Sri Lanka Economic Crisis: Why It Defaulted in 2022 and How Far It Has Recovered

World Bank: output is back at its pre-crisis level, but poverty is not Recovery

The World Bank’s October 2026 update says real GDP has returned to its pre-crisis level. The economy grew 4.7% in the first half of 2026, its twelfth straight quarter of expansion, and the Bank projects 4.4% for 2026 and 4.2% for 2027. Poverty in 2025 is estimated at 16.9%, still well above its pre-crisis level, labour-market indicators lag, and renewed inflation has partly eroded household gains (World Bank).

The IMF is less upbeat on the same year: in May it forecast growth moderating to around 3% in 2026. The two forecasts are shown side by side below. The page gives no pre-crisis GDP figure, so none is invented here.

IMF completes the combined fifth and sixth reviews IMF

The IMF Executive Board completed the combined fifth and sixth reviews of the Extended Fund Facility (EFF), releasing about US$695 million (SDR 508 million). Total disbursements under the arrangement reach about US$2.4 billion (IMF).

Approved and disbursed are different numbers. The EFF approved in March 2023 is worth SDR 2.286 billion (about US$3 billion); money is released review by review, and SDR 1,778 million had been paid out after this decision (IMF). The gap, roughly SDR 0.5 billion by AiTimeline’s arithmetic, is not yet released.

The IMF reported strong performance on end-December 2025 targets, but two commitments were not observed: no new external payment arrears and no new import restrictions. It warned that risks are tilted to the downside, citing the Middle East war, higher oil prices, the cyclone’s aftermath and about 4.5% rupee depreciation year to date. Inflation had risen to 5.4%, from nearly zero a year earlier.

IMF staff reach agreement on the two reviews IMF

IMF staff agreed with the authorities on the combined fifth and sixth reviews, subject to Board approval and two conditions: restoring cost-recovery electricity and fuel pricing while protecting vulnerable groups, and completing the financing-assurances review. The IMF said the economy grew 5% in 2025, gross official reserves were US$7 billion at end-March 2026, and March inflation was 2.2%. 2025 fiscal performance was strong, it said, mainly because of taxes on motor-vehicle imports (IMF).

Cyclone Ditwah adds a new bill to the recovery Shock

Cyclone Ditwah brought record rain, floods and landslides across all 25 districts. By 14 December the Disaster Management Centre counted 644 dead and 183 missing, with 1.34 million people affected and more than 118,000 houses damaged or destroyed (Ada Derana). On 19 December 2025 the IMF approved about US$206 million in emergency financing under its Rapid Financing Instrument, separate from the EFF, and deferred the fifth review (ETV Bharat/PTI).

The brief dates the cyclone to December; the rains began in late November, and the IMF’s emergency loan is what came in December.

Third and fourth reviews keep the money flowing IMF

The Board completed the third review on 28 February 2025, releasing about US$334 million (IMF), and the fourth review in early July 2025, releasing SDR 254 million, about US$350 million (IMF). Each tranche was tied to targets on revenue, reserves and governance.

The international bond exchange is completed Debt deal

Holders of about 97.8% of the outstanding bonds accepted the exchange, which Bloomberg reported as a roughly 27% haircut on nominal value. New bonds settled on 20 December 2024. One series, the 2022 bond, drew only 73% acceptance, and one holder with about a quarter of it challenged the restructuring (Daily Mirror).

Restructuring changes the timing and terms of debt; it does not erase it.

Dissanayake wins the presidency Politics

Anura Kumara Dissanayake won the presidential election in a run-off count, the first in Sri Lanka’s history, defeating Sajith Premadasa, and was sworn in on 23 September 2024 (Ada Derana). He had campaigned on anti-corruption and relief for households. His government endorsed the bondholder agreement reached two days before the vote and continued the IMF programme.

Agreement in principle with bondholders Debt deal

Sri Lanka announced an agreement in principle with the main bondholder groups, days before the election. The deal kept macro-linked and governance-linked features and cut the nominal value; Bloomberg put the haircut at about 27% (Bloomberg). The brief puts this in September and the China Exim deal in November; the Exim deal was in fact reached earlier (next entry).

China Exim Bank and official creditors sign Debt deal

On 26 June 2024 Sri Lanka signed debt-treatment agreements with China’s Export-Import Bank covering about US$4.2 billion (Ada Derana); the agreement in principle had come on 11 October 2023 (Ada Derana). Reports the same day also described a final deal with the bilateral official creditor committee, put at about US$5.8 billion. The brief’s “November 2024” for Exim does not match this record.

Two weeks earlier, on 13 June 2024, the IMF released SDR 254 million (about US$336 million) after the second review (CBSL); the brief gives March 2024.

Domestic debt is restructured Debt deal

The domestic debt optimisation exchanged eligible Treasury bonds for new step-down coupon bonds, settled on 14 September 2023. Offers covering 37% of eligible principal were accepted, and 84% of eligible bonds held by superannuation funds took part (Ada Derana). Banks were excluded to protect deposits; pension funds such as the EPF were included, which made it politically sensitive.

The IMF approves a four-year, SDR 2.286 billion programme IMF

The Board approved a 48-month EFF of SDR 2.286 billion (about US$3 billion) and released SDR 254 million, about US$333 million, immediately (Ada Derana). Some media wrote US$2.9 billion for the same facility, the difference being the exchange rate used. The remaining money depends on reviews.

IMF staff agreement, as inflation peaks at 69.8% IMF

IMF staff and the authorities reached a staff-level agreement on a four-year programme on 1 September 2022, subject to financing assurances from creditors. That month headline inflation on the Colombo index hit 69.8%, and the economy shrank by 7.8% over 2022 on the first official estimate (Newsfirst); the brief gives 7.3%, which AiTimeline could not trace.

Protesters storm the president’s residence Politics

Protesters entered the presidential residence on 9 July. Gotabaya Rajapaksa fled to Singapore and his resignation was effective 14 July (Gulf News). Parliament elected Ranil Wickremesinghe president on 20 July 2022.

Sri Lanka defaults for the first time Shock

A 30-day grace period expired on 18 May 2022 on about US$78 million of interest due on 18 April for bonds maturing 2023-28, making this the first sovereign default in the country’s history. The central bank governor called it a pre-emptive default tied to restructuring (Tamil Guardian).

Sri Lanka suspends external debt payments Shock

The Finance Ministry announced a temporary suspension of payments on foreign-currency debt pending an IMF programme (Daily Mirror). Reserves were about US$1.9 billion in March, against roughly US$4 billion of obligations, with power cuts of up to 15 hours a day (Wikipedia). The brief says Sri Lanka formally sought IMF help in March; AiTimeline did not confirm that date.

A fertiliser ban and pandemic limits compound the strain Background

The ban on chemical fertilisers cut rice output by about 20% in six months and hurt tea exports (Wikipedia); it was later reversed. With tourism still depressed and official remittances down sharply in early 2022, dollars became harder to find.

COVID-19 empties the hotels Background

The pandemic sharply cut tourism earnings and employment in an economy that relied on visitors, tea, garments and remittances for foreign currency. Foreign debt had risen from US$11.3 billion in 2005 to US$56.3 billion by 2020 (Wikipedia).

Large tax cuts take effect Background

The new government cut VAT from 15% to 8% and abolished several other levies from 1 December 2019 (Washington Times/AP). Estimates of the cost differ: one projection in 2019 was Rs 450 billion, a later statement put it at about Rs 800 billion a year. The brief dates the cuts to November; they were announced then but took effect in December.

Easter Sunday bombings Background

Nine suicide bombers hit three churches and three hotels, killing 269 people and injuring more than 500 (UCA News). Tourist arrivals fell sharply, removing a key source of dollars.

Low revenue, high debt and borrowing abroad Background

Sri Lanka entered the crisis with low tax revenue, recurring deficits, high debt-service needs, and reliance on foreign-currency borrowing including international sovereign bonds, while export earnings were too small to cover shocks. These weaknesses are why later shocks became a default rather than a downturn.