Sri Lanka cuts foreign borrowing, boosts domestic financing
View(s):Sri Lanka has recorded a significant shift in its budget financing pattern, with official data showing net foreign debt repayments of US$ 0.09 billion (Rs. 27.9 billion) during the first four months of 2025.
This marks a steep rise from the amount repaid in the same period last year, indicating that the government is continuing to repay more foreign debt than it borrows, a trend rarely seen in the country’s fiscal history.
According to Treasury data, the entire budget deficit of Rs. 261.6 billion from January to April 2025 was financed through domestic borrowing, totalling Rs. 289.5 billion. This not only covered the deficit but also contributed to net foreign debt repayment.
The Finance Ministry is projected to mobilise roughly $3.2 billion (Rs. 956.8 billion) in official foreign finance in 2025, excluding large investment inflows and bilateral loan disbursements. With additional multilateral loans and FDI, the total foreign financing for the year could surpass $5 billion (Rs.1495 billion), according to official data.
This pattern reflects a broader economic transition that began after the country regained monetary stability in September 2022, following its worst financial crisis in decades. Since then, foreign financing for the budget has been consistently negative, driven by the drying up of bilateral lending and continued repayments of multilateral loans.
In 2024, Sri Lanka’s net foreign financing was negative by $0.004 billion (Rs. 1.21 billion) by year-end. While part of this figure was due to debt restructuring agreements, it marked a clear reversal from the country’s long-standing reliance on foreign borrowing.
Economic experts note that such a shift demands careful monetary management. The Central Bank of Sri Lanka has been tasked with maintaining macroeconomic stability through tight, deflationary policies and appropriate interest rates. These measures are crucial to compress the current account deficit, making room for foreign capital repayments.
Aside from supporting the government, the Central Bank is also repaying its own external liabilities, which were accumulated during previous policies that inflated imports and widened the current account deficit, ultimately contributing to the 2022 sovereign default.
Meanwhile, the private sector has also been repaying foreign debt on a net basis, as the Central Bank avoided excessive money printing or inflationary rate cuts during most of 2024. This behavior further highlights the systemic adjustment taking place in the post-crisis economy.
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