Sri Lanka’s Debt Crisis: A Crisis of Governance

This paper examines the origins, evolution, and resolution efforts surrounding Sri Lanka's 2022 sovereign debt default.Many defaults are triggered by sudden external shocks, but, in contrast, Sri Lanka's crisis was largely the result of prolonged domestic policy failures, including chronic fiscal deficits, a narrow tax base, overreliance on external borrowing, and poor monetary management.These structural weaknesses were compounded by governance failures, including corruption, institutional fragility, and populist policymaking, which eroded public trust and investor confidence.Exogenous shocks such as the COVID-19 pandemic and commodity price surges exacerbated an already fragile macroeconomic position, ultimately leading to a depletion of foreign reserves, surging inflation, and widespread social unrest.The paper outlines the difficult path toward crisis resolution, including complex negotiations with bilateral and commercial creditors and an International Monetary Fund program featuring governance reforms and fiscal austerity.While recent reforms have brought a degree of macroeconomic stability, Sri Lanka's recovery remains fragile, with the long-term success of its restructuring efforts contingent on sustained policy discipline, improved governance, and stronger resilience to external shocks.