Business
Crunch time just about to descend upon Sri Lanka
Repaying foreign debt or financing essential imports?
The available foreign reserves of the country can be used to either repay foreign creditors or to finance imports of essential goods and services required by its citizens. This is the dilemma facing Sri Lanka today.
Repaying the full value of the bond using the limited foreign reserves available would provide a windfall gain to those currently holding these bonds.1 But it will be at great cost to the citizens of the country who will face shortages of essentials like food, medicine, and fuel.
In these circumstances, it is in the best interest of all its citizens, for the government to defer payment of the US dollar 500 million International Sovereign Bonds
(ISB) coming due on 18 January 2022, until the economy can fully recover and rebuild.
Just as an individual with co-morbidities is more vulnerable to develop severe illness if infected with COVID-19 and more to likely require hospitalisation and even treatment in an ICU, Sri Lanka was vulnerable to economic shocks long before COVID-19 struck. The country was already facing several macroeconomic challenges. Muted economic growth. An untenable fiscal position. Although a tough consolidation programme was put in place to bring government finances to a more sustainable path, sweeping tax changes implemented at the end of 2019 reversed this process, with adverse consequences to government revenue collection. Weak external sector due to high foreign debt repayments and inadequate foreign reserves to service these debts.
COVID-19 only exacerbated these macroeconomic challenges. And like a patient who gets over the worst of COVID-19 has a long road to recovery; the economy of Sri Lanka faces many challenges to get back on track.
The onset of COVID-19 in early 2020, only worsened an already grim macroeconomic situation. The country lost the confidence of international markets, and the ability of the sovereign to rollover its external debt became difficult if not impossible. In these circumstances, there was a solid argument for a sovereign debt restructuring. But the response from the government and the Central Bank of Sri Lanka (CBSL) was a firm “No”.
The argument was that Sri Lanka never defaulted on its debt and it was not going to do so now. The official position was also that the government had a ‘plan’ to repay its debt and hence there was no reason to engage in a debt restructuring exercise. However, Sri Lanka faced high debt sustainability risks: the debt to GDP ratio at 110% was one of the highest historically and interest payments to government revenue at over 70% was one of the highest in the world.
Fast forward to 2022. The country’s foreign reserves declined to US $ 3.1 billion.2 Useable reserves are much lower. CBSL has sold over US $ 200 million of the country’s gold reserves to meet its debt obligations. In the first week of 2022, CBSL announced further swap facilities and its commitment to repay the International Sovereign Bond (ISB) of US $ 500 million due in January.
According to statistics from the Central Bank, in addition to the ISB payment, there are pre-determined outflows from foreign reserves amounting to US $ 1.3 billion in the first two months of 2022. Further, based on trade data for the last 5 years, the country on average has a trade deficit of around US $ 2 billion to finance during the first quarter of the year (see Table 1). With expected inflows from tourism under threat with the onset of the Omicron variant and continuing decline in worker remittances, financing this external current account deficit will add further pressure on available foreign reserves. India which accounted for around 20% of recent tourist arrivals is now requiring returnees to the country to quarantine. This will likely further dampen tourist arrivals.
In this context, the country faces a trade-off between using its limited foreign reserves to repay its debt or utilising it to finance essential imports. US $ 500 million is sufficient to finance imports of fuel for five months; or pharmaceuticals for one year; or dairy products for one and a half years of; or fertilizer for two years.
See table 1: Summary of External Sector Performance Q1 – 2017 to 2021 (US $ mn)
Therefore, it is in the best interest of the country and its citizens for the government to defer payment on its debt and use its limited foreign reserves to ensure uninterrupted supply of essential imports. But this requires a plan. To minimise the cost to the economy, the government must immediately engage its creditors in a debt restructuring exercise. This will require a debt sustainability analysis (DSA) by a credible agency to identify the resources required for debt relief and the economic adjustment needed to put the country back on a sustainable path.3 This will be critical to bring creditors to the negotiating table and provide them comfort that the country is able and willing to repay its debt obligations in the future.
The cost of not restructuring is much higher. A non-negotiated default (if and when the country runs out of options to service its debt) would lead to a greater loss of output, loss of access to financing or high cost of future borrowing for the sovereign. It could even spill over to the domestic banking sector, triggering a banking or financial crisis.
The consequences are clear. What will we choose?
Dr. Roshan Perera is a Senior Research Fellow at the Advocata Institute and the former Director of the Central Bank of Sri Lanka
Dr. Sarath Rajapatirana is the Chair of the Academic Programme at Advocata Institute and the former Economic Adviser at the World Bank. He was the Director and the main author of the 1987 World Development Report on Trade and Industrialisation.
The Advocata Institute is an Independent Public Policy Think Tank. Learn more about Advocata’s work at www.advocata.org.
A game-changer for Sri Lanka’s capital market
As the global community convened for the World Bank Group’s 2025 Spring Meetings under the timely theme “Jobs: The Path to Prosperity,” one message stood out: prosperity in the developing world depends not only on physical infrastructure but also on strong financial systems.
Among the influential voices at this year’s gathering was Douglas L. Peterson, Special Advisor to S&P Global and a longstanding advocate of resilient market economies.
Drawing from a decade-long tenure as CEO of S&P Global, Peterson delivered key insights that resonate deeply with the challenges and opportunities facing emerging economies such as Sri Lanka.
Peterson stressed that while global capital is abundant, it doesn’t move indiscriminately. “It follows signals, namely, data, transparency, regulatory certainty, labour and market stability.”
“When investors look to deploy capital in developing markets, they’re seeking a solid financial infrastructure,” Peterson said. “That includes reliable data, transparent pricing mechanisms, independent credit rating agencies, and clearly defined bankruptcy laws.”
These factors may not make headlines, but Peterson underscored their essential role.
“Financial infrastructure enables confidence, and confidence attracts investment,” he said.
A key initiative Peterson is championing in collaboration with the World Bank is titled ‘Originate to Distribute’, a structured finance approach where loans are created by institutions like the World Bank but sold to private investors.
Traditionally, loans from development banks remain on their balance sheets for decades. This initiative proposes standardising and structuring such loans so that private investors can purchase, pool, and trade them – essentially converting infrastructure loans into a new, tradable asset class.
“This is about creating velocity and scale,” Peterson said. “If the World Bank can originate loans and distribute them to the private sector, every dollar stretches further. It helps close the multi-trillion-dollar infrastructure investment gap.”
For countries like Sri Lanka, where public finances are under pressure, such a model could unlock significant private capital provided the regulatory environment and financial infrastructure are prepared to support it.
In alignment with the World Bank’s focus on job creation, Peterson prioritised five sectors he believes are pivotal for employment growth in developing nations: infrastructure (both physical and digital), agri-business, healthcare, tourism, and manufacturing. The common thread across all these sectors, he asserted, is infrastructure.
“Build an airport and you get hotels, transport services and even carbon savings,” Peterson said. “A bridge not only connects communities but also cuts costs, travel time, and emissions.”
According to Peterson, infrastructure investment yields a multiplier effect, often generating an additional $1.40 to $1.60 for every dollar spent. It also catalyses other industries. Manufacturing depends on roads and ports; tourism needs transport and energy; agriculture requires logistics and storage; and healthcare relies on reliable access and communication systems.
Peterson’s reflections also touched on a more structural issue that Sri Lanka is currently facing; the need to develop robust domestic capital markets. He emphasised moving beyond a banking-dominated financial system toward one that includes institutional investors like insurance companies and pension funds.
“These institutions become long-term investors,” he noted. “They form the foundation for sustainable infrastructure investment. Homegrown capital reduces reliance on external debt and increases financial resilience.”
Peterson’s remarks serve as a timely reminder as job creation and long-term prosperity in Sri Lanka will not come through piecemeal efforts. Instead, they require coordinated investments in both physical and financial infrastructure, from better roads and ports to regulatory frameworks that inspire investor confidence.
Unlocking private capital through trust, transparency, and smart financial engineering is the way forward. And as leaders like Peterson have shown, the tools and models already exist. It is now up to policymakers and financial leaders in Sri Lanka to ensure Sri Lanka is ready to embrace them.
Douglas L. Peterson currently serves on the board of the UN Global Compact and was formerly CEO of S&P Global, where he expanded the company’s market capitalisation from $16 billion to over $150 billion. He also led the G7 task force on sustainable finance in 2021.
By Sanath Nanayakkare
The Delegation of German Industry and Commerce in Sri Lanka (AHK Sri Lanka) successfully organized a visitor delegation to Intersolar Europe 2025, held from 7 – 9 May in Munich, Germany. Recognized globally as one of the most significant and comprehensive trade fairs dedicated to the solar industry, Intersolar serves as a premier platform for showcasing the latest innovations in renewable energy and sustainable technologies.
The Sri Lankan delegation comprised senior representatives from prominent companies in the sector, including Mega Solar, Micro PC Systems, Eco Solar Rays, and Puwakaramba Building Solutions, reflecting the country’s growing commitment to advancing renewable energy solutions.
The primary objective of this visit was to provide Sri Lankan companies direct access to the latest developments in solar technology, including sustainable energy solutions, energy storage systems, e-mobility, floating solar applications, agrivoltaics and recycling solutions. By connecting local enterprises with cutting-edge technologies and global industry leaders, AHK Sri Lanka aims to facilitate the adoption of modern energy solutions in Sri Lanka and support the nation’s broader transition to a more sustainable and energy-secure future.
A key highlight of the delegation’s agenda was a strategic meeting with the organizers of Intersolar Europe. This engagement provided valuable insights into the exhibition’s future vision and fostered discussions on potential collaboration opportunities between German and Sri Lankan stakeholders in the renewable energy sector.
Further amplifying the value of the delegation, AHK Sri Lanka coordinated over 25 tailored B2B meetings between Sri Lankan companies and German/European industry counterparts. These curated matchmaking sessions enabled participants to explore commercial opportunities, initiate technical partnerships, and lay the groundwork for future investments and joint ventures.
Prime Group, Sri Lanka’s leading real estate brand with a 30-year legacy and international branches in Australia and Dubai, has named celebrated Sri Lankan music icon Umaria Sinhawansa as its Global Brand Ambassador. This partnership unites two Sri Lankan powerhouses to showcase local talent and excellence worldwide.
The collaboration aims to strengthen Prime Group’s global expansion while promoting Sri Lankan culture. Umaria, who bought her first property from Prime Group a decade ago, expressed pride in representing the brand. Prime Group’s Co-Chairperson, Sandamini Perera, highlighted Umaria’s embodiment of Sri Lankan heritage and global appeal, aligning with their mission to elevate the country’s real estate innovation.
Together, they aim to inspire trust, connect with international markets, and celebrate Sri Lanka’s cultural richness on a global scale.
NOC issue, fixture clash put Mustafizur’s IPL participation in doubt
Presidential secretariat launches initiative to install sanitation facilities at fuel stations under “Clean Sri Lanka”
Financial assistance from the President’s Fund for next of kin of victims of the Kotmale bus accident disbursed through Divisional Secretariats
-
Features4 days agoSAITM Graduates Overcome Adversity, Excel Despite Challenges
-
News4 days agoDestined to be pope:Brother says Leo XIV always wanted to be a priest
-
Sports4 days agoASBC Asian U22 and Youth Boxing Championships from Monday
-
Opinion4 days agoDrs. Navaratnam’s consultation fee three rupees NOT Rs. 300
-
Foreign News5 days agoMexico sues Google over ‘Gulf of America’ name change
-
Features3 days agoChampioning Geckos, Conservation, and Cross-Disciplinary Research in Sri Lanka
-
Business4 days agoDilmah – HSBC future writers festival attracts 150+ entries
-
Business4 days agoBloom Hills Holdings wins Gold for Edexcel and Cambridge Education