Multilateral institutions lead support while budget financing dominates inflows amidst slow recovery and debt repayments.
Sri Lanka received $1.9 billion in foreign financing during the first half of 2024, according to data from the Ministry of Finance, signaling cautious optimism for the debt-stricken nation following its 2022 default. The Asian Development Bank (ADB) led the funding, providing $862 million, while Japan resumed lending after participating in debt restructuring negotiations.
Of the total financing, $1.89 billion came in the form of loans and $68.6 million as grants. Multilateral institutions dominated the disbursements, with the ADB—backed primarily by Japan and the United States—contributing $859.8 million. The World Bank extended $564.9 million, with $545.7 million of that as loans.
The International Monetary Fund (IMF), another key partner, provided $334 million in loan support. The Beijing-backed Asian Infrastructure Investment Bank (AIIB) gave $51.9 million, while the OPEC Fund and the International Fund for Agricultural Development (IFAD) contributed $20.3 million and $16.4 million, respectively.
Following its default, Sri Lanka relied heavily on multilateral institutions and India for financing. Japan and China limited their assistance to grants during this period. USAID also extended support through initiatives such as a $40 million grant for agriculture via the Food and Agriculture Organization (FAO).
Despite the default, Sri Lanka maintained payments to institutions like the IMF, World Bank, ADB, and AIIB. Meanwhile, it resumed settlements with India’s central bank using foreign exchange acquired through tight monetary policy, even before broader debt restructuring was finalized.
A significant portion—49% or $939 million—of 2024’s financing was designated for budget support rather than project-specific loans. These budget support funds are untied and can be used to settle maturing foreign debt. In contrast, 67% of the $1.72 billion disbursed in 2023 served the same purpose.
As private sector credit begins to recover and the Central Bank of Sri Lanka lowers interest rates following IMF-endorsed policy frameworks, concerns have emerged. Analysts warn that the most recent rate cut, though not inflationary in itself, may reduce the country’s buffer to meet debt obligations. Budget support flows are also showing signs of slowing.
Though budget deficits are narrowing, Sri Lanka continues to bear the burden of paying interest on newly restructured loans and international bonds. Historical policy missteps, particularly rate cuts and tax changes in 2019 that defied classical economic doctrines, have drawn criticism for exacerbating balance of payments pressures.
The nation has missed IMF reserve targets multiple times over the past decade—in 2012, 2018, and 2019—largely due to monetary easing amid recovering private credit. As Sri Lanka navigates its fragile recovery, maintaining discipline in both fiscal and monetary policy remains critical.