Quora Answer: How Will the IMF Determine whether Debt Restructuring in Sri Lanka is Adequate?

The following is my answer to a Quora question: “How will the IMF determine whether debt restructuring in Sri Lanka is adequate?”

This is political theatre.  Sri Lanka’s economic collapse in 2022 was the most complete sovereign meltdown in Asia since the Indonesian crisis of 1998.  Foreign exchange reserves fell to US$50 million in usable form — barely enough to cover two weeks of imports.  Fuel queues stretched for kilometres.  Hospitals ran out of medicine.  The government defaulted on US$51 billion in external debt in April 2022 — the first Sri Lankan sovereign default in history.  President Nandasena Gotabaya Rajapaksa fled the country for Singapore in July 2022 after protesters stormed the presidential residence.  This was not bad luck.  It was the predictable outcome of decades of fiscal mismanagement, corruption, and the systematic capture of economic policy by political dynasties with interests orthogonal to the public good.

The IMF approved a 48-month Extended Fund Facility of US$3 billion in March 2023.  Sri Lanka has since completed several programme reviews.  The economy has stabilised.  Inflation has declined from 70 per cent at its 2022 peak to single digits.  Foreign exchange reserves have recovered to US$6 billion.  The IMF has declared progress.  The IMF’s assessment framework covers the standard metrics: primary fiscal surplus, revenue mobilisation, reserve adequacy, debt restructuring completion, and structural reform benchmarks.  By most of these metrics, Sri Lanka is performing adequately.  This is the diplomatic version.  The honest version is more complicated.

The IMF’s Shareholder Problem

The IMF is not a neutral arbiter.  It is a multilateral institution whose largest shareholders — the United States at 17.4 per cent of voting power, the European Union member states collectively at 30 per cent — exercise structural influence over its lending decisions, programme design, and assessment criteria.  Sri Lanka’s debt restructuring required the participation of China — Sri Lanka’s largest bilateral creditor, holding US$7.4 billion in bilateral debt.  China’s participation in the Common Framework debt restructuring process — the G20 mechanism designed to coordinate debt relief for distressed sovereigns — was delayed, contested, and eventually secured only after protracted negotiations that held up Sri Lanka’s IMF programme reviews.

China’s position throughout was that its development finance loans — extended through China Exim Bank and China Development Bank for projects including the Hambantota Port, the Colombo Port City, and various infrastructure programmes — should be treated differently from commercial bond debt.  The Western creditor nations and the IMF insisted on comparable treatment.  The dispute was not about Sri Lanka’s welfare.  It was about the precedent being set for the Common Framework’s application to other BRI-indebted sovereigns — Zambia, Ghana, Ethiopia — where the same creditor hierarchy dispute was playing out simultaneously.

Sri Lanka was the test case in a geopolitical contest between the Western-backed multilateral debt architecture and China’s bilateral development finance model.  The IMF needed Sri Lanka’s programme to succeed as evidence that the Common Framework could deliver.  China needed the terms to preserve the commercial viability of its overseas lending.  Sri Lanka needed debt relief to survive.  The interests were not identical.

The Hambantota Port best illustrates how Sri Lanka arrived at this position.  China Merchants Port Holdings financed the port with a US$1.1 billion loan at 6 per cent interest.  When Sri Lanka could not service the debt, it leased the port to China Merchants Port Holdings for 99 years in 2017 — the transaction that produced the debt trap narrative that has shaped Western discussion of BRI financing ever since.  Whether the narrative is fully accurate is debated.  What is not debated is that Sri Lanka signed a commercial agreement it could not service, under a government with documented corruption and conflicts of interest, using Chinese financing for a port whose commercial viability was contested from the outset.

The Corruption and Structural Reform Problem

The IMF’s programme includes structural benchmarks on revenue mobilisation, state-owned enterprise reform, and governance improvement.  These benchmarks are the items most likely to be partially met, reported as met, and then quietly reversed after the programme review is completed.

Sri Lanka’s structural problems are not technical.  They are political.  The Rajapaksa family’s domination of Sri Lankan politics for two decades — Percy Mahinda Rajapaksa as President from 2005 to 2015, then Prime Minister, then Finance Minister; Gotabaya Rajapaksa as President from 2019 to 2022; Basil Rohana Rajapaksa as Finance Minister — created a patronage network that penetrated every significant state-owned enterprise, regulatory body, and revenue collection function.

Ceylon Petroleum Corporation, Ceylon Electricity Board, and Sri Lankan Airlines collectively lost US$5 billion between 2010 and 2022 — a figure that exceeds the IMF programme’s total facility value.  These losses were not the result of market conditions.  They were the result of politically mandated pricing that subsidised connected interests, procurement that favoured politically connected suppliers, and employment rolls inflated to service political patronage obligations.  The IMF’s structural benchmarks require these entities to move toward cost-reflective pricing, reduce employment to operationally necessary levels, and implement transparent procurement.  The benchmarks have been partially met on paper.  The structural incentives for politicians to reverse them are unchanged.

The 2024 election of President Anura Kumara Dissanayake — a socialist politician whose Janatha Vimukthi Peramuna party had never previously held executive power — introduced a different political dynamic.  Dissanayake’s election on an anti-corruption platform created political pressure for structural reform.  His government’s ability to translate that pressure into durable institutional change — against an entrenched bureaucracy, a judiciary with compromised independence, and business interests with deep political relationships across party lines — remains the question the IMF’s programme cannot answer.

What the IMF Can and Cannot Assess

The IMF can assess whether Sri Lanka is meeting its quantitative performance criteria — fiscal surplus, reserve levels, revenue collection.  It can verify whether specific structural benchmarks have been enacted in law or regulation.  It cannot assess whether those laws are being implemented, whether the institutions implementing them are independent of the political interests they regulate, or whether the reform trajectory will survive the next election.

The IMF declared Zambia’s debt restructuring adequate in 2023.  Zambia’s structural reform programme, two years later, has produced limited observable change in the governance of the state-owned enterprises and revenue authorities whose dysfunction produced the debt crisis.  The money stabilised the macroeconomic position.  The structural problem remains.  Sri Lanka in 2026 is in a similar position.  The macroeconomic stabilisation has been achieved.  The fiscal primary surplus is being maintained.  The reserves have recovered.  The IMF will declare the programme a success when the facility concludes.

Whether Sri Lanka has addressed the structural conditions that produced the collapse is a different question.  The patronage networks still exist.  The state-owned enterprise losses have been reduced but not eliminated.  The revenue mobilisation improvement reflects cyclical recovery as much as structural reform.  The legal framework for anti-corruption enforcement has been strengthened on paper.  The institutional capacity and political will to use it against connected interests have not been demonstrated at scale.

The Assessment

The IMF assessment determines whether Sri Lanka has stabilised.  History determines whether it has reformed.  The money thrown at the problem was necessary to prevent complete state collapse.  It was not sufficient to address the conditions that produced it.  Those conditions require political will that the IMF cannot supply, institutional reform that takes a generation, and the sustained absence of the patronage dynamics that two decades of Rajapaksa governance embedded at every level of the state.

Sri Lanka is not Greece.  Greece had the European Union’s institutional framework, a functioning legal system, and the existential motivation of euro membership to drive reform.  Sri Lanka has the IMF, a 99-year port lease to China, and a new government with the right intentions and a very short runway before the next political cycle tests whether those intentions survive contact with power.

The IMF will declare the programme adequate.  The structural reforms will be partially implemented.  The next crisis will arrive in a different form, on a different timeline, when the next government inherits the same structural incentives and the same institutional weaknesses.  This is not pessimism.  It is the pattern that every IMF programme produces in the absence of the domestic institutional transformation that no external lender can purchase.

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Terence Nunis | Executive Chairman, Equinox Zenith | Author, The 1% Playbook: The Billionaire Cheat Code