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Paying with Austerity: The Debt Crisis and Restructuring in Sri Lanka

Debt Crisis and Austerity in Sri Lanka

In May 2022, Sri Lanka defaulted on its external debt service commitments. This was the first instance in two decades of an Asian-Pacific economy defaulting on its debt. PERI researchers C.P. Chandrasekhar, Jayati Ghosh, and Debamanyu Das examine both the medium- and short-term factors leading to this debt crisis. These include the IMF-dictated embrace of liberalization policies starting in the late 1970s and the collapse of foreign exchange resulting from the global COVID lockdown. Chandrasekhar, Ghosh, and Das explore policy alternatives that would be less regressive and ensure sustainable development for Sri Lanka.


On April 12, 2022, Sri Lanka defaulted on external debt service commitments. Announcing the “pre-emptive default,” pending restructuring, the government also announced that it was suspending repayments due in 2022 on its external debt. By May, Sri Lanka was formally in default, becoming the first country in the Asia-Pacific region to default on debt in two decades. There were medium-term factors that underlay the crisis, not least of which was the chronic dependence on foreign finance, especially debt, to cover widening current account deficits that followed the IMF-inspired and dictated embrace of liberalization policies starting in the late 1970s. In recent years, following the global financial crisis and the end of the civil war in 2009, this dependence on external borrowings intensified. There was also a dramatic shift towards bilaterally, besides multilaterally, financed investment projects and increasing reliance on the bond market, partly to meet debt service commitments on accumulated debt. Given this vulnerability, a crisis was precipitated by a collapse in foreign exchange receipts during the Covid pandemic, due to falling exports, near-zero tourist arrivals and reduced remittances and the subsequent spike in the outflow of foreign exchange because of the speculation-induced rise in the prices of fuel and food. This paper details the events which culminated in the Sri Lankan debt crisis, assesses the appropriateness of the official, IMF-prescribed strategy of adjustment and debt restructuring, considers the experience with restructuring thus far, and explores alternatives that would have been, and could still be, less regressive and ensure sustainable development.

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