The Sri Lankan Economy: The Sovereign Debt Crisis, IMF-Supported Stabilization, and Beyond

Abstract

This paper contributes to the international policy discourse on sovereign debt crises and IMF-supported stabilization reforms in emerging market and developing economies in the post-COVID-19 era through a case study of Sri Lanka. It examines the origins of Sri Lanka’s unprecedented sovereign debt crisis in the aftermath of the pandemic, the process of economic stabilization under the IMF’s Extended Fund Facility (EFF) programme, and the development challenges facing the country beyond the crisis. Sri Lanka’s stabilization performance under the EFF programme has so far been encouraging. However, the evidence presented in this paper suggests that the programme is likely to conclude with a substantial debt overhung and persistent external payments pressures. Achieving sustained and equitable growth while carrying this heavy debt burden will remain a formidable development challenge. Placing the economy on a self-sustaining growth path beyond the stabilization phase requires complementing the standard IMF approach to macroeconomic stabilization with coherent structural reforms that address the fundamental imbalances underlying the economy’s vulnerability to external shocks. Show more