Debt Crisis, Structural Adjustment and Trade Policy

Summary

Professor Prema-chandra Athukorala argues that Sri Lanka’s debt crisis cannot be explained by COVID-19 or any single policy error. The pandemic was the trigger, but the country’s underlying vulnerability had developed over many years through debt-financed growth concentrated in non-tradable sectors. This weakened export capacity and left Sri Lanka increasingly unable to earn the foreign exchange required to service its external debt.

The presentation traces this anti-tradable bias to exchange-rate policy, import tariffs that penalised export production and policy backsliding on foreign direct investment. While IMF-supported fiscal consolidation is necessary to restore stability, Athukorala argues that it will not be sufficient on its own. A durable recovery also requires structural reforms that redirect resources towards exports and import-competing production, rebuild international competitiveness and expand Sri Lanka’s capacity to earn foreign exchange.

Key Points

• Sri Lanka’s crisis resulted from the combination of a long-standing economic vulnerability and an external trigger, rather than the pandemic alone.
• Post-war growth was heavily debt-financed and disproportionately concentrated in non-tradable sectors.
• As tradable production and exports declined relative to GDP, external debt and debt-service obligations became increasingly difficult to sustain.
• Exchange-rate management, protective import tariffs and weakened foreign-investment policy reinforced the bias against export-oriented production.
• Fiscal and monetary consolidation can reduce inflation and domestic excess demand, but it does not automatically correct the economy’s underlying production structure.
• Stabilisation should be combined with reforms that shift investment and resources towards exports and competitive import-substituting production.