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A much-touted recovery of the Sri Lankan economy masks deeper social costs

By Daniyal Talat | March 2026

Sri Lanka’s recovery from its 2022 sovereign default is frequently described as one of the most dramatic macroeconomic turnarounds in the Indo-Pacific. In April 2022, under then-president Gotabaya Rajapaksa, the country suspended payments on roughly US$46 billion in external debt, triggering its first sovereign default in decades. Inflation surged beyond 70 per cent, foreign reserves collapsed to near zero, fuel and food shortages became routine, and mass protests forced Rajapaksa to flee the country.

Three years later, the picture appears transformed: inflation has fallen sharply, reserves have recovered, GDP growth has resumed, and Sri Lanka has posted its first primary fiscal surplus in over a decade. Yet the question remains whether this recovery represents genuine structural renewal or merely macroeconomic stabilization achieved at high social cost. The backbone of the turnaround has been the US$3 billion Extended Fund Facility agreed with the International Monetary Fund in March 2023, the country’s seventeenth IMF program.

The scale and frequency of Sri Lanka’s IMF engagements underscore both the depth of the 2022 collapse and the country’s long-standing fiscal fragility. The program required sweeping reforms: restoring cost-reflective energy pricing, expanding the tax base, strengthening central bank independence, reducing fiscal deficits, and implementing anti-corruption measures.

In strictly macroeconomic terms, the results have been striking. Inflation dropped from crisis levels to low single digits and even briefly turned negative by late 2024. Foreign reserves, once depleted, climbed steadily. Investor confidence partially returned following debt restructuring agreements with private bondholders and bilateral creditors. On paper, the country has regained a measure of credibility.

However, IMF-led stabilization narrows the government’s policy space, and President Anura Kumara Dissanayake now governs within those constraints. Elected in late 2024 at the head of the National People’s Power coalition on a platform of clean governance and social protection, Dissanayake inherited not only a battered economy but also a binding reform framework negotiated before his tenure. Markets initially feared a populist reversal, yet his administration has largely maintained IMF conditionality, signalling continuity rather than rupture.

This decision reflects economic necessity as much as ideological pragmatism. Without IMF backing, Sri Lanka would struggle to maintain external financing, manage its debt restructuring agreements, or sustain investor confidence. Nonetheless, adherence to IMF benchmarks limits expansive redistributive policies and large-scale public spending initiatives that many voters expected from a progressive government. The social costs of this stabilization have been unevenly distributed. Fiscal consolidation has relied heavily on tax increases, particularly indirect taxes such as the value-added tax, which disproportionately affect lower-income households.

Cost-reflective pricing for electricity and fuel, though economically rational in reducing subsidies and fiscal drain, has increased living costs for ordinary citizens and raised input costs for small and medium-sized enterprises.


While inflation has declined dramatically, real wages have not uniformly recovered to pre-crisis levels, and many households continue to experience diminished purchasing power. For families already pushed into poverty during the 2022 collapse, stabilization has not automatically translated into meaningful improvement in daily life.

The human cost of economic recovery has fallen disproportionately on low-income households, women in vulnerable sectors, small businesses, and young people seeking opportunity

Female workers in export-oriented industries bear particular vulnerability. Sri Lanka’s apparel sector, which employs large numbers of female workers and accounts for a significant share of export earnings, remains sensitive to external demand and to shifts in trade policy. Any downturn in global markets or imposition of tariffs can quickly translate into job insecurity.

Although macroeconomic indicators suggest stability, employment growth has been modest, and underemployment remains a concern. Young people, especially graduates, continue to seek opportunities abroad, contributing to a steady outflow of skilled labour. The resulting brain drain complicates long-term development prospects, even as remittances provide a short-term buffer. Small businesses also face persistent strain. Many micro and small enterprises shuttered during the crisis and have struggled to reopen due to tighter credit conditions and weakened domestic demand. Banks, still cautious after the financial shock, have prioritized balance-sheet repair. Interest rates, though lower than crisis peaks, remain burdensome for entrepreneurs seeking to expand operations.

Thus, while aggregate GDP growth has rebounded, the recovery’s benefits are unevenly distributed across sectors and social groups. Political constraints extend beyond IMF conditionality. Sri Lanka’s entrenched networks of patronage and legacy political actors did not disappear with the fall of the Rajapaksa administration. Bureaucratic inertia, vested interests in state-owned enterprises, and resistance to deeper structural reforms complicate implementation. Electricity pricing reforms, for example, have faced public backlash and partial reversals, reflecting the tension between fiscal discipline and social acceptability. Reform fatigue is emerging as a real risk: citizens who endured the harshest years of the crisis may question why continued austerity measures are necessary when macroeconomic indicators appear improved.

Moreover, Sri Lanka remains structurally vulnerable to external shocks. Its export base is concentrated in a few sectors, including apparel, tea, and rubber, and key markets absorb a substantial share of output. Any disruption in global trade flows, geopolitical realignment, or shifts in demand can rapidly affect foreign exchange earnings. Even with reserves rebuilt, buffers remain thin relative to the scale of potential shocks. Public debt, though declining as a percentage of GDP following restructuring, remains high, limiting fiscal flexibility. A slowdown in growth or renewed currency depreciation could quickly reverse gains.

This duality defines Sri Lanka’s current moment. On one level, the country has achieved what many observers thought improbable in 2022: stabilization without prolonged hyperinflation, a functioning reform program, and an orderly political transition. On another level, stabilization has not yet evolved into inclusive development. Poverty rose sharply during the crisis, and although conditions have improved, social indicators lag behind macroeconomic metrics.

The IMF’s program has restored order to the balance sheet, but balance sheets do not capture the lived experience of households coping with higher taxes, more expensive utilities, and uncertain employment prospects. Dissanayake’s administration must therefore navigate a delicate balance.

It must maintain credibility with international creditors, uphold commitments under the IMF program, and demonstrate tangible social dividends to the electorate. Failure to deliver visible improvements in livelihoods could erode public support and fuel political polarization. Conversely, abandoning fiscal discipline prematurely risks undermining the fragile gains achieved since 2023. The tension between macroeconomic prudence and social equity lies at the heart of Sri Lanka’s recovery debate.

Ultimately, Sri Lanka’s comeback is neither an illusion nor a complete success. It is a stabilization phase that has prevented further collapse and laid foundations for renewal, but it has not yet resolved deep structural weaknesses or fully alleviated social hardship.

The human cost of adjustment has fallen disproportionately on low-income households, women in vulnerable sectors, small businesses, and young people seeking opportunity. Whether the country’s recovery becomes durable will depend on its ability to transition from crisis management to productivity-driven, inclusive growth. That transition requires not only fiscal discipline but also sustained investment in skills, export diversification, institutional reform, and targeted social protection. Until these elements take firmer root, Sri Lanka’s recovery will remain impressive in macroeconomic terms yet incomplete in human ones.

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