Sri Lanka’s economic “stability” is outpacing output growth and the government is covering up the country’s severe deterioration in its national balance sheet due to debt and high interest costs, a global business cycle analyst has said.
The main reason for this situation is the International Monetary Fund (IMF) program, he points out.
Dr. Kenneth De Zilwa, chief executive officer of the Lanka Rating Agency, said Sri Lanka’s debt trajectory through early 2026 points to a worsening solvency crisis that threatens long-term economic viability.
He warned that debt accumulation fueled largely by interest payments could deliver what he described as a “death blow” to the economy.
At the center of his critique is the sharp rise in domestic government debt. De Zilwa said domestic debt has more than doubled, from about Rs. 9 trillion in 2020 to nearly 20 trillion rupees by June 2025, despite painful domestic debt restructuring, steep tax increases and deep cuts in public spending.
He said the increase reflects borrowing to service existing debt rather than investment in growth.
High interest rates and rollover pressures, he argued, have forced the government to tap domestic savings to meet interest obligations, crowding out private-sector credit and binding the banking system more closely to sovereign risk.
“A doubling of domestic debt in a stagnant economy is not progress,” De Zilwa said, describing it as balance-sheet deterioration driven by debt servicing rather than development.
External debt trends, he said, are equally concerning. Foreign debt rose from roughly Rs. 15 trillion in 2020 to about Rs. 28 trillion by December 2024, despite Sri Lanka being in default and undergoing restructuring.
De Zilwa attributed the increase to currency depreciation, accumulated interest arrears and new borrowing, including about $5.4 billion in external funds absorbed during the IMF program period.
He said those inflows have failed to improve Sri Lanka’s Net International Investment Position, a key indicator of external solvency.
Sri Lanka’s NIIP, already negative at about $47.6 billion in 2020, deteriorated further to around negative $53.4 billion by 2024, reflecting rising external liabilities and limited accumulation of foreign assets.
De Zilwa also criticized policy decisions that allowed non-essential foreign exchange outflows, citing roughly $2 billion in vehicle imports.
In an economy with weak external earnings, he said, such spending adds to liabilities without expanding productive capacity.
Without a shift toward growth-driven, production-based policies, De Zilwa said, Sri Lanka risks remaining trapped in a cycle of debt and austerity.
“The headline stability hides a harsher reality. The national balance sheet is weaker, private-sector profitability is crushed, capital formation has collapsed, and the country is more indebted than ever,” he added.(Source- The Leader)
