The Sri Lankan Economy: From Optimism to Debt Trap

Abstract

This paper provides an interpretative survey of the economic policy and performance of the Sri Lankan economy during the postindependence era, with a focus on the sources of the country's vulnerability to the unprecedented sovereign debt crisis in the wake of the COVID‐19 pandemic and prospects beyond the crisis. The prime focus of the Extended Fund Facility (EFF) program that Sri Lanka signed with the International Monetary Fund (IMF) in March 2023 is on economic stabilization through fiscal consolidation. The analysis of this present paper infers that recovery from the crisis and placing the economy on a self‐sustained growth path requires combining the standard IMF approach to macroeconomic stabilization with coherent structural adjustment reforms to redress the long‐standing anti‐tradable bias in the incentive structure that was the root cause of the vulnerability to the crisis.