📈 Sri Lanka’s Debt-to-GDP Improves, But Fiscal Challenges Persist

Sri Lanka’s central government debt fell to 99.5% of GDP in June 2025 (from ~114% in 2023), aiming for the IMF target of 95% by 2030. However, underlying debt repayment terms, interest burdens, and foreign exchange dependence highlight ongoing risks. • Debt Restructuring & Servicing: The 2024 debt restructuring deferred heavy payments to 2028–2043. Interest rates on restructured main bonds drop initially to 3.6% until 2027, rising to 5.1% (2028–2032) and peaking at 9.25% (2032–2035). • Fiscal & Revenue Pressures: The 2026 Budget projects revenue of Rs. 5,300 Bn with interest expenses absorbing Rs. 2,617 Bn (nearly 50% of revenue). Though improved from 79.9% in 2023, high interest costs severely constrain public spending. Tax revenue is budgeted at 15.4% of GDP for 2026 amid a slowing IMF growth forecast of 3%. • Sectoral Foreign Earnings (1H 2026): Foreign debt servicing relies heavily on narrow inflows, showing mixed performance: • Merchandise Exports: $ 6.9 Bn (+6.3% YoY) • Remittances: $ 4.6 Bn (+23.2% YoY) • Tourism Earnings: $ 1.5 Bn (-11.8% YoY) • Reserves & Debt Visibility: Gross reserves slipped to $ 6.59 Bn in July 2026 (down from $ 7.3 Bn in Feb). Total debt including state-owned enterprise guarantees reached 104.1% of GDP in June 2025, though capped at 7.5% of average GDP under the Public Financial Management Act of 2024.