IMF First Deputy Managing Director Gita Gopinath’s June 2025 speech in Colombo was not simply an update on Sri Lanka’s economic programme. It was an attempt to reshape the global narrative around a country long associated with policy inconsistency and financial mismanagement. Delivered at the halfway mark of Sri Lanka’s programme with the International Monetary Fund (IMF), the address was part progress report, part warning, and part blueprint.
For the first time in decades, Sri Lanka may be doing more than just recovering. It may be changing course. “Sri Lanka’s experience stands out—both for the severity of the crisis the country experienced three years ago and the remarkable progress achieved in a very short time,” Gopinath said. The country defaulted on its external debt in 2022, the first time in its post-independence history. What followed was a series of harsh measures aimed at stabilising a collapsed economy. Inflation had surged. Fuel and medicine were scarce. Public trust in the government had eroded. In response, a new administration negotiated a four-year Extended Fund Facility (EFF) with the IMF. Two years in, the results are visible, even if the underlying risks remain.
Macroeconomic stabilisation has been the most visible success. Sri Lanka’s economy grew by 5% following two years of contraction. Tax revenues have risen sharply as a share of GDP. Inflation, which had been running into double digits, is now under control. Shortages of essential goods have eased. Reforms to public financial management, central bank independence, and anti-corruption laws have enhanced the credibility of a government historically known for its opacity. Gopinath credited these gains to the discipline of the reform programme and the sacrifices of ordinary citizens.
This was not a conventional recovery. Unlike past IMF programmes that faltered due to limited domestic buy-in or half-hearted reform, the current one has involved profound structural change. The decision to default and restructure both external and domestic debt was politically costly but fiscally necessary. External creditors agreed to forgive $3 billion and restructure another $25 billion. Sri Lanka’s bonds are now back in global indices. Its credit rating has improved, albeit modestly. The restructuring has also freed up fiscal space that can be redirected toward investment and social protection.
The restructuring process itself is being studied as a model for future applications. “The Sri Lankan debt restructuring experience provides several lessons that will help make the process simpler for other countries that need restructuring in the future. Sri Lanka’s experience better illuminated the trade-offs in setting debt targets and directly led to the development of improved methodologies for evaluating state contingent features in debt contracts. It helped creditors learn how to improve coordination and provided them with new instrument designs to consider. Together with other recent restructuring cases, it helped motivate important reforms to IMF’s debt policies,” Gopinath said.
Sri Lanka had to navigate a fragmented creditor landscape. Bilateral creditors, such as India, Japan, and China, had different expectations, timelines, and internal approval mechanisms. The IMF, along with the G20’s Global Sovereign Debt Roundtable, helped coordinate and facilitate agreements. The process also required innovation. For example, the IMF developed new tools to assess how contingent liabilities and changing macroeconomic conditions affect debt sustainability. These tools are now being applied to other countries facing similar crises. One of the most challenging aspects of the restructuring involved domestic debt.
Local banks, the central bank, and public pension funds collectively held a significant portion of Sri Lanka’s debt. A haircut or outright reduction in principal would have jeopardised financial and social stability. Instead, the government opted to lower interest rates and extend maturities. This approach minimises immediate pain but may create future vulnerabilities. Still, the IMF believes that the balance struck was appropriate. Gopinath’s speech also reflected the global context in which this recovery is taking place. Slowing global growth, rising protectionism, and geopolitical tensions all pose significant risks for small, open economies like Sri Lanka.
These external headwinds limit the country’s options. Export diversification, attracting foreign direct investment, and boosting tourism remain critical. However, none of these will succeed without continued macroeconomic stability and institutional reform. The social costs of the crisis are still being felt. Poverty levels remain high. The World Bank estimates that 24.5% of Sri Lankans were living below the national poverty line in 2024. Many of the reforms, while necessary, have been regressive in the short term. Removing energy subsidies, introducing cost-reflective pricing, and expanding the tax base have had a disproportionately negative impact on lower-income households.
Gopinath acknowledged this burden and stressed the importance of targeted social spending and broader engagement with civil society. The IMF, traditionally criticised for its austerity-oriented approach, is offering a more nuanced framework. The emphasis is now on long-term resilience rather than quick fiscal consolidation. Governance, transparency, and anti-corruption reforms are central components of the programme. The message is clear: rebuilding credibility is as essential as rebuilding growth. The fact that these themes featured prominently in Gopinath’s speech reflects a shift in how the IMF approaches countries with repeated programme failures.
Sri Lanka’s history with the IMF has not been encouraging. Since 1965, it has entered into 16 IMF arrangements. Roughly half of them ended prematurely. Often, the cycle was the same. A crisis would emerge. A programme would be signed. Reforms would begin, only to be reversed once immediate pressure eased. Growth would resume briefly, then stall. External shocks or internal mismanagement would trigger another crisis. Gopinath’s refrain, “This time must be different,” was both a hope and a plea for change. The difference now lies in both urgency and structure.
The political cost of failure is higher. The economic foundation, while still fragile, is more robust. Reforms have been more comprehensive. Public engagement, though limited, is greater than in past episodes. International attention is sharper. Sri Lanka is no longer merely a regional issue. It is a test case for a more flexible, coordinated approach to sovereign crises that many countries in the developing world may soon require. What happens next will determine whether this becomes a turning point or another false dawn.
The government must complete the remaining phases of the programme, which include
further tightening of fiscal policy, deepening governance reforms, and managing domestic debt risks. These are areas where political resistance is likely to grow. Gopinath emphasised the importance of staying the course, warning that policy missteps could quickly erode the hard-earned gains.
“Sri Lanka’s reform programme has delivered strongly. But history reminds us of the risks. Of the 16 IMF programmes Sri Lanka has engaged in over the years, about half ended prematurely. Often, reform fatigue sets in and reverses hard-earned gains. Growth faltered. The country cannot afford to repeat,” Gopinath warned.
The global economic order is not waiting for Sri Lanka to catch up. Fragmentation in trade, volatile capital flows, and climate-related risks all pose significant threats to long-term stability. Sri Lanka will need to build buffers while also preparing for the uncertainties of the next decade. For now, the country has room to manoeuvre. That may not last if reforms stall or if political instability returns. The IMF, for its part, appears committed to remaining engaged. It has adapted its tools, refined its approach, and is using Sri Lanka as an example of what is possible when reforms are pursued decisively. However, it is also aware of the fragility of such progress.
Confidence is difficult to build and easy to lose. Gopinath’s message made clear that credibility will depend not just on economic metrics but on public trust and institutional integrity. Ultimately, Sri Lanka’s recovery may offer a glimpse into how countries can emerge from financial ruin without reverting to old patterns of behaviour. Whether it becomes a case study in resilience or relapse will depend on choices made now, not just by technocrats and lenders but by political leaders and citizens alike.