Rebuilding from collapse: From stabilisation to transformation

President Anura Kumara Dissanayake 

When the Sri Lankan Government assumed office in 2024, it inherited a country in deep crisis — a state bureaucracy diminished by corruption, mismanagement, and elite capture. Years of short-termism, politicised policy, and neglect of national production had eroded sovereignty and self-reliant development. Yet, the democratic transition offered a rare opportunity for renewal. For the first time in years, citizens elected a Government that promised to prioritise people and the environment promising a fair, sovereign, and sustainable economy.

Despite the election manifesto the challenge before this Government is monumental: to restore stability while rebuilding a structurally broken country. The first year necessarily focused on halting economic free-fall— continuing with the IMF program, controlling inflation, and re-establishing administrative order.  

This is partly due to what the new Government inherited from the interim regime, where laws were rashly passed and agreements-in-principle with the IMF signed just days before the election, for instance. However, almost at the first anniversary of the Government it is now evident that stabilisation alone cannot deliver justice or sustainability, given the regressive conditionalities embedded in the IMF framework. The next phase must mark a deliberate pivot - toward policies that restore national dignity, reduce dependency, and centre human and environmental wellbeing.

The new Government inherited deep structural weaknesses. Politically, decades of elite capture and impunity eroded State institutions. Governance under successive regimes—from Chandrika’s “Samaya saha Saubhahyaya -  Peace and Prosperity” to Mahinda’s “Jathika Chinthanaya - National Ideology,” Ranil’s “Yahapalanaya - Good Governance”, and Gotabaya’s “Viyathmaga: Path of Intellectuals”—served to entrench families and business interests whose financial and media influence shaped policy. Furthermore, patronage and nepotism corroded the civil service, while parliament became secondary and the judiciary weakened

The inheritance

The new Government inherited deep structural weaknesses. Politically, decades of elite capture and impunity eroded State institutions. Governance under successive regimes—from Chandrika’s “Samaya saha Saubhahyaya -  Peace and Prosperity” to Mahinda’s “Jathika Chinthanaya - National Ideology,” Ranil’s “Yahapalanaya - Good Governance”, and Gotabaya’s “Viyathmaga: Path of Intellectuals”—served to entrench families and business interests whose financial and media influence shaped policy. Furthermore, patronage and nepotism corroded the civil service, while parliament became secondary and the judiciary weakened.

The unresolved national question further undermined state legitimacy. Fifteen years after the civil war, the absence of reconciliation and the military’s continued presence in the North and East remain stark reminders of an unreformed state and the strength of entrenched interests. Maintaining one of Asia’s largest peacetime militaries meant absorbing vast fiscal resources that could have strengthened health, education, and stronger welfare support to lessen the fallouts of increasing inequality and poverty levels of 25% in the country.

Economically, the nation teetered on collapse in 2022. Public debt was 115% of GDP, external debt repayments consumed 46% merchandise export earnings, and Sri Lanka had defaulted. The economy remained import dependent and un-diversified. White-elephant projects like Mattala Airport, Hambantota Port, and Colombo Port City symbolised corruption and dependency - adding debt without returns.

Environmental degradation paralleled economic decay. Deforestation in Anuradhapura, sand mining in Jaffna, and reckless coastal construction damaged ecosystems, while poor planning worsened vulnerability to floods and droughts. Socially, inflation had devastated living standards. Over 60 percent of workers survived on daily wages, millions fell into poverty, and skilled professionals migrated en masse. Inequality widened as elites enriched themselves. A demoralised public sector suffered declining professionalism. Technologically, both state and private sectors lagged in digitalisation, constraining productivity and innovation.

Reasons for optimism

Despite this sorry record, reasons for optimism persists. The most significant source of hope is the strength of democracy. The 2024 elections signalled a rejection of corruption and ethnic division. The peaceful transition of power reaffirmed democratic strength and a readiness among citizens to embrace inclusivity and insist on an equitable social contract.  

Sri Lanka’s human and natural resources remain strong: fertile land, vast ocean wealth, and a favourable climate can sustain agriculture, fisheries, and renewable energy. Its strategic Indian Ocean position offers trade and logistics opportunities. A literate population with English proficiency can support a shift toward a modern, knowledge-based economy. The existence of a sovereign currency and an established legal framework offers a foundation for reform. Above all, there is now political will to shift from elite accumulation to collective wellbeing.

Global pressures and Policy space

Sri Lanka’s new Government finds itself in the unenviable place where rebuilding needs to occur within an unjust global order. The IMF, World Bank, and credit rating agencies—dominated by creditor nations—promote austerity, liberalisation, and privatisation, often worsening inequality across the Global South. The World Bank’s Public Finance Review on Sri Lanka in September 2025 acknowledged that austerity stifled investment and growth, yet the IMF Working Paper on Sri Lanka’s Sovereign Debt Restructuring (September 2025) continued to defend a model detached from social and environmental realities.

The Government needs to signal it is strategically pivoting away from its inheritance by starting to govern with laws that have a mandate; which also means revisiting laws and using its 2/3rds majority that has the economic sovereignty of the people. Hence, the next Budget in 2027 must mark a decisive pivot toward people- and environment - centred development. This shift should reassert national priorities

Global financialisation has made speculative capital decisive in shaping national destinies. The weaponisation of the dollar, arbitrary tariffs, threats of sanctions, and declining concessional finance have trapped developing countries in dependency, where Sri Lanka is not alone.  Climate justice remains elusive: those least responsible for emissions face the harshest impacts, while adaptation funds remain slow and conditional.

Geopolitically, Sri Lanka stands amid great-power rivalry between India, China, and the United States. Its location offers opportunity yet invites interference. The breakdown of the so-called rules-based order and the resurgence of protectionism heighten external volatility. In this context, Sri Lanka must pursue strategic non-alignment—engaging internationally without surrendering sovereignty.

Public expectations

The new administration’s mandate was transformative and delivering on it will be pivotal for a nascent Government and parliament to build credibility.   Economically struggling citizens rightly demand immediate relief from the cost-of-living crisis, job creation with fair wages, a strong welfare system, and the eradication of corruption. Structural change—fair debt restructuring, recovery of stolen assets, and abolition of the executive presidency and the Prevention of Terrorism Act — is also expected.

However, the reality is that such expectations confront severe constraints. Years of brain drain depleted technocratic capacity, while the bureaucracy remained demoralised. Reform faces resistance from domestic elites and external actors accustomed to compliant regimes. Nationalist agitation, misinformation, and foreign interference remain potentially destabilising forces.

Stability as priority

Amid the economic collapse, the Government’s decision to maintain the IMF arrangement during its initial years is pragmatic. The economy was fragile, foreign reserves were depleted, and investor confidence had evaporated. Any abrupt deviation from the existing framework risked economic solidity and increased social hardship. Consequently, the Government prioritised stabilising the economy’s fundamentals — containing inflation, improving credit ratings, and curbing state waste. 

This stabilisation phase was vital to create the breathing space necessary for deeper structural reforms. The Government’s cautious approach continues with the passage of the Appropriation Bill 2026, signalling a commitment to fiscal discipline over an immediate transition towards more progressive economic policies.

The 2026 Budget figures indicate that, despite the Government’s best efforts, the stringent IMF-imposed targets fail to provide Sri Lanka with the foundation for a sustainable and equitable recovery. For example, foreign reserves in 2025 are projected to remain below the $7 billion target - excluding Yuan-denominated loans from China amounting to $1.5 billion.

The risks of reform are real—but the greater danger lies in inertia. Sri Lanka’s future depends on the courage to pivot: to embrace policies that value people over profit, sovereignty over subservience, and sustainability over short-term gain. Through transparent governance, civic participation, and principled non-alignment, Sri Lanka can rebuild — restoring dignity, stability, and hope for generations to come

The rupee exchange rate—whose stability is essential for keeping dollar-denominated imports and debt servicing costs manageable—has depreciated by approximately 6% since December 2024, despite several favourable external conditions, including lower global crude oil prices, higher remittance inflows, stronger export performance, and a more favourable debt servicing profile. A degree of temporary stability was also helped due to a significant underspending of the capital expenditure budget which reduced imports. 

Sri Lanka’s economy has very limited capacity to withstand external shocks, leaving it highly vulnerable to global financial and commodity market 

fluctuations. 

Strategic pivot

While stabilisation was necessary, prolonging austerity would entrench dependency. Debt servicing obligations will rise sharply after 2028, consuming fiscal space needed for welfare and investment. Austerity satisfies creditors but impoverishes citizens and suppresses growth. The IMF’s frameworks prioritise repayment over development; continuing without recalibration, risks renewed debt distress and unrest.

A series of bills — including the Central Bank Act, Public Debt Management Act, Public Financial Management Act, Banking Act, and Economic Transformation Act — were rushed through Parliament by the previous unelected interim administration under the guidance of the International Monetary Fund (IMF). These statutes, introduced immediately before the Presidential election, now constrain the present Government, which has a clear democratic mandate to pursue meaningful reforms.  The Government needs to signal it is strategically pivoting away from its inheritance by starting to govern with laws that have a mandate; which also means revisiting laws and using its 2/3rds majority that has the economic sovereignty of the people.  

Hence, the next Budget in 2027 must mark a decisive pivot toward people- and environment - centred development. This shift should reassert national priorities: food and energy sovereignty, industrial revitalisation, import substitutions, non-essential import restrictions, value-added exports, purposeful economic activity and fiscal autonomy. Progressive taxation, Central Bank reform for developmental financing, and investment in renewable energy and productive infrastructure are essential. Its large parliamentary majority gives the Government a mandate to amend regressive laws and confront vested interests.

Governance reform is equally vital—abolishing the Executive Presidency, ensuring judicial independence, and strengthening transparency. Politically, Sri Lanka should adopt a pragmatic non-alignment, leveraging its strategic geolocation while maintaining autonomy. Socially, education, gender equality, and accountability must underpin inclusive growth. Technological modernisation—through digitalisation and skills development may help increase efficiency and reduce corruption.

Risks and mitigation

The transition will face resistance. Western Governments and multilateral lenders will oppose challenges to IMF conditionalities or debt cancellation. To counter this, Sri Lanka must build alliances within the Global South—through BRICS and the G77—to strengthen negotiating power.  Transparent communication with creditors and citizens will help build confidence.

Supporting the UN led reforms of the international corporate taxation system and halting illicit financial flows can further mitigate risks to the country. 

Domestically, elites threatened by higher taxation and anti-corruption measures will seek to discredit reform. Public education campaigns and civic dialogue can counter manipulation, framing reform as national renewal rather than populism.  Reducing military expenditure, reorienting demobilised personnel to other forms of work, managing underutilised infrastructure, and repealing regressive laws will require careful sequencing and communication.

Transformation is neither immediate nor effortless; it demands time, discipline, and collective sacrifice. The path to renewal must be equitable—protecting the most vulnerable while mobilising shared responsibility across society, where those with the broadest shoulders should be made to bear the larger burden

The Government must also anticipate disinformation and political agitation from vested interests. Independent media and transparent governance are vital for credibility. 

A second round of debt restructuring may prove unavoidable, with the debt-to-GDP ratio projected to remain around 95% and external debt servicing expected to consume nearly 30% of Government revenue by the conclusion of the IMF program. The flawed 2024 bondholder agreement has further constrained fiscal space by committing Sri Lanka to unsustainably high repayment obligations.

The country needs a new, independent debt sustainability analysis and a comprehensive debt audit to strengthen future renegotiations.  A substantial reduction in the external debt stock, along with a debt servicing target calibrated to foreign exchange earnings rather than GDP, is essential to create fiscal space for investment in sustainable and inclusive development.

Transformation is neither immediate nor effortless; it demands time, discipline, and collective sacrifice. The path to renewal must be equitable—protecting the most vulnerable while mobilising shared responsibility across society, where those with the broadest shoulders should be made to bear the larger burden. 

The lessons

The new Government has inherited a broken state—crippled by debt, inequality, and institutional decay. Yet, the democratic transition has rekindled hope for renewal. The stabilisation phase prevented collapse, but now the nation stands at a crossroads. 

The next Budget in 2027 provides a historic opportunity to plan and pivot toward a development model that values people and the environment over profit.  This pivot must break with decades of dependency and austerity, rebuild economic sovereignty, and prioritise collective wellbeing over narrow fiscal targets. Preparatory work for this transformation must begin immediately.  

The risks of reform are real—but the greater danger lies in inertia. Sri Lanka’s future depends on the courage to pivot: to embrace policies that value people over profit, sovereignty over subservience, and sustainability over short-term gain. Through transparent governance, civic participation, and principled non-alignment, Sri Lanka can rebuild — restoring dignity, stability, and hope for generations to come.

(The writer is co-founder of the Institute of Political Economy (ipe-sl.org) and a former local councillor in London. He can be reached at [email protected].)