Why did the SriLankan Economy Default? How to Prevent a Default?

The Sri Lankan economy has been facing big problems in the past few years, and it needed help paying its debts. This article wants to examine why this happened and discuss ways to stop it from happening again. If we understand the things that caused the problem, the people who make decisions, economists, and people involved in the situation can try to do something to stop it from happening again.


Economic Context Of Srilanka

To understand why Sri Lanka couldn’t pay its debts, we must know some basic information about the country. Sri Lanka is a developing country in South Asia with around 22 million people. The Sri Lankan economy is diverse, which means it depends on different things like farming, making things, providing services, and tourism.


Factors Leading To Default

  • High Debt Burden

One of the main reasons Sri Lanka couldn’t pay its debts was because the government owed a lot of money. They borrowed money from inside and outside the country and had a lot of debt. The problem was that they borrowed more than they could afford and needed to use the money wisely. This caused a crisis where they couldn’t make their debt payments, which is called a default.

  • Declining Economic Growth

Sri Lanka’s economy started shrinking, worsening the debt problem. There were a few reasons for this decline, such as problems with the government, policies that could have worked better, and more investment in infrastructure. With the economy growing slowly, the government needed more money to pay off the growing debt. It became harder and harder for them to meet their debt payments.

  • Currency Depreciation And Balance Of Payments Crisis

The decrease in the value of the Sri Lankan currency, the rupee, was a significant factor in the economic default. When the currency lost weight, it became more challenging for the government to repay the money it owed to other countries. This created a crisis in the country’s ability to balance its payments with other nations. The shortage of foreign money reserves worsened the situation, and urgent actions were needed to avoid defaulting on the debt.

  • Structural Weakness And Governance Issues

The Sri Lankan economy faced underlying problems that made the default situation worse. These problems included corruption, inefficiency, and poor governance. These issues made it harder to use resources effectively and made investors lose confidence. Additionally, the mismanagement of government-owned businesses added to the burden on the economy.

  • External Shocks

Sri Lankan economy was also impacted by events outside the country’s control, such as worldwide economic slowdowns and uncertainties in global politics. These events hurt Sri Lanka’s exports, tourism, and foreign investments, resulting in a decrease in foreign money entering the country. The decline in revenue from important sectors like clothing and tea exports added to Sri Lanka’s economic difficulties.


Preventive Measures

  • Fiscal Discipline And Debt Management

To avoid future defaults, Sri Lanka needs to prioritise fiscal discipline and put solid strategies for managing debt in place. This involves adopting responsible financial policies, enhancing methods for collecting taxes, and cutting down on unnecessary spending. The government should concentrate on sustainable borrowing practices, minimising dependence on foreign debt, and ensuring transparency in managing debt.

  • Economic Diversification And Development

For long-term economic stability, it is essential to decrease Sri Lanka’s dependence on a small number of sectors. The country should focus on diversification by supporting the growth of industries not traditionally emphasised, such as technology, renewable energy, and knowledge-based sectors. This can open up new possibilities for economic expansion, create more jobs, and decrease vulnerability to external uncertainties.

  • Strengthening Governance And Transparency 

It is essential to tackle governance problems to build trust among investors and support long-term economic development. Sri Lanka should prioritise measures that combat corruption, improve transparency in government activities, and ensure accountability at every level. This involves implementing strong legal structures, reinforcing regulatory institutions, and promoting collaborations between the public and private sectors.

  • Infrastructure Development 

Investing in building essential structures and systems is vital for sustained economic growth and progress. Sri Lanka should prioritise projects that improve productivity, connectivity, and trade facilitation. Enhancing transportation networks, port facilities, and digital infrastructure can boost competitiveness and attract investments. However, it is essential to carefully plan and execute these projects, ensuring they are cost-effective and economically feasible to prevent additional financial strain.

  • Fiscal discipline And reforms

To manage its budget deficit, Sri Lanka must implement effective measures to control government spending, improve revenue collection, and carry out comprehensive tax reforms. The government should prioritise expanding the tax-paying population, combating tax evasion, and establishing a fair and transparent tax system. Reforming state-owned enterprises to enhance efficiency and alleviate financial burdens is also essential. These steps will contribute to better fiscal discipline and economic stability in the country.

Increasing exports and expanding the range of countries to which Sri Lanka sells its goods can help generate foreign currency and decrease the trade imbalance. Sri Lanka should improve its ability to compete in international markets by enhancing the quality and value of its products. This can be achieved through investments in research and development, fostering innovation, and adopting new technologies, enabling Sri Lankan industries to better compete globally.

In addition, Sri Lanka should seek out new markets and decrease its dependence on a small number of primary countries it exports to. This can be accomplished by actively engaging in trade negotiations, forming agreements with other countries, and joining regional and global trade groups. By expanding access to different markets, Sri Lanka can take advantage of fresh possibilities and decrease its susceptibility to unforeseen changes in the global economy.

  • Human Capital Development

Investing in people’s knowledge and skills is essential for long-term economic growth. They should focus on education and training to develop a workforce that has the abilities needed in today’s Sri Lankan economy. This can be done by improving vocational programs, encouraging entrepreneurship, and supporting research and innovation. It’s also essential to promote a culture of continuous learning, where individuals can continuously upgrade their skills to keep up with changing economic trends.

  • Social Safety Nets And Inclusive Growth

To lessen the effects of economic shocks and maintain social stability, Sri Lanka should improve its support systems and strive for proper growth that includes everyone. This involves implementing programs that specifically help those in need, assisting vulnerable groups, and enhancing access to healthcare and education. By reducing inequality and poverty, Sri Lanka can build a stronger society where all benefit from economic progress.

A detailed and lasting economic plan is essential to guide the country towards sustainable progress. They should create a strategic vision that includes various aspects like expanding the Sri Lankan economy, managing debt responsibly, improving fiscal practices, strengthening institutions, and developing human capital. The plan should have specific goals, measurable benchmarks, and a solid system to track progress and ensure responsible actions.



The economic default in Sri Lanka happened for several reasons, such as having too much debt, not managing money well, unexpected economic events, and unstable politics. To avoid facing similar problems again, Sri Lanka must take a well-rounded approach to deal with the economic downturn’s leading causes. This includes managing debt responsibly, being careful with money, diversifying the economy, strengthening institutions, promoting exports, developing infrastructure, investing in people’s skills, having safety nets, and planning for the long term. By implementing these preventive measures, Sri Lanka can create a strong and sustainable economy that benefits everyone and helps improve their lives.


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