by
Natasha Gunawardena
and
Kavishika Ileperuma
Introduction
Sri Lanka’s new brand is its economic crisis. The Indian Ocean island nation has been in the global news since 2022 for its unprecedented balance of payment (BoP) crisis of which the excessive debt overhang is a central feature. The twin crises of illiquidity and insolvency that characterize the current economic paralysis in Sri Lanka is the culmination of a decades-long setbacks in current account performance and domestic public finances (Montes, Gunasekera, & and Wagle, 2022; Athukorala & Wagle, 2022). The Easter Sunday attacks in April 2019, Covid-19 pandemic and the subsequent global economic slowdown had a compounded effect on the economy by thinning out foreign currency cashflow supported by migrant workers’ remittances, exports and tourism income; and severely affecting domestic and international trade and business continuity.
On 12 April 2022, the Sri Lankan government announced its decision to suspend – on a temporary basis – the servicing of external debt owed to bilateral and commercial creditors. This decision presents an unprecedented phase in Sri Lanka’s evolving macroeconomic status. The ongoing difficulties share many of the features of its previous macroeconomic crises, but now in a truly dire setting – the post-default
context – in which overcoming the crisis must be undertaken under much harsher external conditions than those in past crises.
Understanding the parameters of these conditions and the political economy of Sri Lanka’s sovereign debt will be important in informing the policy initiatives and political agendas that can be constructively considered at the present time. This paper will highlight inflection points in Sri Lanka’s sovereign debt trajectory and the political economy that both drives and is reproduced by it. Sri Lanka’s case will be critically evaluated with historic evidence (from 1980 to 2022) based on global and domestic trends seen in Sri Lanka. The paper is structured in two parts. The first part presents a granular, data-driven analysis of Sri Lanka’s debt structure, pointing to triggers of the current predicament of insolvency. The second part discusses the political economy dynamics of Sri Lanka’s debt default, its global
and domestic dimensions, and the implications of the contemporary politicization of the debt crisis. The analysis points to the aggressive reinforcement of neoliberal economic policies in Sri Lanka’s post-default context, and the crystallization of a socio-political ecosystem that ensures its continuity.
