Sri Lanka could face external debt above 70% of GDP even after the completion of the debt restructuring and debt vulnerabilities will remain if the country does not implement debt management laws, the Asian Development Bank (ADB) said.

In its April Development Report, the bank said that the resumption of growth in Sri Lanka hinges on the assumed continuation of reforms and better supply conditions as crucial reforms such as the Public Financial Management Act which will strengthen fiscal discipline and a debt management law to mitigate medium-term refinancing risks is expected to be enacted in 2024 along with the completion of external debt restructuring.

ADB said that Sri Lanka could face external debt above 70% of GDP even after relief.

Moreover, it expects Sri Lanka's growth to rebound to 1.9% in 2024 and 2.5% in 2025 from the 2.3% contraction in 2023 which will be driven by rising output in services, resumption in industrial projects and continuous reform aimed at improving the business climate while tax increases will dampen the recovery in private consumption and investment.

Also, Sri Lanka’s average annual inflation is expected to return to single-digit inflation at 7.5% in 2024 and 5.5% in 2025 after 2 years of high inflation.

Further, the aforesaid report said that although commitment to maintaining a primary surplus is expected to continue in 2014 after an estimated primary surplus of 1.4% of Gross Domestic Product (GDP) in 2023, the fiscal deficit is likely to widen because the Government expects recurrent expenditure to increase from 15.8% of GDP in 2023 to 16.8% in 2024 while any divestment of State-owned assets under consideration should improve the fiscal balance.

However, the risks that could impact the recovery of Sri Lanka include the upcoming elections with a possible impact on fiscal policy and reform implementation.

“Commitment to the reform programme will also be tested by efforts to balance public sentiment with the implementation of the IMF programme. Delays in the completion of a debt restructuring agreement and any barriers to passing key legislation could dampen sentiment and derail growth,” ADB pointed out.

Also, it said that Sri Lanka is reeling from high outmigration, particularly by the young, leading to higher skills mismatch which could impact forecasts if prolonged and weakness in the finance sector may prolong a full recovery.

“Additionally, weather vagaries could adversely impact agriculture and food security. Weaker-than-expected growth in key export markets could lead to increasingly tepid demand for exports, and geopolitical uncertainty could impinge on growth,” the report further noted.