Dollars and debt; the battle-cry of our times. As our economy slowly sinks, we dig into the debt story to show you exactly who Sri Lanka owes money to, why, when, and for what.

March 4, 2022

Read this article in English | සිංහල | தமிழ்


Story & Analysis by Umesh Moramudali  Visualizations by Yudhanjaya Wijeratne Edited by Aisha Nazim  Translated by Mohammed Fairooz & Nadim Majeed

For the first time since independence, Sri Lanka is at high risk of defaulting foreign loan commitments. Some international media as well as global investment firms have already pointed out that Sri Lanka will default on its foreign debt in the upcoming months.

This leads to the question of how much Sri Lanka owes — and to whom? Why and how have we borrowed so much that we can’t seem to pay it back? This is our take on unravelling those questions.

First off, why did Sri Lanka borrow so much?

To put it simply: mostly because Sri Lankan governments haven’t been raising enough revenue.

Governments borrow when they do not have sufficient revenue to meet its expenditure. Governments are vested with the responsibilities of providing national security, maintaining law and order, developing infrastructure and providing social welfare. Sri Lanka is no exception to this.

Paying state-sector employee salaries — like those of teachers, doctors, the police, and the military for instance — and paying contractors for building highways, irrigation systems, and other new infrastructure are part of the government’s costs. Costs which the government needs to keep raising money for in order for it to keep spending. And one of the main sources of government revenue is... taxes. Taxes are imposed on goods, services, individuals and companies - but when the government fails to generate enough revenue through taxes, it ends up borrowing to bridge the gap.

When governments borrow, they can borrow from domestic sources or from foreign sources. Domestic borrowings are largely done through issuing Treasury Bills and Treasury Bonds; which are also referred to as government securities.

In this article, we’ll be looking at the Sri Lankan Government’s (GOSL’s) borrowing from foreign sources.

A refresher of Sri Lanka’s foreign debt

Over the last five decades, a large portion of infrastructure development projects in Sri Lanka were financed through foreign loans. During the late ‘70s and throughout the ‘80s, Sri Lanka carried out a number of development projects — such as the Mahaweli development project — with significant financial assistance received through foreign loans granted by other countries, and multinational organisations like the World Bank.

For decades, Sri Lanka was heavily reliant on concessionary foreign loans for its development process, to the extent that some development economists identified Sri Lanka as a donor darling.


Due to the heavy reliance on borrowing, Sri Lanka’s public debt stock increased rapidly after the liberalization of the economy in 1977. As the government of Sri Lanka continued to borrow for infrastructure development and consumption, the country’s debt stock skyrocketed during the 1980s. By 1989, Sri Lanka’s public debt (which is the domestic debt + foreign debt) amounted to 109% of its GDP. Foreign debt as a percentage of the country’s GDP also reached a peak with 62% recorded in 1989.

While foreign debt stock skyrocketed as a percentage of GDP, the country still managed to muddle through crises with the support of the International Monetary Fund (IMF). This was largely because most of Sri Lanka's foreign debt at the time was concessionary loans. Such concessionary loans had low-interest rates, and longer payback periods; which varied from 20-40 years with an approximate grace period of 10 years. Because of the low-interest rate and very long payback period, the GOSL did not have to pay a massive amount of money as foreign debt repayments each year.

However, things started to change after the country was upgraded to a [middle-income country]( Lanka is a lower,%2C inclusive%2C and resilient country.)  in 1997. Subsequent to the upgrade to middle-income status, multilateral development agencies reduced the concessionary loans provided to Sri Lanka. While we upgraded to a middle-income country on GDP Per capita terms (average annual income per person), we continued to have a lot of economic issues as well as many infrastructure needs.  Furthermore, the government still had high budget deficits and did not have the capacity to invest on infrastructure on its own.

So what did Sri Lanka do? We started to look at alternatives. One potential option was to borrow from international capital markets, and the other was to increase reliance on loans provided by Export-Import Banks (EXIM Banks), mainly from the China EXIM Bank. These loans were commercial borrowings that had higher borrowing cost. This shift resulted in a complete change in Sri Lanka’s foreign debt dynamics during the last two decades. By the end of 2020, 51% of Sri  Lanka’s foreign loans were commercial, non-concessionary loans.