Business
Sri Lanka’s macroeconomic policy setting: Cohesion or confusion?
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’
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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.
UN Global Compact Network Sri Lanka is introducing a transformative patron structure for its Working Groups, set to take effect in 2025. This initiative strengthens the Network’s commitment to advancing corporate sustainability by amplifying the leadership of select companies within their respective issue areas. The Memoranda of Understanding (MoUs) were signed on March 20, 2025, at the 80 Club, in the presence of the Network’s Board Members.
Network Sri Lanka’s Working Groups have long provided a platform for businesses to exchange knowledge and drive industry-wide progress on sustainability. With this new structure, leading companies will take on an enhanced role in guiding participants within their Working Groups, offering mentorship, strategic insights, and best practices to drive collective action.
As Patrons, these companies will host events, provide guidance, and shape the direction of their respective Working Groups, ensuring that discussions translate into tangible, scalable solutions aligned with national and global sustainability priorities.
Meet the Patrons and Their Areas of Leadership
MAS Holdings (Pvt) Ltd – Gender & Diversity
MAS Holdings will lead the Gender & Diversity Working Group, championing inclusive business practices, gender equality, and women’s leadership in corporate Sri Lanka.
A. Baur & Co (Pvt) Ltd – Business & Human Rights
A. Baur & Co will lead efforts within the Business & Human Rights Working Group, championing ethical business practices, human rights protections, and responsible corporate conduct.
Talawakelle Tea Estates PLC – Climate Emergency Task Force
Talawakelle Tea Estates will drive action within the Climate Emergency Task Force, supporting businesses in climate change mitigation, adaptation and resilience strategies.
Kelani Valley Plantations PLC – Water & Ocean Stewardship
Kelani Valley Plantations will support the Water & Ocean Stewardship Working Group, focusing on sustainable water management and conservation practices.
Dilmah Ceylon Tea Company PLC – Water & Ocean Stewardship & Sustainable Supply Chain & SME
Dilmah will take on a dual Patron role, sharing its expertise in sustainable supply chains and water stewardship, particularly in global supply chain sustainability and marine biodiversity conservation efforts.
Teejay Lanka PLC – Sustainable Supply Chain & SME
Teejay Lanka will support the Sustainable Supply Chain Working Group, bringing its expertise in ethical sourcing, circularity, and sustainable manufacturing.
“As a steward of A. Baur & Co. (Pvt.) Ltd.’s 127-year legacy, built on ethical governance and the unwavering dedication of our people. Ensuring a living wage is not just a moral imperative, it’s also a smart business strategy. When the employees have the financial security they need, they’re more productive, engaged, and loyal. We recognize that this transformative change cannot be achieved in isolation. By working together with other stakeholders, we can create a ripple effect that benefits everyone. Through our commitment to advocating for a living wage, we aim to inspire broader private sector participation, facilitate the exchange of best practices, and strengthen the ecosystem for equitable economic growth in Sri Lanka.” – Rolf Blaser, Managing Director / CEO, A. Baur & Co. (Pvt.) Ltd.
Network Sri Lanka is the Country Network of the UN Global Compact, mobilizing businesses to integrate sustainability into their core strategies. Through its Working Groups, the Network facilitates peer learning, collaboration, and collective action to drive meaningful change across industries.
Assetline Finance Limited (AFL), the flagship company of the Financial Services Cluster of David Pieris Holdings, has received an upgraded entity credit rating from Lanka Rating Agency (LRA) to A with a Positive Outlook, up from its previous rating of A- with a Stable Outlook. This upgrade, along with the improved outlook, reflects AFL’s strong financial fundamentals, sustainable growth trajectory, and the increasing confidence of the market in its long-term stability and performance.
This new rating reflects the Company’s unwavering commitment to prudent financial stewardship, a strong focus on sound risk management practices, and a strategic approach to value creation. During the year, the Company demonstrated steady growth in its asset base, surpassing LKR 50 billion and reinforcing its strong position within the industry. This growth was driven by strategic investments and a disciplined approach to capital management, which has consistently reinforced the Company’s liquidity and financial position. It clearly demonstrates AFL’s operational efficiency and its ability to generate long-term shareholder value.
Commenting on the upgraded rating, Ashan Nissanka, Director & CEO of AFL, stated: “Our favourable rating further positions us to unlock greater opportunities, drive progress, and strengthen stakeholder trust. It is not just a reflection of where we stand today but symbolises our path ahead towards a stronger future.”
Furthermore, the Company maintained a strong and well-managed capital structure, with a capital adequacy ratio significantly above the minimum regulatory requirement. It also successfully secured international funding from the Japan-based ASEAN Women Empowerment Fund (JAWEF), managed by BlueOrchard Finance Ltd., a globally recognized impact investment manager. Securing this funding affirms the Company’s financial resilience and its ongoing commitment to empowering women entrepreneurs. Through its Liyadiriya initiative, the Company continues to improve financial accessibility for rural women, contributing to inclusive economic development.
The Company also expanded its geographical footprint by opening four new branches, increasing its total branch network to 59 and establishing a nationwide presence. This expansion was aimed at broadening the customer base, particularly in underserved areas, to promote financial inclusivity. It aligns with the Company’s strategic intent to support women entrepreneurs across Sri Lanka. Additionally, the Company’s lending focus remains aligned with national priorities, particularly in the renewable energy and SME sectors, which are seen as key drivers of long-term development.
Sampath Bank recently formalised a strategic partnership with the Chamber of Young Lankan Entrepreneurs (COYLE) by signing a Memorandum of Understanding (MOU) at its Head Office. This partnership highlights Sampath Bank’s ongoing commitment to promoting innovation, driving business growth, and empowering Sri Lanka’s entrepreneurial ecosystem.
Through this collaboration, Sampath Bank will serve as the official banking partner for the COYLE Awards and the Young Lankan Program, two flagship initiatives that recognise business excellence and nurture emerging leaders. Supporting these initiatives allows the Bank to create a strong pipeline for SME engagement, provide access to tailored financial solutions, and build meaningful relationships with the country’s leading entrepreneurs.
Tharaka Ranwala, Senior Deputy General Manager – Marketing, Customer Care, and Card Centre, Sampath Bank (2nd from L), exchanged the MOU with Suren Chandraratna, Senior Vice Chairman, COYLE (2nd from R), in the presence of Anjali Goonetilake, Senior Manager – Marketing, Sampath Bank (1st from L), and Jayamal Gunaratne, Project Chairman, COYLE (1st from R).
The partnership further positions Sampath Bank at the forefront of SME development in Sri Lanka, distinguishing it as a long-term enabler of entrepreneurial success and a key driver of sustainable economic progress.
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