Business

Sri Lanka’s macroeconomic policy setting: Cohesion or confusion?

Published

5 years ago

2021/08/31

By Dushni Weerakoon

The hike in policy interest rates by the Central Bank of Sri Lanka (CBSL) in August 2021 marks a shift from stimulus to exit strategies in the pandemic era. Such recalibrations globally are focused on how to tackle the historically large debt-to-GDP ratios that the COVID-19 pandemic leaves in its wake. At end 2020, advanced economies (AEs) on average had amassed debt to the tune of 120% of their GDP with emerging markets economies (EMEs) trailing some distance at 65% of GDP. As the spotlight moves, the full impacts of the macroeconomic policy measures, hitherto obscured by the urgency to deal with the health crisis, are now coming under greater scrutiny.

Sri Lanka’s debt metrics make an orderly exit more difficult

Many countries, especially AEs, exercised their ‘monetary sovereignty’ to create and print their own money to support stimulus efforts. They have done so through coordinated monetary/fiscal policies – i.e. using monetary policy to keeping borrowing costs low while fiscal authorities provide back-stop assurance. Some are better positioned to manage the inherent risks and conflicts of interest that are involved in this exercise. AEs have an advantage as issuers of reserve currencies with global demand and historically low interest rates; EMEs with limited exposure to foreign currency-denominated debt and holding comfortable stockpiles of reserves are less exposed to disruptive tail events.

Such countries can bring down their debt ratios if they are able to maintain nominal GDP growth persistently above the average interest rates that they pay on their debt – i.e. the growth-corrected interest rate (r-g) whereby countries can run modest primary deficits and still have a stable or falling debt-to-GDP ratio.

Sri Lanka is not similarly positioned. Its debt metrics point to high vulnerabilities – a high debt-to-GDP ratio of 101% of GDP, large exposure to foreign currency-denominated debt, and a hefty foreign debt repayment schedule. Under these conditions, the threat from exercising monetary sovereignty was always self-evident. A depreciating currency, notwithstanding distortionary controls on imports and capital flows, worsens the debt vulnerabilities.

Domestic and foreign debts are hardly similar. Given Sri Lanka’s debt metrics and the fundamental economic imbalances that have generated them, simple accounting identities do not always offer very plausible solutions. If the exchange rate depreciates, it adds to the real value of outstanding debt, relative to the size of the economy, even if interest rates remain modest. Further, shocks like COVID-19 raise risk premia, and marginal borrowing costs can rise suddenly and sharply, cutting countries abruptly out of financial markets.

Crucial to instill and retain macroeconomic policy credibility

Short of distortionary measures such as inflating debt away or maintaining an overvalued currency, a primary surplus is needed to stop the public debt-to-GDP ratio from rising and an even larger surplus is needed to reduce it. Improving the primary budget balance calls for tax increases or public spending cuts that are unpopular and have upfront costs. Given the government’s unwillingness to go down this path, households and firms will be required instead to bear the cost through higher interest rates that will affect their consumption and investments.

Higher interest rates in this instance will also not ‘pull in’ foreign capital to firm up the exchange rate given the risk premia on the currency front as depreciating pressure deepens. With reserves in hand to cover barely two months of imports, the forex market will continue to face volatility and instability until a steady stream of capital inflows, beyond short-term swaps, emerge. Until such time, a depreciating domestic currency will increase the interest burden as calculated in that currency. If debt servicing interest rate costs are pushed persistently above the economic growth rate, Sri Lanka’s debt burden will grow steadily even in the absence of new borrowing – a context sometimes called a ‘debt spiral’.

Without a clearly spelt-out debt sustainability path, Sri Lanka seems to be placing all its bets on foreign direct investment (FDI) to ease external pressures and revive economic growth. For a successful outcome – i.e. productivity gains to drive long-term growth – the type of FDI matters. The more desirable is efficiency-seeking FDI, but this is also harder to attract. For now, a policy environment of import curbs and capital controls is more likely to see strategic-seeking infrastructure-led FDI. The latter runs the risk of switching resources to non-tradable sectors – reducing the availability of external financing over the longer term – and the prospect of a short-lived growth burst as before in the post-war years. Crucially too, the sole reliance on FDI leaves Sri Lanka at the mercy of developments beyond its control.

Rather, efforts to attract FDI should be coupled with building effective policy strategies that instill and maintain credibility. Indeed, this is all the more important as Sri Lanka appears to be firmly against an International Monetary Fund (IMF) bailout. IMF loan amounts are small and it no longer has much sway on debt relief with much of EME foreign debt held by private institutional investors and China. An IMF programme is mostly useful in firming up sovereign credit ratings and reviving the sentiments of investors. But investor sentiments can also improve if governments put forward and implement credible policy strategies. By contrast, the CBSL’s policy rate adjustment to anchor expectations, for instance, will not stick if direct financing of fiscal spending is to continue under yield control measures. Instead, market convictions on the credibility of the policy mix will drive economic fundamentals. As Sri Lanka readies to transition out of pandemic-related emergency support, some notion of fiscal and debt sustainability to anchor confidence should be the priority in Budget 2022 preparations.

* This blog is based on the comprehensive chapter on “Economic Performance and Outlook: Managing the Crisis and Promoting Recovery” in IPS’ forthcoming annual flagship publication ‘Sri Lanka: The State of Economy 2021’

Link to blog: https://www.ips.lk/talkingeconomics/2021/08/30/sri-lankas-macroeconomic-policy-setting-cohesion-or-confusion/

Dushni Weerakoon is the Executive Director of the Institute of Policy Studies of Sri Lanka (IPS) and Head of its Macroeconomic Policy research. She joined IPS in 1994 after obtaining her PhD, and has written and published widely on macroeconomic policy, regional trade integration and international economics. She has extensive experience working in policy development committees and official delegations of the Government of Sri Lanka. Dushni Weerakoon holds a BSc in Economics with First Class Honours from the Queen’s University of Belfast, U.K., and an MA and PhD in Economics from the University of Manchester, U.K.

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Business

Sri Lanka eyes India grid link as ADB pushes Pan-Asia energy integration

Published

7 hours ago

2026/05/6

Sahan Weerasooriya

Priyantha Wijayatunga speaks at the Samarkand Energy Forum of the ADB.

Sri Lanka’s long-discussed electricity grid connection with India is gaining renewed momentum, as the Asian Development Bank (ADB) intensifies efforts to promote cross-border energy integration across the region.

At the ADB Annual Meetings in Samarkand, Senior Director for Energy, Priyantha Wijayatunga, identified the proposed India–Sri Lanka grid interconnection as the most promising avenue to strengthen the island’s power sector. The concept dates back to the 1970s, when Sri Lanka, following the completion of the Mahaweli Development Project, even explored the possibility of exporting electricity. However, rapid economic growth and rising domestic demand shifted the country toward energy imports.

Today, with energy security and cost pressures mounting, the idea has regained urgency. “The time is right,” Wijayatunga said, stressing that political will and financing will be decisive. While undersea transmission cables make the link technically viable, costs remain a major challenge. The ADB, he confirmed, stands ready to support Sri Lanka as a development partner in advancing the project.

Sri Lanka’s prospects are closely tied to a broader regional vision being advanced by the ADB through its Pan-Asia Power Grid Initiative (PAGI). The initiative aims to transform how energy is produced, shared, and consumed across Asia and the Pacific by promoting cross-border electricity trade and grid connectivity.

PAGI is designed not merely as a collection of projects, but as a systems-level integration platform that connects national grids into subregional and eventually continent-wide networks. Its core objectives include bridging energy gaps, enhancing energy security, integrating large-scale renewable energy, and strengthening resilience across interconnected systems.

A key pillar of PAGI is leveraging the region’s resource complementarity. Countries in South Asia, for instance, possess uneven but highly complementary energy resources—hydropower in Nepal and Bhutan, and solar and wind potential in India. By linking grids, countries like Sri Lanka could tap into these diverse energy sources, reducing dependence on costly fossil fuel imports while improving reliability.

ADB estimates suggest that deeper regional power trade in South Asia could yield substantial economic benefits, including lower system costs and more efficient energy distribution. The initiative also envisions mobilizing up to $50 billion in investments by 2035, expanding transmission infrastructure, and improving electricity access for millions.

For Sri Lanka, integration into such a regional grid could be transformative. A connection with India would allow the country to import affordable electricity during shortages, stabilize supply, and support its transition toward cleaner energy. It could also open the door to future participation in a wider South Asian power market.

With feasibility studies and policy discussions already underway, and with ADB backing firmly in place, Sri Lanka’s long-envisioned grid connection with India now appears more achievable than ever.

As the Samarkand meetings underscore the urgency of regional cooperation in an increasingly uncertain energy landscape, Sri Lanka stands at the threshold of a new chapter—one where energy security is strengthened not in isolation, but through connection.

by Sanath Nanayakkare in Samarkand, Uzbekistan

Business

Oceans in crisis: Sri Lanka hosts ‘Sharks International 2026’ amid stark warnings

Published

7 hours ago

2026/05/6

Sahan Weerasooriya

Sri Lanka this week finds itself at the centre of a deepening global ocean crisis, as leading scientists, policymakers and conservationists gather in Colombo for Sharks International 2026—a high-profile summit unfolding against mounting evidence that the world is rapidly losing control of its marine ecosystems.

The conference, now underway at the Bandaranaike Memorial International Conference Hall, marks the first time the prestigious forum has been hosted in Sri Lanka. But beneath the diplomatic language and scientific exchanges lies a far more urgent reality: the collapse of shark and ray populations is no longer a distant environmental concern—it is an unfolding economic and food security emergency.

More than 100 million sharks and rays are being wiped out globally each year, largely due to overfishing and illegal, unreported and unregulated (IUU) fishing. In Sri Lanka, the situation is particularly acute. Of the 105 species recorded in local waters, nearly 70 are now threatened with extinction, a statistic that scientists warn should set off alarm bells far beyond conservation circles.

Deputy Minister of Environment Anton Jayakody did not mince words when addressing the gathering, framing the issue not just as an ecological tragedy but as a looming economic shock.

“This is not just about saving species. It is about protecting the foundation of our fisheries, our food systems, and the livelihoods of thousands of Sri Lankans. If shark and ray populations collapse, the consequences will ripple through the entire marine economy,” he said.

Sharks and rays sit at the top of the ocean food chain. Their disappearance disrupts the delicate balance of marine ecosystems, triggering cascading effects that can decimate commercially valuable fish stocks. For a country like Sri Lanka—where coastal communities depend heavily on fisheries—this is not an abstract threat but a direct challenge to economic stability.

Yet despite years of warnings, critics argue that global action has been dangerously slow, fragmented, and often undermined by competing commercial interests.

By Ifham Nizam

Business

SriLankan Airlines leads with two category wins in South Asia at PAX Awards

Published

7 hours ago

2026/05/6

Sahan Weerasooriya

SriLankan Airlines led with two wins in the Airline Award category for South Asia, securing both Best Overall Passenger Experience and Most Improved Airline at the PAX International Readership Awards 2026 held recently in Hamburg, Germany. The awards celebrate the industry’s best and brightest, with winners determined by votes from PAX’s global readership.

The Best Overall Passenger Experience – South Asia award recognises an airline that delivers an exceptional onboard experience to passengers across multiple service areas, including meal service, inflight entertainment and seating. At SriLankan Airlines, this entails meticulous planning at every stage of the passenger journey, supported by collaboration among multiple teams and continuous monitoring and refinement.

Maria Sathasivam, Manager Product Development of SriLankan Airlines, commented on the achievement, stating, “we are incredibly honoured to receive yet another independent endorsement of the service we deliver. Every interaction matters to us, and we are committed to consistently meeting and exceeding passenger expectations, and it is truly rewarding to see these efforts recognised.”

SriLankan Airlines continues to enhance the end-to-end travel experience, from booking through to arrival. Ongoing digital upgrades, including improvements to the airline’s website and app, are designed to deliver a more intuitive and seamless customer experience, supported by AI-driven features and expanded ancillary offerings. At its hub, the Bandaranaike International Airport in Colombo, the airline has also expanded self-check-in and bag drop facilities for added convenience.