Sri Lanka’s Debt Woes Deepen despite Restructuring Gains

Sri Lanka’s debt burden remains perilous in 2025, casting a shadow over its economic recovery despite significant restructuring gains. By March 2025, the country’s public debt had reached an estimated US$107.5 billion, reflecting the government’s continued dependence on domestic borrowing.

External debt stood at around US$37.2 billion by end-March, trimming only slightly to US$37.1 billion by mid-2025. In the first half of the year alone, the government settled US$1.36 billion in external obligations about 55 percent of the US$2.45 billion due for the year.

Debt servicing continues to exert severe pressure on state finances. From January to June 2025, Sri Lanka paid US$863.6 million in external loan principal and US$495.3 million in interest. Domestically, by April 2025 the government had already spent Rs. 1.5 trillion on debt servicing, including Rs. 796 billion in interest70 percent of which was linked to rupee-denominated debt.

The overall debt-to-GDP ratio is also climbing again, reaching roughly 99.5 percent by June 2025, compared to 99.1 percent at the end of 2024. Central government domestic debt rose to Rs. 19.6 trillion during the period, while foreign currency debt increased to Rs. 11.1 trillion.

Despite the gravity of the situation, Sri Lanka has achieved notable progress on debt restructuring. The IMF’s fourth review of its Extended Fund Facility was completed in July 2025, unlocking further assistance.

IMF data shows external public debt at US$40.2 billion by end-2024, with annual servicing costs projected to decline to around US$2.86 billion in 2025 and to continue easing during 2026–2027.

Yet international analysts warn that risks remain elevated. S&P Global projects government debt to peak around 101 percent of GDP in 2025, largely because some domestic obligations were excluded from restructuring. Interest payments alone are forecast to absorb more than half of government revenue this year, severely limiting fiscal space for reforms or social protection.

President Anura Kumara Dissanayake has stated confidently that Sri Lanka can now service its restructured debt. But doubts persist regarding the consistency of the NPP government’s policy direction. While the government secured an agreement with Japan in March 2025 to restructure roughly US$2.5 billion in loans, negotiations with China and India remain unresolved fueling uncertainty over bilateral relief.

 

Reconciling the administration’s reform promises with political pressures remains a challenge. The government’s ambition to achieve full debt-servicing capability by 2028 depends heavily on fiscal discipline, strong revenue mobilisation, and strict adherence to IMF-recommended reforms. Any deviation from these commitments risks jeopardising the fragile economic stability Sri Lanka is trying to rebuild.