unleash severe cash flow shocks across the supply chain, crippling exporters, manufacturers, and tens of thousands of smallholder farmers.

According to CRTA Chairman Harin de Silva, removing the SVAT at this stage will “plunge the entire value chain into chaos,” as manufacturers and exporters will be required to pay VAT upfront on all transactions.

This, he said, would block billions of rupees in working capital that firms currently rely on to purchase raw rubber and sustain production. For smallholders, who depend on steady farm-gate demand, the impact could be immediate with reduced purchasing power pushing prices sharply down.

Sri Lanka’s natural rubber industry is already struggling. Data from the Rubber Research Institute show that total natural rubber production fell by nearly 10% year-on-year in the first half of 2025, reflecting erratic weather and declining replanting.

Meanwhile, export earnings from rubber and rubber-based products slipped by around 8% to USD 680 million between January and August 2025, according to the Central Bank’s external sector statistics.

Analysts warn that additional policy shocks could accelerate this downturn, threatening rural employment and foreign exchange inflows at a time when the economy is still under IMF supervision.

Small and Medium Enterprises (SMEs) in the rubber supply chain which handle latex processing, crepe production, and component manufacturing face the gravest risk. Many operate on thin cash margins and lack access to affordable credit.

The upfront VAT requirement, without a fast and reliable refund process, could leave them unable to meet payroll or purchase inputs. “If these SMEs collapse, it will destroy decades of local value-chain development,” de Silva cautioned, warning that the ripple effects could reach exporters and rural producers alike.

Export manufacturers, too, are voicing alarm. Already burdened by high energy costs and weakening global demand, rubber product exporters say tying up liquidity in VAT refunds potentially delayed beyond the Inland Revenue Department’s promised 45 days could cripple operations.

“Many companies simply cannot afford to have their cash blocked for more than a month,” de Silva noted. “This will force them to scale back production, delay payments, or even import raw materials, undermining local suppliers.”

Although the government has pledged a risk-based digital refund system, the CRTA points out that crucial elements such as e-invoicing and real-time verification remain incomplete. Without these, refund processing will likely lag, compounding cash-flow distress.

Industry experts argue that the government’s fiscal reforms, though aimed at improving transparency and revenue collection, risk backfiring if implemented prematurely. Rubber exports, once a cornerstone of Sri Lanka’s post-independence trade now stand at a critical crossroads.

The CRTA, along with other export chambers, has called for the SVAT phase-out to be deferred until a fully functional digital refund mechanism is operational, warning that hasty execution could reverse the fragile recovery in one of Sri Lanka’s most vital export sectors.

By: Staff Writer

September 30, Colombo (LNW): Sri Lanka and Japan have agreed to strengthen and expand their partnership across economic, security, and development fronts during President Anura Kumara Dissanayake’s official visit to Tokyo. The discussions took place on Sunday (29) with Japanese Prime Minister Ishiba Shigeru, marking a key milestone in bilateral relations under the Comprehensive Partnership framework.

Both leaders reaffirmed their commitment to closer collaboration in investment, infrastructure development, and regional stability. Prime Minister Ishiba commended Sri Lanka’s economic recovery under the International Monetary Fund (IMF) program and the progress made in debt restructuring. He pledged Japan’s continued support for Colombo’s reform agenda and fiscal stabilization efforts.

President Dissanayake expressed gratitude to Japan for its leadership as Co-Chair of the Official Creditor Committee (OCC), highlighting Tokyo’s early role in signing a bilateral debt restructuring deal in March 2025 the first among OCC members. The leaders emphasized that completing debt restructuring and maintaining reform momentum would help restore investor confidence and ensure sustainable growth.

The President also welcomed Japan’s decision to resume 11 previously signed yen loan projects in 2024, ahead of other creditors. Both sides noted the importance of steadily implementing major infrastructure projects, including the second phase of the Bandaranaike International Airport expansion, which aims to boost connectivity and tourism. They also underscored the significance of improving power transmission networks and advancing digital terrestrial television broadcasting under Japan’s financing.

Prime Minister Ishiba reiterated Japan’s commitment to supporting Sri Lanka’s anti-corruption drive and assisting post-conflict rehabilitation, particularly in the Northern and Eastern Provinces. The two leaders also discussed broader regional and global issues, reaffirming their shared vision for a “Free and Open Indo-Pacific” and a rules-based international order.

They further agreed on the importance of multilateralism, democracy, and transparent lending practices that safeguard debt sustainability. The discussions reflected growing alignment between Tokyo and Colombo on strategic and economic priorities amid shifting geopolitical dynamics in Asia.

President Dissanayake conveyed his sincere appreciation for Japan’s longstanding partnership and the warm hospitality extended during his visit. The meeting marked a renewed phase in Sri Lanka–Japan relations, underscoring mutual commitment to economic revival, regional cooperation, and sustainable development