SL’s debt burden far from over: Analyst

Sri Lanka’s macroeconomic adjustment path remains heavily burdened by an unchanged debt stock and widening trade deficits, while the flexible exchange rate policies continue to trigger massive balance sheet shocks across the state enterprises, according to Global Business Cycle Economist Dr. Kenneth De Zilwa.

Discussing the nation’s debt fundamentals, Dr. De Zilwa pointed out that while the external debt restructuring has offered near-term breathing room through grace periods and maturity extensions, it has completely failed to reduce the underlying stock of debt. 

Citing the Finance Ministry data, he noted that Sri Lanka’s total public debt still stands at a staggering US $ 103 billion as of the first quarter of 2026. 

“The key issue is that the debt has been reprofiled, not resolved. That shifts pressure into the future rather than removing it,” he explained.

Turning to the external sector, Dr. De Zilwa highlighted a concerning trajectory in the trade deficit. Based on the Central Bank data from May 2026, the cumulative trade deficit widened significantly to US $ 4.7 billion during the first five months of the year, up from US $ 2.7 billion in the corresponding period of 2025. 

This expansion, driven by the import growth vastly outpacing the exports, is causing a continued deterioration in the Net International Investment Position (NIIP), as the external liabilities mount faster than the economy’s ability to generate external revenue-producing assets.

At policy level, Dr. De Zilwa acknowledged that the flexible exchange rate adjustments, supported by the International Monetary Fund (IMF), serve as a macroeconomic stabilisation tool. However, he warned of the deep, negative implications this has on the balance sheets of both the private sector and state-owned enterprises (SOEs). 

He stressed that within Sri Lanka’s specific SOE structure and national external balance sheet, the negative transmission effects of these policies significantly outweigh the positives—a reality he noted is even reflected in the IMF’s own research report from June 2025.

Currency depreciation acts as a severe pressure point, increasing the rupee-denominated debt servicing costs and driving up the domestic refinancing pressures. 

Furthermore, the existing debt stock undergoes revaluation, due to the translation risk of external debt. Dr. De Zilwa explained that this triggers a deeper structural impact, as the rupee depreciation fundamentally undermines the competitiveness of the globally exposed domestic sectors that rely heavily on imported energy, raw materials, logistics, packaging and technology licensing.

He identified the SOE balance sheet as the most critical transmission channel for macro stress and vulnerability caused by the rupee depreciation. According to the PublicFinance.lk data, the exchange rate impact on the key state entities between 2020 and 2022 was devastating. 

Ceylon Petroleum Corporation recorded Rs.710 billion in total losses, which included a massive Rs.623 billion hit in 2022 alone. Similarly, SriLankan Airlines absorbed Rs.478 billion in total losses, with Rs.248 billion concentrated in 2022, while the Ceylon Electricity Board took a Rs.128 billion hit, including Rs.47 billion in 2022.

Collectively, these three institutions absorbed a staggering cumulative loss of approximately Rs.1.316 trillion over that period, with the vast majority of the financial destruction concentrated during the sharp currency depreciation phase of March 2022. 

“This is the real transmission mechanism of the exchange rate policy in a dollar-exposed public sector,” Dr. De Zilwa noted. 

“Depreciation does not remain neutral. It converts directly into quasi-fiscal losses that are passed on as cost reflective price adjustments.”

He argued that while flexible exchange rates might theoretically correct the external imbalances, the structural reality in Sri Lanka is that they generate massive balance sheet shocks, effectively transferring the macroeconomic adjustment directly into fiscal and quasi-fiscal stress. 

Despite the macro stabilisation narratives, Sri Lanka faces severe ongoing challenges, driven by an unchanged debt stock of approximately US $ 38 billion between 2023 and the first quarter of 2026, widening the trade deficits and a reliance on external debt funding that perpetuates a negative NIIP.

He added that at the current IMF-projected growth levels of around 3 percent of GDP, Dr. De Zilwa warned that the Sri Lankan economy simply lacks the capacity to reverse these external balance sheet pressures. To counter this, he advocated for an urgent shift toward a higher-growth trajectory of around 7 percent GDP growth per year for at least six to eight years.

“The alternative business model is a shift toward a higher-growth trajectory of around 7 percent GDP growth per year for at least six to eight years, driven by internalising dollar savings and rapidly shifting to export industry-led expansion, plus focusing on new tech productivity-led industrialisation, with focus on the creation of external revenue-generating asset, moving towards the Asianisation of Sri Lankan export product market share,” he said. 

“Without that, the system continues to accumulate hidden liabilities, even as headline stability narratives floating around; rather than being caught up with headlines, Sri Lanka should be focusing on improving competitive pricing and strengthening the external national balance sheet.” (NF)