• Sri Lanka's debt is expected to drop from 113% of GDP in 2023 to 82% by 2032, exceeding IMF targets.

Sri Lanka's debt stock is projected to decline from 113% of GDP at the end of 2023 to 82% by 2032, exceeding the IMF’s target of 95%, if the country meets the IMF’s 2.3% primary surplus goal. This performance, driven by a bondholder deal that restructures $12.6 billion in debt to $9.2 billion, includes macro-linked bonds whose future payouts are tied to GDP growth. If growth outpaces IMF forecasts, part of the 27% debt haircut will be reversed and coupon rates will rise from 2028, while slower growth would trigger an additional haircut. Bloomberg Economics projects an effective haircut of 15.5% based on its optimistic growth outlook.

Bloomberg Economics also suggests that Sri Lanka could achieve its debt reduction targets with a lower primary surplus of 0.8%, allowing the government additional fiscal space of up to 1.5% of GDP. This comes alongside better-than-expected tax collections and improved compliance, providing another 0.7% of fiscal flexibility. President Dissanayake's approval of the debt restructuring deal has eased market concerns about the future of the IMF bailout program and boosted his party’s prospects in the upcoming parliamentary elections by making room for electoral promises to provide public relief.

Debt burden set to shrink by 2032 | The Morning