Sri Lanka debt service has sharply exceeded incoming foreign funds in the first half of 2025, with the government paying over 1.35 billion US dollars while receiving just 547 million dollars in external inflows, Finance Ministry data shows.
Sri Lanka debt service hits $1.36bn as inflows lag at $547mn in early 2025
Sri Lanka debt service commitments reached 1,358.6 million US dollars during the first six months of 2025, far surpassing the country’s foreign inflows of only 547.5 million dollars. According to the Mid-Year Fiscal Report issued by the Finance Ministry, the shortfall was covered by purchasing dollars from the Central Bank of Sri Lanka, highlighting the government’s increasing reliance on monetary financing to meet external obligations.
Of the total Sri Lanka debt service, 863.6 million dollars were used for principal repayments while 495.3 million dollars covered interest payments. The finance report noted that the limited availability of foreign currency income made it necessary for the Treasury to access central bank-held reserves. The central bank supplied dollars to the Treasury without fully sterilizing the liquidity, which allowed excess rupees to remain in the financial system.
Analysts have cautioned that this approach contributed to a gradual depreciation of the rupee as the central bank did not absorb excess liquidity from private importers. Despite the challenges, the fourth tranche of 350 million dollars from the International Monetary Fund eased immediate pressure on Sri Lanka debt service obligations and added temporary stability to foreign exchange reserves.
The report further stated that the Treasury utilized its cash buffer to service both foreign and domestic debt commitments. However, economic experts argue that reliance on central bank financing increases long-term risks, particularly when external debt repayments are funded using newly created rupee liquidity. They also noted that foreign debt could be managed more sustainably if the Treasury were allowed to purchase dollars directly in the market, similar to state-owned enterprises such as the Ceylon Petroleum Corporation.
Critics point out that Sri Lanka debt service does not necessarily require fresh external borrowings if rupee revenues can be converted transparently into dollars in the open market. Preventing the Treasury from buying dollars independently has made it dependent on central bank reserves and vulnerable to currency instability. Some analysts suggest establishing a dedicated Treasury foreign exchange trading desk or allowing state banks to purchase dollars on its behalf to reduce future debt rollovers.
Economists warn that a continued combination of high Sri Lanka debt service, weak inflows and excess liquidity could trigger further depreciation and erode confidence in monetary policy. They emphasise that strategic liquidity management, rather than excessive reliance on central bank financing, is critical to ensuring financial stability and avoiding a repeat of past debt crises.