A report released by the International Monetary Fund (IMF) in December 2024 identifies several weaknesses in Sri Lanka’s public debt management framework, including legal and institutional fragmentation and limited transparency. Based on a joint IMF-World Bank mission to Colombo in early 2023, the report notes that the existing legal framework is incomplete and ambiguous. The lack of clear definitions of public debt, the absence of a medium-term debt management strategy, and the lack of clarity on including extrabudgetary units in central government debt have made it difficult to establish a coherent plan for managing debt. Additionally, institutional responsibilities are split between multiple agencies, leading to inefficiencies. The Central Bank of Sri Lanka oversees domestic debt issuance, while the Ministry of Finance handles external borrowing, with back-office functions shared between the Treasury and the Central Bank. This fragmentation has undermined coordination in debt management.
Transparency in public debt reporting has also been a challenge, with gaps in data including the lack of information on direct issuances to the Central Bank and the outstanding balances of on-lent loans to SOEs. The absence of a unified framework for managing guarantees has contributed to inefficiencies. The IMF’s recommendations include creating a new Public Debt Management law to consolidate debt oversight and establish a unified Debt Management Office within the Ministry of Finance. This office would integrate fragmented functions and focus exclusively on debt management while ensuring independence. The law would also require developing a medium-term debt management strategy, an annual borrowing plan, and regular reporting to Parliament to improve transparency and accountability.
Sri Lankan authorities have accepted these recommendations and plan to draft the Public Debt Management law alongside a new public financial management law. Interim reforms that do not require legislative changes will be implemented immediately. The IMF and World Bank have agreed to provide technical assistance to support these efforts. These reforms are part of Sri Lanka’s commitments under the IMF’s Extended Fund Facility and the World Bank’s Development Policy Operation, which aim to strengthen fiscal oversight and improve debt sustainability.
The Ministry of Finance announced the establishment of the PDMO on December 2, 2024, with the office expected to be fully functional by January 2026. The PDMO will centralize the management of government borrowings and obligations of SOEs and subnational bodies. Its responsibilities will include managing government debt, overseeing loan guarantees, coordinating on-lending operations, and maintaining public debt records. SOEs and other public entities must now obtain prior approval from the Minister of Finance for public issuances of government securities, foreign loans, or guarantees and provide quarterly updates on outstanding debt.
While these reforms are underway, Sri Lanka faces significant fiscal challenges. Central government debt as a percentage of GDP declined slightly to 101.8% in September 2024 from 105.49% in December 2023, although the absolute value of debt increased. Debt restructuring under the IMF’s Extended Fund Facility programme has secured $17.5 billion in debt service relief. Still, debt-to-GDP is projected to remain above 100% in the coming years, with Fitch Ratings estimating a gradual decline to 103% by 2028. The country’s tax revenue-to-GDP ratio remains low at 7.4%, well below regional and global averages, with inefficient tax enforcement and weak revenue collection. Losses from SOEs further exacerbate the fiscal situation.
The IMF has called for structural reforms in tax administration, including improved oversight and enforcement against evasion, to address these issues. Economic analysts have emphasized the need for tax revenue to rise to 14% of GDP by 2028 to support debt servicing commitments. Without comprehensive reforms in revenue administration and public sector efficiency, the risk of further fiscal instability remains high.
As Sri Lanka continues its debt restructuring and works to implement reforms, the effectiveness of these measures will determine the country’s ability to regain fiscal stability and investor confidence. While creating the PDMO represents a significant step in debt management, addressing broader structural issues will be essential for the country’s long-term economic recovery.
The fiscal future hinges on the ongoing public debt reform efforts, with important implications for investors. The establishment of the Public Debt Management Office (PDMO) aims to centralize debt management, improve transparency, and streamline the borrowing process. However, challenges such as fragmented oversight, high debt-to-GDP ratios, and weak revenue generation threaten the country’s long-term fiscal stability. For investors, these reforms may enhance clarity in debt management and accountability. Still, uncertainty around state-owned enterprise (SOE) liabilities and structural inefficiencies may hinder confidence in Sri Lanka’s economic recovery and debt sustainability.