Sri Lanka Debt Crisis has deepened in the first half of 2025 as the government spent significantly more on debt repayments than it received in dollar inflows. With rising reliance on the central bank for foreign currency, concerns are growing over liquidity pressures, rupee depreciation, and long-term financial stability.
Sri Lanka Debt Crisis intensifies as debt service outpaces dollar inflows in 2025
Sri Lanka Debt Crisis continues to worsen as official data reveals the government serviced 1,358.6 million US dollars in debt during the first half of 2025, while only 547.5 million US dollars flowed into the Treasury. The remaining funds were obtained from the Central Bank of Sri Lanka, highlighting the country’s ongoing reliance on monetary authority intervention to manage foreign debt obligations.
According to the Mid-Year Fiscal Report, the central bank purchased dollars and provided them to the Treasury without fully sterilizing liquidity. This approach allowed funds to circulate back into the financial system, but it also contributed to excess rupee liquidity and increasing pressure on the exchange rate. As a result, the Sri Lanka Debt Crisis escalated with the rupee steadily depreciating against major currencies.
By June 2025, the Finance Ministry had repaid 863.6 million dollars in principal and 495.3 million dollars in interest. The Treasury acknowledged a shortage of US dollar proceeds, which forced authorities to use existing cash flow buffers and depend on central bank support. The International Monetary Fund contributed 350 million dollars under its fourth tranche, easing some pressure but not resolving the core concerns surrounding the Sri Lanka Debt Crisis.
Experts argue that fresh foreign borrowings are not the only solution, as the Treasury still retains the option to purchase dollars using rupee revenues, similar to state-owned enterprises. Analysts have urged financial authorities to create a dedicated foreign exchange trading desk or to allow state banks to acquire dollars directly from the market for debt repayment purposes, instead of increasing foreign debt to settle existing commitments.
The Sri Lanka Debt Crisis is further aggravated by inflationary monetary policy and restrictions on accepting taxes in foreign currency. Economists warn that continued reliance on central bank liquidity, combined with dollar payments funded through unsterilized forex sales, risks depleting reserves and triggering another default. Historical trends since 2015 show that borrowing dollars to repay maturing debt only increases the overall debt stock and interest burden.
The Treasury confirmed the use of a cash buffer to settle both foreign and domestic debt obligations. However, analysts caution that using domestic liquidity for foreign debt service without proper reserve management can cause reserve losses and currency depreciation. This mechanism has amplified concerns surrounding the Sri Lanka Debt Crisis, especially as the central bank has reduced reverse repo auctions and moved towards a scarce reserve system.
With limited foreign exchange reserves, rising borrowing needs, and ongoing depreciation, the Sri Lanka Debt Crisis underscores the urgent need for strategic liquidity management, structural reforms, and transparent financial planning to restore investor confidence and economic stability.