Three years after default, Lanka rebounds

Sri Lanka's return to upper-middle-income status just three years after its worst post-independence economic crisis has been attributed to consistent implementation of IMF-backed reforms, fiscal discipline and strong institutional governance, according to an analysis published by The Business Standard.

The World Bank this week reclassified Sri Lanka as an upper-middle-income country after its real Gross Domestic Product (GDP) expanded by five per cent in 2025, surpassing the Bank's earlier forecast of 3.5 per cent. The country's Gross National Income (GNI) per capita also exceeded the US$4,496 threshold required for upper-middle-income status.

The report, titled How Sri Lanka regains upper-middle-income status after enduring a three-year crisis, said the country's recovery was among the fastest recorded following a sovereign default, describing the upgrade as the strongest indication that its post-crisis reform programme had succeeded.

Sri Lanka defaulted on its external debt in April 2022, suspending repayments on about US$51 billion in foreign debt after an economic collapse triggered by tax cuts, persistent fiscal and external deficits, the Easter Sunday attacks, the COVID-19 pandemic and soaring global commodity prices, which depleted foreign exchange reserves and caused severe shortages of fuel, gas and medicines.

The report said the turnaround was driven by a US$3 billion IMF Extended Fund Facility, tighter fiscal and monetary policies, tax reforms, market-based energy pricing and expenditure controls, which successive governments continued despite political and economic pressures.

Distinguished Fellow of the Centre for Policy Dialogue (CPD), Prof. Dr. Mustafizur Rahman, told The Business Standard that Sri Lanka's success stemmed from the consistent implementation of fiscal and monetary policies by both the Government and the Central Bank.

Debt restructuring, including a US$17.5 billion agreement with private creditors and China, together with US$4 billion in financial assistance from India, provided the fiscal space needed to sustain reforms, the report said.

It added that a sharp recovery in tourism, with arrivals exceeding two million in 2024, stronger worker remittances, industrial growth and an expansion in financial services boosted foreign exchange earnings and underpinned the five per cent economic growth recorded in 2025.

The report also highlighted policy continuity as a key factor, noting that the National People's Power administration, which assumed office in late 2024, largely maintained the IMF-supported reform programme instead of reversing it.

Prof. Rahman said Sri Lanka's ability to implement policy decisions consistently and strengthen governance after the Rajapaksa administration had been central to restoring economic stability.

However, the report cautioned that the country's long-term success would depend on its ability to generate foreign exchange through export- and trade-led growth as major external debt repayments resume from mid-2027.