Charting a Path for Debt Sustainability in Sri Lanka

Since December 2018 Sri Lanka has been subject to three notches down in rating by S&P, Moody’s and Fitch Ratings. This situation is a historical first for Sri Lanka. While many of Sri Lanka’s key macroeconomic indicators have, in the past recorded more negative levels, Sri Lanka has never in the past, been evaluated as being at such a serious level of risk, in terms of defaulting on its debt.

Despite these evaluations/projections, there is at present no formal debt sustainability analysis for Sri Lanka that has been published, either by the government or international organisations. Consequently, there is also a lack of clarity with regard to the minimum necessary improvements that Sri Lanka would need to make to ensure that it does not move into a situation of debt default.  This paper develops and sets out four criteria, which if met, would enable Sri Lanka to sustain its current level of debt, without moving into default, provided that Sri Lanka received adequate short-term liquidity in terms of foreign reserves.