Features
A Pathfinder Perspective: Sri Lanka no choice but to Restructure External Debt

Has the time come to consider seriously the merits of restructuring the government’s external debt obligations? The Sri Lankan authorities have indicated that they are in the process of negotiating inflows to meet the country’s immediate foreign exchange requirements. However, there is considerable uncertainty as to whether there would be sufficient inflows to meet the acute dollar illiquidity over the medium-term.
Companies and even families, restructure their debt when foreseeable future earnings become insufficient to repay debts, while maintaining their financial viability. The same applies to countries. Over the years, a number of countries have restructured their debt and the pandemic is pushing others to follow suit. Has Sri Lanka reached that point when it would be advantageous to restructure its external debt? What are the costs and benefits of doing so? If debt restructuring is a credible option, how one would go about it?
Should Sri Lanka restructure its external debt?
Foreign revenues in the next couple of years are extremely unlikely to be suffucuent to service external debt obligations, while supporting the essential foreign exchange (Forex) requirements of the economy. Known external debt repayments amount to USD26 billion over the next five years. It is unrealistic to expect to repay about USD 5 billion per year, particularly in the next 12-24 months, when foreign inflows are unlikely to increase on the scale necessary to service debt and finance imports necessary to meet essential needs and support the growth of the economy, particularly as the downgrading of Sri Lanka’s sovereign rating has excluded it from international capital markets. Countries protect access to these markets scrupulously to have the capacity to roll-over debt and avoid such a predicament.
It is noteworthy that the following Business Chambers have jointly issued a statement highlighting the severe problems being faced by their members due to the acute shortage of Forex which has been caused primarily by the combination of the loss of tourism earnings and access to international capital markets: Ceylon Chamber of Commerce, FCCISL, Ceylon National Chamber of Industries, The National Chamber of Commerce of Sri Lanka, The Women’s Chamber of Industry and Commerce, Chamber of Young Lankan Entrepreneurs, The International Chamber of Commerce Sri Lanka, National Chamber of Exporters and the Chamber of the Construction Industry.
Collectively, these Chambers represent almost all sectors of the economy. Their concerns cannot be addressed while there is a diversion of large amounts of Forex from markets to the Central Bank of Sri Lanka (CBSL) to service external debt. As a result, there is now a strong case for considering debt restructuring to release foreign exchange to meet the needs of businesses and acquire the essential needs of the people, e.g., food, fuel and pharmaceuticals.
The costs and benefits of external debt restructuring.
The most significant disadvantage of restructuring external debt is an immediate loss of access to international capital markets. This is now completely irrelevant for Sri Lanka as market access was lost when the economy was downgraded to a CCC rating. It is now even lower, at CC. As a result, Sri Lanka can no longer borrow in international markets. Another downside is the increase in the risk premium Sri Lanka would need to pay when it is eventually able to regain market access. However, the increased risk premium demanded by markets as a result of the restructuring is likely to be tempered by the impressive commitment Sri Lanka has shown in meeting its obligations thus far. Two International Sovereign Bonds (ISBs) of USD 1 billion each were repaid on time in October 2019 and July 2020, despite having to deplete external reserves, thereby imposing sacrifices on domestic businesses and households. This combined with Sri Lanka’s impeccable debt servicing record to date is likely to contain the increase in the cost of future borrowing when it becomes possible.
Domestic banks have holdings of both ISBs and Sri Lanka Development Bonds (SLDBs). Both these instruments will be impacted by any debt restructuring exercise. Foreign bond holders are extremely unlikely to accept exemption from haircuts of domestic entities, mainly banks, which hold US-denominated debt, issued both abroad and domestically. Hence not only ISBs but also SLDBs will need to be included in the pool of debt to be restructured.
It is important to note that the impact of any haircut will not be as painful as some may fear, since many of the domestic entities have purchased ISBs at an already discounted price in the secondary market. (There would be no such mitigation for SLDBS, which are not a tradeable instrument.) If necessary, the CBSL would need to provide some temporary regulatory forbearance to any domestic bank which experiences capital adequacy challenges due to haircuts imposed on creditors as part of the debt restructuring.
Options for Restructuring
Debt restructuring is a long and complex process. Having delayed and allowed usable reserves to deplete to barely one month’s import cover, it is no longer possible to achieve a soft pre-emptive restructuring. There are three modalities available to restructure debt: reprofiling the principal (extending maturities); modifying coupon (interest) rates; and write-down of principal (haircuts). Given its current circumstances it is unlikely that Sri Lanka could avoid haircuts for its creditors.
It is unrealistic and impractical to expect to restructure external debt without the support of the IMF. Before embarking on an external debt restructuring one needs the IMF to independently validate that Sri Lanka has a strong need to restructure its debt, in order to assure creditors that the Sri Lankan authorities are not being opportunistic. The IMF would also need to validate the proposed medium-term fiscal adjustment path to debt sustainability.
Rescheduling bilateral, commercial and multilateral debt requires different treatments. Bilateral debt rescheduling is negotiated with the Paris Club of creditors. It is not possible to approach the Paris Club without IMF support. China and India are not members of the Paris Club and separate negotiations would be necessary with them. An option is to seek to initiate an informal “Common Framework” approach (approved by the G20 which includes both China and India). It would need to be informal as the “Common Framework” is not available for a middle-income country like Sri Lanka.
This approach would have the advantage of including Sri Lanka’s three major bilateral donors: China, India and Japan. Bilaterals are likely to focus more on stretching maturities. Commercial creditors could be approached once a deal is in place with bilateral donors. Such sequencing can lead to a better deal for the debtor country on the basis of equivalence across all creditors in terms of the rescheduling. In this respect, there is considerable merit in taking soundings from the Japanese Ministry of Finance regarding their suggestions for the terms of the restructuring. Over the years, Japan has proved to be a flexible and generous creditor in this respect.
On Commercial debt, here again, it is exceedingly difficult to proceed without the IMF. Given its current circumstances, the restructuring package for Sri Lanka’s commercial debt is likely to include a combination of stretching maturities; coupon modification and a haircut. Haircuts on repayment of principal should be avoided, if at all possible, as they delay rating improvement and regaining market access. It is likely that it is now too late for Sri Lanka to avoid a haircut for its commercial creditors. It makes little sense to scar the economy and cause hardship to the people in order to pay ISB holders 100 cents in the dollar when most of the bonds outstanding have been discounted by more than 40 percent.
It is not possible to restructure Multilateral debt (i.e., debt owed to the World Bank, the Asian Development Bank and the IMF) without a complete suspension of the relationship between Sri Lanka and these institutions. There would be a suspension of all lending activity including project loans. However, the practice has been for to these institutions to provide financing to assist the debtor country to service the payments owed to each of them, once the debt rescheduling package is negotiated.
Appointment of Advisers
It is customary to appoint a financial and a legal adviser at the outset of the restructuring process. The IMF is able to provide a list of potential advisers from which the country concerned can choose.
Pathfinder Perspective – Conclusion
The unsustainability of Sri Lanka’s external debt is the cumulative effect of poor economic management over several decades. The size and persistence of the external financing gap for the foreseeable future makes debt restructuring an urgent priority. It should be possible to negotiate a package which provides three years of breathing space to rebuild Sri Lanka’s economy to earn and attract sufficient foreign inflows to achieve external debt sustainability and place the economy on a path of sustained growth. Nearly 75% of Government external debt is owed to bilateral and commercial creditors, all of which is eligible for rescheduling, thus providing considerable scope for relief from onerous debt repayments. Now that Sri Lanka has lost access to international capital markets and is extremely unlikely to regain it for some years due to its CC rating, there is very little downside and very considerable upside to debt restructuring.
There is now no choice but to restructure our external debt. The positive impact on dollar liquidity will be substantial and could be measured in billions of dollars. It is also timely as the negative social consequences are manifesting themselves in terms of ever-increasing hardships for the people, particularly the poor and vulnerable. It does not seem realistic to count on short term liquidity injections or a reliance on a revival in tourism as well as increased exports, FDI and remittances, to overcome the dollar illiquidity and its negative consequences in the next couple of years. Paying back debt at the expense of scarring the economy and imposing hardships on the people should not be seen as a badge of honour.
This is A Pathfinder Perspective issued by the Pathfinder Foundation can view on https://pathfinderfoundation.org/ Readers’ comments via email to are welcome.
Features
Tree planting along road reservations and banks of streams

Reservations of Roads & Natural Streams which extend to about 10 to 20 on either side are not actively protected in Sri Lanka though it is very common in other countries. Those reservations are owned by the government. Therefore, public use of this land can be considered as a fair use of the land. Main purpose of this proposal is to introduce an intervention to connect the Forest Patches in urban areas such as Gampaha using the reservations of roads and natural streams, by planting trees so that those strips could also act as Urban Bio Corridors while enhancing the tree cover at national level. These trees also absorb the fumes emitted by vehicles while addressing global warming caused due to lack of tree cover. It also serves as a roof top for pedestrians who use reservations along public roads while adding aesthetic value to the area. Enhancing the community awareness about BioDiversity of Sri Lanka and the importance of maintaining a clean environment along road reservations is also another objective of this type of intervention. This intervention also addresses the needs of all sectors of the local communities.
Concept
The Green Road is a relatively new concept for roadway design that integrates transportation functionality and ecological sustainability. This project addresses the transport sector also because it facilitates Environmentally Sustainable Transport (EST) for local people. Therefore, Provincial Road Development Authority (PRDA) is the ideal institute to implement this project. It is also possible to introduce cycle tracks along stream banks as short cuts by improving the banks of natural streams as roads. This intervention would reduce vehicle congestion in main public roads while supporting Clean Sri Lanka programme because local communities themselves become watch dogs against culprits who pollute road reservations and water bodies of natural streams.
Already implemented projects in Mahaweli Areas
In Sri Lanka, the concept of Bio Corridor was introduced in 1988 under a Project called Mahaweli Agriculture and Rural Development project implemented in System B under an USAID funded programme. Similar to highways which connect main cities, in this case the Bio Corridors were introduced as “Bio Highways” connecting fragmented forest patches (“Bio Cities”) in paddy field areas. At the same time those corridors were improved as Cycle Tracks for the local farmers.
Figure 1 indicates the present status of a tree plantation programme implemented in Mahaweli Area (Thambuttegama) in the 1980s along newly introduced roads.
Past Experience of PRDA (WP) related to similar interventions
In 2010, similar intervention was introduced in Gampaha District in parallel with a flood mitigation project implemented by the Provincial Road Development Authority (WP). For example, while Uruwal Oya running adjacent to Gampaha Urban Area was improved to mitigate floods, riparian tree belt areas were also introduced. Later, parts of that stream running adjacent to Gampaha Town were improved as Recreational purposes such as jogging tracks for urban communities. As an additional benefit, it was expected that the shades provided by riparian tree cover would discourage growth of invasive plants such as Japan Jabara, which clogs the drainage outlets resulting in floods in urban areas.
by Eng. Mahinda Panapitiya
Features
Has Compass lost direction?

Sri Lankan voters have excelled in the art of changing governments in executioner style, which they did in many elections including that of 1977,1994, 2015, 2019 and, of course, 2024. They did so, giving massive majorities to parties in opposition that had only a few seats, because the preceding governments were so unpopular. It invariably was a negative vote, not a positive vote-endorsing policies, if any, of the incoming governments, the last election being no exception. NPP, contesting under the compass symbol, was essentially a revamp of the JVP and their main strategy, devoid of any specific policies, was throwing mud at opponents and promising a transparent, corruption free government. They made numerous promises on the hoof. Have they stood up to the challenges?
What the vast majority of the public wanted was a significant reduction in the cost of living, which has spiralled out of control due to the misdeeds of the many preceding regimes, resulting in near starvation for many. The NPP promised to renegotiate the deal with the IMF to give relief to the masses but soon found, to their dismay, that it was a non-starter. Of course, the supporters portrayed it as a display of pragmatism! They promised that the price of fuel could be slashed overnight as it was jacked up by the commission earned by the previous minister who was accused of earning over Rs 100 for every litre! It has not happened and the previous minister has not received the apology he deserves. The cost of living remains unbearable and all that the government continues to do effectively is slinging mud at opponents.
To the credit of the NPP government, financial corruption has not set in, but it cannot be forgotten that most previous governments, too, started this way, corruption setting in later in the cycle of government. However, corruption in other forms persist contrary to the promises made. Had the government sacked the former speaker, the moment he could not justify the claimed PhD, it could have claimed high ground and demonstrated that it would not tolerate corruption in any form. For some reason, unknown to the public, he seems to have a strong hold on the party and he seems indispensable!
As for bringing to justice those previously corrupt, only baby steps have been taken. During the election campaigns AKD promised to get Arjun Mahendran from Singapore within 24 hours of his election and now they are blaming the Singapore government! It looks as if promises were made without any idea as to the practicality of implementation. According to social media posts circulated, the list of assets held by Rajapaksas would have made them richer than Elon Musk! A lady lawyer who described in detail, during the election campaign, the wealth amassed in Uganda by Rajapaksas admitted, after her election, that there was no basis. Her justification was that the NPP government ensured free speech; even to tell lies as the truth.” Government media spokesman has just admitted that she lied about the cost of new year text messages sent by previous presidents and she remains an ‘honourable’ MP!
As far as transparency is concerned, Compass is directionless. MoUs/Pacts signed with India, during the recent visit of PM Modi shines bright with opaqueness! After giving various excuses previously, including that those interested could obtain details by making requests under the Right to Information Act, the official cabinet spokesman’s latest is that it needs the permission of India to release details. This makes one wonder whether there is a lot to hide or it may be that, de facto, we are already under the central government of India and that AKD is just the Chief Minister of the 29th state!
Whilst accusing the predecessors of misuse of power, the NPP does the same thing. AKD’s statements that he would be scrutinizing allocation of funds to local bodies, if opposition parties are elected, surely is an indirect threat to voters. Perhaps, it is not an election offence as the Elections Commission has not taken any action despite complaints!
Whether the exposition of the Tooth Relic, which was done in a mighty hurry, to coincide with the mini-election campaign would backfire remains to be seen. As it was done in a hurry, there was no proper planning and even the basic amenities were not provided to the thousands who queued for days. AKD, as usual, was quick with a political gesture by the unplanned visit meeting those in the queue. What he and his government should have done is proper planning but, instead, government supporters are inundating social media blaming the public for bad behaviour!
To cap this all is the biggest faux pas of all; naming the mastermind of the Easter Sunday attack. AKD built up expectations, and the nation was waiting for the exposure on 21 April, which never materialised. His acolytes are doling out excuses. Dr Nalinda Jayatissa was as evasive as possible during his post-cabinet meeting briefing. Perhaps, there is no mastermind other than those identified by all previous investigations including that by the FBI. All that the president did was handing over the Presidential Commission of Inquiry report to the CID. The acting IGP appointed a committee of three to study, but the next day a fourth person was added, a person who is named as one of those who did not act on intelligence received!
Perhaps, as an attempt to give credence to the allegations made in the Channel 4 programme, Pillayan was arrested. Though it was on a different offence, the alleged abduction of the former chancellor of the Eastern University, Minister Wijepala had the audacity to state in the parliament otherwise. Pillayan has been detained under the PTA, which the NPP promised to abolish! The worst is the campaign of character assassination of Udaya Gammanpila who has decided to represent Pillayan. Dr Jayatissa, who has never practised his profession, took exception that Gammanpila, who has not practiced as a lawyer, is representing Pillayan. Gammanpila has corrected him by listing the cases he had been involved in. In any case, Gammanpila need not be in court but get a set of lawyers to defend, if and when, a case is filed. It begs clarification, the ministerial comment that Gammanpila should be ashamed to represent Pillayan! Has the government already decided the guilt of Pillayan?
Compass has lost direction, indeed, and far too soon!
By Dr Upul Wijayawardhana
Features
Canada holds its own as Americans sour on Trump

On Monday, April 28, Canadians gave the Liberal Party its fourth successive mandate, albeit as another Minority Government but much stronger than in the last two elections, and, more importantly, with a different Prime Minister. Justin Trudeau who had been Prime Minister from 2015 was forced to resign in January 2025 on account of his perceived electoral unpopularity. Trudeau was succeeded by Marc Carney, 60 year old former Governor of the Bank of Canada and later the Bank of England, who dramatically revived the falling fortunes of the Liberal Party and secured its fourth mandate in 10 years.
The Liberal Party and Prime Minister Mark Carney owe their good fortunes to the presidential madness that is going on south of the border, in the United States of America. With his mercurial obsession over tariff’s and recurrent musings about making Canada America’s 51st State, President Trump painted the backdrop to the Canadian election. Trump’s antics did not go down well with the Canadian public and in a rare burst of patriotism the people of Canada overarched their diversities of geography, language, culture, religion and ethnicity, and rallied round the Maple Leaf national flag with utmost determination to stick it to Trump and other Ugly Americans of his ilk.
People and businesses in Canada shunned American products, stopped travelling to US holiday destinations and even took to booing the US national anthem at sporting events involving US and Canadian teams. The threat of economic pain due to a tariff war is real, but Canadians are daring to suffer pain rather than become a part of the US. And Justin Trudeau showed his best leadership in his last days as Prime Minister. Combining diplomatic skill and splendid teamwork with eloquent defiance, Trudeau succeeded in forcing Trump into what has since become Trump’s modus operandi in implementing his idiosyncratic tariff policy: tariff, one day; pause, the next day; and uncertainty, extended indefinitely.
100 Days of Disaster
What he began with Canada and Mexico, Trump has since writ large upon the whole world. His second term is already a term of chaos not only for America but also for the whole world economy. The US economy is officially in first quarter contraction. Another four months, it could be a man made recession of what was in January an economy that was humming sound and was easily the best performing one in the world. It’s only 100 days of the second term, and what is left of it is looming as eternity. “Only 1,361 Days to Go,” is the cover page heading of the latest issue of the Economist. That sums up America’s current state of affairs and their global spillover effects.
Americans are beginning to sour on Trump but there is no way for them to channel their frustrations and anger to force an immediate executive retreat. Trump has reduced the Republican Party to be his personal poodle and with Republics holding slender majorities in both the Congress and the Senate, the Legislative Branch of the US is now wholly beholden its Executive. The traditional wait is for the midterm Congress elections in two years. But Trump has no respect for traditions and conventions, and it would be two years too much before a Democratic majority in the two houses could bestir the Congress to check and balance the runway president.
The Judicial Branch is now playing catch up after the Supreme Court had given Trump near absolute immunity and enabled his second coming. The lower courts are applying the law as they should and stymieing Trump’s palpably illegal orders on everything from deporting immigrants, to downsizing government, and gutting the country’s university system. The tariff cases are slowly making their way to courts and they will add more confusion to the running of the economy before some kind of sanity is restored. Overall, by upending a system of government that has been constitutionally evolving over 200 years, Trump is providing a negatively sobering demonstration that no system is foolproof if a capable fool is elected to take over the reins of government.
Fortunately for the world, other governments and polities have been quick in drawing the right lessons from the demonstration effects of Trump on their American cousins. Trump’s excesses have had a dampening effect on right wing populism in other countries. The Canadian elections are one such demonstration. Another is expected in Australia where national elections are scheduled for Saturday, May 3. In Europe, right wing populist parties are scaling down their rhetoric to avoid facing local backlashes to Trump’s American excesses.
No populist leader anywhere wants to go where Trump is blindly heading, and no one is mad enough like him to think that imposing tariffs is the way to grow a national economy. In Hungary, its strongman Viktor Orbán after securing super majorities in four elections since 2010, is facing the real possibility of defeat in the national elections next year. Orban is regressively anti-Eu while 86% of Hungarians want to strengthen their EU ties, and they are naturally getting tired of Orban’s smearing of the EU just like all Europeans are getting tired of Trump’s and his VP Vance’s anti-European rhetoric.
Canada Holds its Own
Canada, despite its proximity to the US, has never been a haven for Trump’s right wing populism. Yet there have always been and continue to be pockets of support for Trumpism in Canada, and they have found their sanctuary within the Conservative Party of Canada and behind its leader Pierre Poilievre, a 45-year old career politician who entered parliament in 2005 at the age of 25 and became Leader of the Conservative Party and Leader of the Opposition 18 years later, in 2023.
Clever and articulate with an ability to spin rhyming simplistic slogans, Poilievre cultivated his political base by feeding it on a diet of vitriolic and vulgar personal attacks and advertisements denigrating then Prime Minister Justin Trudeau. Poilievre identified himself with the 2022 truck convoy protest that stormed Ottawa, cheered on by MAGA America, and he came to be seen as Canada’s Trump-lite (not unlike Peter Dutton, the Leader of the Opposition in Australia). Nonetheless, Poilievre’s attacks on Trudeau worked in the post-Covid climate of economic hardships and Trudeau’s popularity sank to the point that his own MP’s started calling for his resignation.
Alas for Poilievre, Trudeau’s resignation in January took away the one political foil or bogeyman on whom he had built his whole campaign. In addition, while his attacks on Trudeau diminished Trudeau’s popularity, it did not help enhance Mr. Poilievre’s image among Canadians in general. In fact, he was quite unpopular outside his base of devotees. More people viewed him unfavourably than those who viewed him favourably. Outside his base, he became a drag on his party. He would even go down to defeat in his own electorate and lose his seat in parliament that he had held for 20 years.
Mr. Poilievre’s troubles began with the emergence of Mark Carney as the new Liberal Leader and Prime Minister – looking calm, competent and carrying the ideal resume of experience in dealing with the 2008 financial crisis as Governor of the Bank of Canada, and calming market nerves after the 2016 Brexit referendum as Governor of the Bank of England. Carnie, who had never been in formal politics before, seemed the perfect man to be Prime Minister to weather the economic uncertainties that President Trump was spewing from Washington. Almost overnight Liberal fortunes shot up and after resigning themselves to face a crushing defeat with Trudeau at the helm, Liberals were suddenly facing real prospects of forming a majority after two terms of minority government.
In the end, thanks to the quirky genius of the electorate, Liberals ended with 168 seats with 43.7% of the vote, and four seats short of a majority in the 343 seat national parliament, while the Conservative Party garnered 144 seats with 41.3% vote share. Both parties gained seats from their last election tallies, 15 new seats for Liberals and 16 for Tories, and, unusual in recent elections, the two parties garnered 85% of the total vote. The increases came at the expense of the two smaller but significant parties, the left leaning New Democratic Party (reduced from 24 to seven seats); and the Bloc Québécois (reduced from 45 to 23 seats) that contests only in the French majority Province of Quebec. The Green Party that had two MPs lost one of them in the election.
In the last parliament, the New Democrats gave parliamentary support to the minority Trudeau government in return for launching three significant social welfare initiatives – a national childcare program, an income-based universal dental care program, and a pharmacare program to subsidize the cost of prescription drugs. These are in addition to the system of universal public health insurance for hospitals and physician services that has been in place from 1966, thanks again to the programmatic insistence of the New Democratic Party (NDP).
But the NDP could not reap any electoral reward for its progressive conscience and even its leader Jagmeet Singh, a Sikh Canadian, lost his seat in the election. The misfortune of the NDP and the Bloc Québécois came about because even their supporters like many other Canadians wanted to entrust Mark Carney, and not Pierre Poilievre, with the responsibility to protect the Canadian economy from the reckless onslaughts of Donald Trump.
Yet, despite initial indications of a majority government, the Liberals fell agonizingly short of the target by a mere four seats. The Tories, while totally deprived of what seemed in January to be the chance of a landslide victory, managed to stave off a Liberal sweep under Mark Carney. The answers to these paradoxes are manifold and are part of the of reasonably positive functioning of Canadian federalism. The system enables political energies and conflicts to be dispersed at multiple levels of government and spatial jurisdictions, and to be addressed with minimal antagonism between contending forces. The proximity to the US helps inasmuch as it provides a demonstration of the American pitfalls that others should avoid.
by Rajan Philips
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