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  • Publication | 2023
Sri Lanka Development Update April 2023
Global Food and Nutrition Security

Sri Lanka’s longstanding structural weaknesses, which were elevated by a series of exogenous shocks, plunged the country into a severe economic crisis. Poor governance, a restrictive trade regime, a weak investment climate, and episodes of loose monetary policy and an administered exchange rate, contributed to macroeconomic imbalances in the last two decades. Fiscal indiscipline, linked to low revenue collections, led to high fiscal deficits and large gross financing needs. These weaknesses were masked by rapid growth, particularly after the end of the civil war in 2009, spurred along by risky commercial borrowing and an increasingly inward-oriented economic model. The tax cuts in 2019 further eroded weak fiscal buffers and led to a rapid growth in debt to unsustainable levels. Several exogenous shocks also contributed to this, including a political crisis in 2018, the Easter bombings in 2019, the COVID-19 pandemic in 2020, and Russia’s invasion of Ukraine in 2022. Despite imminent and significant external debt service obligations, Sri Lanka lost access to international financial markets in 2020 following credit rating downgrades.