The sovereign debt crisis in Sri Lanka: Anatomy and policy options
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During the Covid-19 pandemic, there has been a dramatic increase in national debt levels across the entire world, with reported cases of downgrading sovereign debt ratings and difficulty of fulfilling debt obligations (‘debt distress’) heavily concentrated in low and middle-income countries. In this context, the unfolding sovereign debt crisis in Sri Lanka has attracted worldwide attention as the canary in the coal mine for what could become a global ‘development’ crisis. This paper examines the Sri Lankan crisis encompassing both the sources of vulnerability to the Covid-19 shock, and debt structuring and stabilisation reforms after the debt default. When the Covid-19 shock triggered the crisis, the Sri Lankan government treated it as a simple balance- of-payments disturbance that would dissipate together with the pandemic, while ignoring the systemic ‘solvency’ challenge of dealing with the massive debt overhang evolved over the previous two decades. Timely action with IMF support to restructure debts and stabilise the economy could have avoided an ugly default and stabilise the economy a lower economic and socio-political damage.
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