Sri Lanka has to compromise growth if it choses lower inflation target: CB Governor

Friday May 15, 2026 12:19 pm

ECONOMYNEXT — Sri Lanka stands at a critical juncture as it navigates a post-debt restructuring landscape, facing potential pitfalls that mirror Jamaica’s decade-long struggle with a debt-interest spiral, a report by First Capital Research warns.

The report, titled Jamaica’s Debt Reckoning & Lessons for Sri Lanka, highlights that while Sri Lanka has successfully initiated its Domestic Debt Optimization (DDO) and met initial fiscal targets, the risk of “sluggish growth” could derail its path to recovery.

Unlike Jamaica, whose crisis was largely domestic, Sri Lanka faces a more complex external debt burden, making policy continuity vital, the report warned.

The Jamaican Warning

Jamaica underwent two domestic debt restructurings between 2010 and 2013. The first attempt, the Jamaica Debt Exchange (JDX), failed within three years due to fiscal slippage, the assumption of state-owned enterprise (SOE) debt, lack of a principal haircut and economic stagnation.

“Reduced rates and extended maturities did little to address Jamaica’s debt woes, especially given their lack of fiscal discipline and economic growth. At the end of 2012, the overall debt stock had inflated beyond its pre-restructuring level, demanding further action.”

It was only after a second, more stringent intervention—the National Debt Exchange (NDX) in 2013—that Jamaica achieved sustainability. However, this success came at a high cost: a “lost decade” of investment where capital expenditure was sacrificed to maintain primary surpluses.

The report identifies three potential paths for Sri Lanka.

While fiscal discipline has remained intact under the IMF program, the transition to a Treasury Single Account (TSA) as proposed under the new Public Financial Management Act could inadvertently stifle the economy.

Currently, the government parks cash buffers in state banks, which then provide liquidity to the private sector.

Moving these funds to a central account at the central bank — as Jamaica did — could dry up private credit.

First Capital warns in its report that if Sri Lanka continues fiscal discipline but growth remains stagnant, it will struggle to return to international bond markets.

“A slow growth scenario could in fact delay restoration of international confidence and Sri Lanka’s entry to the international bond market. Thus, in the face of sluggish growth, Sri Lanka has much more to lose than Jamaica did after its second restructuring.”

Three Scenarios

The most optimistic scenario sees fiscal discipline holding firm while private sector credit remains robust, allowing the economy to expand despite high external debt repayments starting in 2028.

The most dangerous scenario, however, involves a derailment of fiscal discipline after the IMF program expires.

This would not only shatter international confidence but also trigger higher interest payments through “governance-linked bonds”.

In such a case, Sri Lanka could follow the failed path of Jamaica’s first restructuring, where the debt stock balloons and warrants a second, more painful intervention. (Colombo/May15/2026)