Sri Lanka enters the new year confronting a familiar but deepening economic strain, with falling foreign reserves, a weakening rupee, rising public debt and mounting disaster-related losses posing what analysts describe as a decisive test of fiscal discipline and policy coherence.
Sri Lanka Human Rights Centre Executive Director and former Provincial Governor Ranjith Keerthi Tennakoon has warned that the country urgently requires a coordinated economic response to prevent further deterioration, particularly as the cost of post-disaster reconstruction threatens to exert fresh pressure on already strained public finances.
“While the government has succeeded in revenue augmentation through heavy taxation and repeated increases in electricity and gas tariffs, its performance in maintaining fiscal discipline remains weak,” Tennakoon said in an economic indicators statement issued on January 5.
According to figures cited by Tennakoon, Sri Lanka’s domestic debt stood at Rs. 17,595.05 billion when President Anura Kumara Dissanayake assumed office. By the end of September 2025, that figure had climbed to Rs. 18,701.46 billion, reflecting an increase of Rs. 1,106.41 billion within a year.
External debt has also trended upward. From Rs. 10,429.04 billion at the end of 2024, foreign debt rose to Rs. 10,974.34 billion by September 2025. As a result, Sri Lanka’s total public debt stock now stands at Rs. 29,675.81 billion, underscoring the scale of the country’s fiscal exposure.
“This trajectory raises serious concerns about long-term debt sustainability,” Tennakoon warned, noting that debt servicing costs will intensify further if currency depreciation continues.
Foreign reserves under pressure
The steady decline in foreign reserves remains one of the most critical challenges facing the economy. Gross official reserves fell from USD 6,531 million in March 2025 to USD 6,033 million by the end of November, a contraction of nearly USD 500 million.
Tennakoon cautioned that upcoming reconstruction needs following widespread floods and landslides will necessitate substantial imports of construction materials, machinery and industrial inputs, inevitably drawing down scarce foreign exchange reserves.
Although Sri Lanka managed to maintain a current account surplus in 2024, the balance slipped back into deficit during September and October 2025, before returning to surplus in November. While a surplus is not required at all times, Tennakoon said the November turnaround offered a “cautious but positive signal” regarding the economy’s direction.
The rupee’s depreciation continues to amplify macroeconomic risks. The exchange rate has weakened from Rs. 293.25 per US dollar last year to around Rs. 309.45, increasing the rupee cost of foreign debt servicing while driving up import and production costs.
More troubling, Tennakoon noted, is the widening gap between commercial bank exchange rates and the informal undiyal (black market) rate, reflecting growing uncertainty and eroding confidence.
“This was precisely how the 2021–2022 economic crisis began — with a widening divergence between official and informal exchange rates,” he warned.
The economic fallout from recent floods and landslides adds another layer of urgency. Tennakoon criticised the government for failing, thus far, to prepare a comprehensive estimate of financial losses and reconstruction costs.
Preliminary assessments by the World Bank estimate disaster-related losses at USD 4 billion, while the International Labour Organization (ILO) places the figure as high as USD 16 billion, equivalent to 16 percent of GDP.
“Massive tax resources will be required for relief payments, while reconstruction will demand substantial foreign exchange for imports,” Tennakoon said, stressing that the government must urgently prepare credible financial assessments to mobilise both domestic and international support.
He also warned that delays in providing adequate relief have already become a serious concern for displaced communities struggling to rebuild their lives.
By Ifham Nizam
from The Island https://ift.tt/upsfrD9
No comments:
Post a Comment