Domestic refinancing risk persists despite longer debt maturities: PDMO

• Nearly quarter of domestic debt falls due within one year
• Domestic debt ATM at 4.7 years against 9.6 years for external debt
• Fixed-rate instruments account for 88% of total debt portfolio
• External debt-to-reserves ratio falls to 5.51 times from 2022 peak of 18.96 times

Sri Lanka has reduced near-term external refinancing pressure and lengthened its overall debt maturity profile following debt restructuring, but a concentration of shorter-term domestic maturities remains a key sovereign risk, according to the first Annual Report of the Public Debt Management Office (PDMO).

At end-2025, 24.3% of domestic debt was due to mature within one year, compared with 1.5% of external debt and 15.8% of the overall Government debt portfolio.

The divergence is also evident in the maturity profile. Average Time to Maturity (ATM) of total Government debt improved to 6.8 years in 2025 from 6.0 years in 2024, with external debt carrying an ATM of 9.6 years compared with 4.7 years for domestic debt.

The PDMO said external refinancing risk remained low, with 3.4% of external debt, equivalent to 1.5% of GDP, maturing within one year.

“Despite these improvements, the concentration of short-term domestic maturities remains a key risk requiring continued monitoring and active debt management,” the PDMO said.

The improvement in the domestic maturity profile was also reflected in reduced reliance on short-term Treasury Bills. T-Bills accounted for 10.11% of total Government debt in 2025, down from 14.06% in 2024, while their share of domestic debt fell to 16.15% from 22.04%.

Interest-rate risk was comparatively contained, with fixed-rate instruments accounting for 88% of the total debt portfolio at end-2025. Fixed-rate instruments represented 78.4% of foreign currency debt, while local currency debt was predominantly fixed-rate.

The Average Time to Re-fixing (ATR) of local currency debt stood at 4.5 years at end-2025.

Foreign exchange risk, meanwhile, remains linked to the size of the foreign currency debt portfolio and Sri Lanka’s capacity to maintain adequate reserve buffers.

Domestic debt accounted for 62.5% of total Government debt at end-2025, limiting the proportion of the portfolio directly exposed to exchange-rate movements.

The external debt-to-Gross Official Reserves ratio fell sharply to 5.51 times in 2025 from a peak of 18.96 times in 2022, reflecting the improvement in reserve coverage relative to the external debt stock.

However, the resumption of external debt servicing following restructuring was reflected in debt-service indicators. External debt service as a share of exports increased to 17.4% in 2025 from 13.1% in 2024, although it remained below the 32.6% recorded in 2021.

External debt service relative to Gross Official Reserves similarly increased to 34.5% in 2025 from 27.3% in 2024, but remained well below the levels exceeding 100% recorded during 2021 and 2022.

“Strengthening reserve adequacy remains a cornerstone of Sri Lanka’s macroeconomic stabilisation agenda and is essential to managing external sector vulnerabilities and restoring market confidence,” the PDMO said.

The report noted that under the IMF-supported program, Gross Official Reserves are expected to increase towards $ 8-9 billion by end-2026, which would further reduce the external debt-to-reserves ratio.

Overall, the PDMO’s risk indicators point to a change in the composition of Sri Lanka’s sovereign debt vulnerabilities following restructuring: external maturities have been pushed out substantially, while the shorter maturity profile of domestic debt leaves the Government with a larger continuing refinancing requirement in the local market.

The PDMO’s 2025 Annual Report is its first and was prepared under the Public Debt Management Act No. 33 of 2024. The Office became fully operational in December 2025, taking over debt management functions previously carried out by the Central Bank of Sri Lanka.

According to the Medium Term Debt Management Strategy 2026-2030 sets out a shift toward deeper domestic financing. 

The Government aims for 90% of borrowing to come from domestic sources by 2030, reducing domestic financing by 5% annually to balance domestic and external exposure in preparation for post 2030 external repayments. 

The PDMO said it will also explore Samurai, Panda, Sukuk and syndicated loans while maintaining concessional borrowing where possible.

On the domestic market, benchmark maturities of 5, 8, 10, 12 and 15 years will be reopened and new maturities introduced. Inflation linked and other innovative instruments will support smoother refinancing. 

The PDMO said it will widen the investor base and strengthen the primary and secondary markets for Government securities as part of its domestic bond market development plan.

Liability management operations will target refinancing risk and debt servicing costs across both domestic and external portfolios. 

“We intend to manage the structure and risk profile of the existing portfolio proactively, including the use of currency swaps to reduce external currency risk,” the PDMO said.

The PDMO also plans to enhance transparency with upgraded debt bulletins, semi-annual data reports and a dedicated website. A monthly auction calendar will support predictable issuance.

While the MTDS offers a medium-term framework, the PDMO cautioned that data gaps, macroeconomic uncertainty, exchange rate volatility and a shallow domestic market continue to impact debt management. 

It said improved coordination among fiscal, monetary and economic agencies is required to ensure consistency across policy fronts.

The PDMO said the strategy aims to strengthen debt sustainability by extending maturities, reducing short term debt and lowering the interest payment to revenue ratio. It added that effective implementation will be essential to maintaining stability and investor confidence over the next five years.