Stabilisation must lead to transformation; A sovereign development fund as a way forward?

Stabilisation is retrospective; it builds firewalls around past failures, manages liquidity ratios, and enforces structural austerity to ensure a nation can barely service its liabilities. Transformation, by contrast, is prospective. It is a radical, forward-looking exercise that reimagines a country’s economic platform, moving it away from a cycle of persistent subsistence toward a high-yielding, wealth-generating future – A view expressed by development policy think tanks

Economic stabilisation achieved in Sri Lanka since its declaration of bankruptcy in 2022 is indeed welcome. All those who are responsible for this must be commended. It is imperative however to mention here that had it not been for the fiscal discipline framework introduced by the IMF, and strict adherence to it as a pre-condition set by the IMF, this recovery would not have been possible as the primary reason for the bankruptcy was in fact the absence of fiscal discipline by successive past governments. The IMF bailout therefore became a necessity rather than an option. It was the only option to prevent the country from sliding to economic oblivion. While the stabilisation process has to continue and is sustainable, it is also imperative to plan and take measures to build on the stabilised economy and transform the economy in order to ensure the debacle of 2022 is never repeated. 

Backdrop to contextualise the need for transformation

Cantered around an ongoing International Monetary Fund (IMF) Extended Fund Facility (EFF) and the newly established Public Debt Management Office (PDMO), the data from the ministry of finance and economy next reveals the following current fiscal position: 

nTotal Public Debt: $102.27 billion (approx. 95% of GDP). 

Debt Breakdown: $61.50 billion is domestic debt; $37.47 billion is central government external debt. This debt repayment is due to commence in 2028.

• External Debt Restructuring Status: Classified by the IMF as “largely completed”. Official bilateral agreements and major international sovereign bond swaps have addressed the bulk of the debt perimeter, leaving less than 2% of residual commercial debt to be finalised. 
• Credit Rating: Fitch Ratings upgraded Sri Lanka’s sovereign credit rating to ‘B’ (Stable Outlook), highlighting the positive credit impacts of completed major restructurings and improving macroeconomic indicators.
• As stated by the Central Bank, backed by 11 consecutive quarters of GDP growth (averaging 5%), a persistent current account surplus, and gross foreign reserves recovering to over $7.2 billion, short-term default risks have dissipated.

While above data shows a positive stabilisation position, Reuters report that Sri Lanka remains highly vulnerable to external shocks primarily on account of the country’s dependency on imports, oil and gas being the main foreign exchange guzzling imports. The IMF warns that structural fiscal stability heavily relies on sustaining energy cost-recovery pricing, continuing reform of loss-making State-Owned Enterprises (SOEs), and enduring external pressures from global trade fluctuations and regional conflicts. Main commercial debt principal repayments are scheduled to resume in 2028. 

All of above, including the country’s overall debt, and in particular its foreign debt, nearly all of it accumulated over decades of bad planning and poor fiscal management, and now due to commence repayments in 2028, will add a considerable burden on the country’s still fragile economy. Its foreign reserves situation which is basically sufficient to fund imports for only a period of approximately 3.2 months and its comparatively low GDP situation, makes the country’s fiscal situation very fragile. To make matters worse for the country, the State-Owned Enterprises (SOEs), represent one of the most critical structural fiscal vulnerabilities in the country’s broader debt matrix. Recent data from the Ministry of Finance provides some data on State entity debt: 

According to official reports published by the Public Debt Management Office (PDMO), direct SOE debt accounts for roughly 3% of Sri Lanka’s total public debt

• Total Audited SOE Debt: Approximately $3.48 billion (as of end-2025/early 2026 calculations). 
• Foreign Currency (FX) Obligations: $2.08 billion is denominated in foreign currency, leaving these entities highly exposed to exchange rate volatility. 
• Local Currency (LKR) Obligations: $1.41 billion is local rupee-denominated debt.
• Government-Guaranteed Debt: Out of the broader pool, roughly $2.88 billion is explicitly backed by Treasury guarantees or Letters of Comfort. 

The Ministry of Finance and Economy Next have stated that while the $3.48 billion figure represents explicitly recognised debt, the structural operation of these entities presents deeper macroeconomic risks: 

• The Net Budgetary Drain: Despite the 51 key “strategic” SOEs reporting a combined book profit of roughly 444 billion rupees due to recent utility tariff hikes, they remain heavily reliant on state funds. According to the Ministry of Finance’s Annual Report, SOEs paid 56.5 billion rupees in levies/dividends back to the state but required Rs. 104 billion in direct budgetary support, operating as a net drain of ~47 billion rupees on taxpayers. 
• Chronic Commercial Default Risks: A core reason the central government’s structural expenditure is heavily constrained is that the Treasury has been legally forced to step in to repay defaulted commercial state-bank loans taken out by struggling SOEs. 
• The “Big Three” Loss Makers: The concentration of debt and systemic risk is heavily clustered within three entities:

1.Ceylon Electricity Board (CEB): Transitioned heavily into deficits following regional weather anomalies and soaring generation costs.

2.Ceylon Petroleum Corporation (CPC): Burdened by legacy FX debt and past subsidies.

3.SriLankan Airlines: Retains massive cumulative liabilities exceeding 600 billion rupees and deep negative equity. 

Restructuring policy 

Under the current administration, the strategy surrounding state entities has shifted. While the government has frozen previous plans to fully privatise the national carrier (SriLankan Airlines), the IMF framework legally binds the state to:

• Enforce strict cost-recovery pricing (ensuring electricity and fuel are not sold at a loss to the public).
• Fast-track the liquidation and closure of 33 non-functional state entities to stem cash leakage.
• Disallow any further unbacked treasury guarantees to prevent SOE liabilities from rolling back onto the central government’s balance sheet

These measures have contributed to the economic stabilisation that has been achieved, but as stated, the fragility still exists due to external and internal contributing factors. While the government has introduced economic upliftment plans in the export sector, agriculture, fisheries, industrial sector, the renewable energy sector and tourism among others, it needs to look at other revenue earning mechanisms and develop a long-term plan that encompasses methods not introduced before and link some of these measures to technology, in particular artificial intelligence backed technology.

Stabilisation is not the same as transformation

When an economy suffers a systemic collapse, the immediate response of global financial institutions is to impose rigid fiscal discipline. In post-default Sri Lanka, this has manifested as an aggressive focus on revenue generation, utility tariff adjustment, and debt restructuring under the strict oversight of the International Monetary Fund (IMF). Yet, an intellectual trap exists at the heart of this process: the dangerous assumption that a country can balance-sheet its way to prosperity. Stabilisation is not the same as transformation. 

To its credit, the current legislative landscape has successfully established the foundation for stabilisation. The enactment of the Public Financial Management (PFM) Act No. 44 of 2024 has brought long-overdue fiscal discipline to the state apparatus, imposing strict statutory caps on public debt, enforcing ministry accountability, and eliminating unbacked Treasury guarantees. Concurrently, the government’s 2026 Governance Action Plan aims to dismantle political patronage through the impending Public Commercial Business (PCB) Management Bill, which seeks to compel strategic state enterprises to register under the standard Companies Act, mandate cost-reflective pricing, and isolate them within a state-owned Holding Company (HoCo) 

However, in terms of transformation, while the PFM Act and the PCB Bill are significant steps toward halting financial bleeding, they remain defensive tools designed to manage state limitations and usher stability rather than inspire national growth. A holding company that merely prevents losses is still a containment strategy, not a wealth generator. To break free from this stabilisation trap over the next five to ten years, Sri Lanka must build directly upon this legislative baseline. The nation must transition from an economy that uses new laws to manage its poverty to one that uses a new financial architecture to multiply its latent worth. 

To design this future, policymakers do not need to look outward for foreign carbon-copies; they must look backward into Sri Lanka’s ancestry and how, long before the advent of modern financial parameters, ancient Sri Lanka thrived not as a subsistence economy but by its mastery of advanced hydraulic engineering, monumental architecture, strategic trade positioning, beyond hydraulic engineering, ancient Sri Lanka possessed a world-class metallurgical industry. 

The island was known in the ancient world for its iron extraction, steel production, and the manufacturing of both practical everyday implements and high-end exports. These traits are in the DNA of its inhabitants and given the right environment, they will shine as they did thousands of years ago. 

Creation of a Sovereign Development Fund (SDF)

This article proposes taking the state-owned architecture currently envisioned under the pending PCB Bill and evolving it into a modern, financialised reinsurance of that exact ancestral philosophy: drawing strength from an inward oriented, Sovereign Development Fund (SDF). Rather than keeping the proposed architecture as a passive, 100% state-owned entity, this article outlines a blueprint to structurally open it to a 51% State-owned and 49% Privately-owned equity enterprise to be set up through a Parliament Act that ensures its operational independence by requiring it to report periodically to the Parliament and not to the government. The value of private sector cash assets like bank deposits, treasury bills and bonds is estimated to be around Rs 25 trillion, and the potential for this sector to invest some component of their cash assets in the SDF is there if the SDF is able to provide a higher return to them. The private owned component should be open to investment by the Sri Lankan Diaspora as well. By operating strictly within the fiscal boundaries set by the PFM Act No. 44 of 2024, this fund will not rely on taxpayer debt or inflationary state borrowing. Instead, it will use its legislative insulation to unlock the passive rupee liquidity currently stagnant in local corporate bank deposits and convert some diaspora remittances into high-yielding, asset-backed investments.

By channelling this capital directly into AI-integrated precision agriculture, blockchain-traced marine logistics, and self-sustaining solar and wind grids, the fund aims to permanently plug Sri Lanka’s structural fiscal shortcomings. In doing so, it honours George Bernard Shaw’s timeless maxim: Some people only looking at things as they are and asking “why,” instead choosing to envision an economic platform that never was, and boldly asking, “why not? from a modernistic context. It is proposed that the SDF is structurally underpinned by some key high-tech portfolios in order to elevate Sri Lanka’s economy from a state of managed stabilisation to transformation. To this end, the proposed Sovereign Development Fund (SDF) must treat Agriculture, Fisheries, and Green Energy not as traditional livelihood sectors, but as high-yielding tech assets. By acting as the primary investor, the 51/49% fund can finance the capital-intensive deployment of among other things, Artificial Intelligence (AI), the Internet of Things (IoT), and blockchain systems that private smallholders or a cash-strapped state cannot afford independently.

1. Agritech and Smart Plantations: Precision Yields and Direct Markets

Historically, Sri Lanka’s ancient agricultural success relied on precise, localised ecological knowledge. Modernising this ancestral strength means replacing indiscriminate chemical inputs with data-driven precision farming powered by AI.

nAI-Driven Micro-Climatic and Soil Mapping: The fund will finance a network of low-cost IoT soil sensors and autonomous drone fleets across major agricultural zones and tea/rubber plantations. AI algorithms will process real-time data on soil nitrogen levels, moisture content, and localised weather changes. Instead of blanket chemical distribution, automated machinery or targeted drones will apply precise, micro-doses of nutrients, cutting fertiliser import costs by an estimated 30–40% while maximising crop yields.

nComputer-Vision Crop Disease Detection: Mobile-based, computer-vision AI models will allow plantation managers and farmers to scan crops for early signs of blight or pest infestations. Early algorithmic detection prevents widespread crop failure, preserving premium yields of export assets like Ceylon Tea and Cinnamon.

nDisintermediation via Blockchain Marketplaces: The SDF will establish a state-backed, decentralised digital commodity exchange. By registering crops on a blockchain ledger at the point of harvest, smallholders can bypass predatory middleman layers. Global buyers can purchase directly from local farms with verified “farm-to-table” traceability metrics (carbon footprint, ethical labor, organic certification), allowing Sri Lankan exports to command a 15–20% premium in high-end Western and East Asian markets.

2. The Blue Economy and Smart Fisheries: High-Value Marine Logistics

Sri Lanka’s position on the maritime Silk Route gives it vast sovereign rights over the Indian Ocean, yet its fishing industry remains largely underutilised and inefficient. The fund will inject technology to transform fisheries into a highly scalable, sustainable export engine.

nSatellite-Aided AI Fish Finding: Deep-sea multi-day boats will be retrofitted with satellite-linked telemetry systems. Centralised AI models will analyse ocean current dynamics, sea surface temperatures, and chlorophyll concentrations to map optimal fishing zones. This eliminates blind sailing, drastically reducing fuel consumption—the largest operational cost for fishermen—and ensuring predictable catch volumes.

nAutomated Blockchain Cold-Chains: To access premium global seafood markets (such as Japan and the EU), strict temperature consistency and catch-origin data are mandatory. The fund will finance solar-powered, IoT-monitored smart cold rooms at key harbours and aboard vessels. Temperature variations will be immutably logged onto a blockchain ledger. 

nIf a shipment’s temperature fluctuates, the smart contract automatically alerts logistics managers, eliminating spoilage and ensuring 100% compliance with international biosecurity standards.

nAI Marine Sustainability Monitoring: To protect territorial waters from illegal, unreported, and unregulated (IUU) fishing, the fund will deploy AI-powered acoustic sensors and satellite tracking to monitor marine biomass levels, ensuring the long-term, self-sustaining preservation of Sri Lanka’s ocean wealth.

3. Green Energy: Eradicating the Foreign Exchange Drain

Fossil fuel imports represent the single largest structural leak in Sri Lanka’s national budget. Reclaiming the ancient philosophy of self-reliance means utilising the island’s year-round solar exposure and world-class wind corridors to build a digitalised, zero-fuel energy infrastructure.

nPredictive AI Smart Grids: Renewable energy (solar and wind) is inherently intermittent. The fund will finance the modernisation of the national grid into a predictive smart grid powered by AI. By analysing real-time meteorological satellite data, the AI grid can predict sudden drops in wind speed in Mannar or cloud cover over Hambantota, instantly balancing the national energy load by drawing from hydro-reservoirs or industrial battery storage.

nIoT Pumped-Storage Hydro and Battery Ecosystems: Mirroring the ancient cascading tank system where excess water was captured for later use, the fund will develop automated pumped-storage hydro installations. During peak daylight hours, excess solar energy will power IoT-controlled pumps to push water uphill into upper reservoirs. At night, this water is released to generate hydropower, functioning as a massive, natural, infinitely recyclable battery system that completely bypasses the need for imported coal or diesel generation.

nSubsea Cross-Border Smart Interconnectors: Over a 10-year horizon, as the fund expands generation past domestic demand, Sri Lanka can monetise its energy surplus. By constructing a High-Voltage Direct Current (HVDC) subsea cable across the Palk Strait, an AI-managed billing system can seamlessly export excess clean energy straight into the Southern Indian electricity grid, transforming Sri Lanka from a chronic energy debtor into a permanent, hard-currency exporter.

Conclusion

It is hoped that this proposal will gain momentum and the conceptual outline presented will provided an opportunity to consider it as a potential option to facilitate the transformation and growth of the Sri Lankan economy. The focus of the present government on digitalisation and emphasis on technology, the steps that have been taken to stabilise the economy in strict compliance with a sound fiscal governance framework, no doubt should provide an opening for this proposal to be viewed from a futuristic prism.