INVESTIGATION | Sri Lanka’s external debt has increased by US$345 million this year — but the bigger story is who the country is borrowing from.
Sri Lanka’s debt crisis did not simply disappear after the country began restructuring its massive external liabilities.
It changed.
The latest government figures reveal a development that deserves more attention than the headline figure of almost US$98 billion in total public debt.
Commercial debt is declining, while borrowing from multilateral institutions and bilateral creditors is increasing.
That raises a much more important question than simply asking whether Sri Lanka’s debt has gone up or down:
Who does Sri Lanka owe now — and what will this new debt structure mean for the country in the years ahead?
The number behind the headline
Sri Lanka’s total gross public debt stood at approximately US$97.952 billion (Rs.32.977 trillion) at the end of June 2026, according to the latest Quarterly Statistical Debt Bulletin published by Sri Lanka’s Public Debt Management Office.
Central government debt accounted for approximately US$95.047 billion.
Of that amount, approximately US$57.039 billion was domestic debt, while US$38.008 billion was external debt.
At first glance, the headline appears encouraging.
Total gross public debt was lower than the approximately US$102.267 billion recorded at the end of March.
But that comparison needs to be treated carefully.
Changes in exchange rates can affect the US-dollar value of Sri Lanka’s debt, meaning that a fall in the dollar-denominated figure does not necessarily mean that the government actually paid off several billion dollars of debt.
The external debt figures tell a different story.
US$38 billion owed overseas
Sri Lanka’s central government external debt stood at US$38.008 billion at the end of June 2026.
That was higher than the US$37.663 billion recorded at the end of December 2025.
In other words, external government debt increased by approximately US$345 million during the first six months of the year.
But the most interesting part of that increase lies beneath the headline.
The three major categories of external debt moved in different directions.
| Creditor category | End-2025 | End-June 2026 | Change |
|---|---|---|---|
| Multilateral | US$14.314bn | US$14.802bn | +US$488m |
| Bilateral | US$10.678bn | US$10.797bn | +US$119m |
| Commercial | US$12.671bn | US$12.409bn | −US$262m |
That produces a striking result.
Sri Lanka’s external debt increased, but its commercial debt declined.
The increase came from official creditors.
Follow the money
Multilateral creditors now account for approximately 38% of Sri Lanka’s external government debt.
Commercial creditors account for around 34%, while bilateral creditors account for approximately 28%.
This distinction matters because these categories represent different forms of borrowing.
Commercial debt includes market-based borrowing, and approximately 81% of Sri Lanka’s commercial external debt is made up of International Sovereign Bonds.
These bonds played a major role in Sri Lanka’s pre-2022 financing model, when the country repeatedly accessed international capital markets to meet government financing requirements.
When foreign-exchange shortages became severe, that model became unsustainable.
Sri Lanka defaulted on its external debt in April 2022.
The composition of external debt is now moving in a different direction.
Commercial debt is declining while official lending from multilateral and bilateral creditors is becoming more important.
That could be a positive development.
But it raises another question:
Is Sri Lanka actually reducing its debt burden — or is it moving toward a different set of lenders?
Who are the bilateral creditors?
The bilateral category deserves particular attention.
Of Sri Lanka’s approximately US$10.8 billion in bilateral debt, around 59% is owed to non-Paris Club countries, while approximately 41% is owed to Paris Club creditors.
China remains Sri Lanka’s largest bilateral creditor, with approximately US$5.01 billion outstanding.
Japan follows with approximately US$2.27 billion, while India accounts for approximately US$853.9 million.
This demonstrates that Sri Lanka’s foreign debt is not owed to one country or even one type of creditor.
The country is dealing with a network of governments, international institutions and private creditors — each with different interest rates, maturity periods, repayment schedules and conditions.
Then there are the multilateral lenders
Multilateral debt has now become the largest category of Sri Lanka’s external government debt.
It stood at approximately US$14.8 billion at the end of June.
The Asian Development Bank and World Bank together account for more than 78% of Sri Lanka’s multilateral debt.
This distinction is important.
A rise in multilateral borrowing should not automatically be treated as equivalent to taking on expensive commercial market debt.
Multilateral institutions can provide financing under terms that are different from commercial borrowing.
Therefore, simply saying that “Sri Lanka borrowed more” does not tell the whole story.
The more important questions are:
What did Sri Lanka borrow?
From whom?
At what cost?
For how long?
And what was the money used for?
The second quarter deserves scrutiny
There is another figure buried inside the latest debt data.
During the first quarter of 2026, Sri Lanka’s external government debt declined by approximately US$195 million.
Then, during the second quarter, it increased by approximately US$540 million.
That means the second-quarter increase was significantly larger than the net increase recorded over the entire first half of the year.
This is precisely the kind of movement that deserves closer examination.
What happened between March and June?
Which loans were disbursed?
Which projects received the funds?
What were the interest rates?
What were the maturity periods?
And were the funds used for development expenditure, budget financing, reconstruction, debt management or other government requirements?
The Treasury’s debt statistics provide the numbers.
The public deserves the story behind those numbers.
Sri Lanka has not returned to where it was in 2022
There is an important distinction that should not be lost in this investigation.
The latest figures do not mean Sri Lanka has returned to the conditions of 2022.
The IMF says debt sustainability has been restored following the restructuring process, although significant risks remain.
According to the IMF’s latest assessment, Sri Lanka’s public debt-to-GDP ratio declined from 125.8% in 2022 to 101.1% in 2025.
The IMF projects public debt at approximately 100.1% of GDP in 2026.
That represents a significant improvement from the crisis period.
But the IMF has also issued a warning that cannot be ignored.
Debt sustainability risks remain high.
The Fund says maintaining debt sustainability will require continued fiscal discipline, stronger revenue mobilisation, reforms and effective debt management.
The IMF’s latest Sri Lanka debt sustainability assessment and programme review also highlights the country’s still-high debt levels and gross financing needs, while stressing that the projected improvement depends on continued reform momentum and effective liability management.
The restructuring is not the same as debt elimination
Sri Lanka has made substantial progress with its debt restructuring.
However, restructuring should not be confused with the elimination of the country’s debt.
The restructuring has changed the repayment profile and reduced some of the immediate pressure.
But Sri Lanka still has a very large debt stock.
And that means the country’s next challenge is not simply completing restructuring.
It is managing what comes after it.
The risk is not necessarily another sudden default
The next Sri Lankan debt crisis may not begin with fuel stations running dry or people waiting in queues for weeks.
It could develop much more quietly.
A government can retain access to financing while becoming increasingly constrained by:
- annual debt-service requirements;
- interest payments;
- refinancing needs;
- exchange-rate movements;
- weak government revenue;
- slower economic growth; and
- continued borrowing to cover fiscal gaps.
The IMF projects Sri Lanka’s central government gross financing needs at approximately 19.8% of GDP in 2026.
That is why the debt stock alone cannot tell the whole story.
The question Sri Lanka has to answer
Borrowing is not inherently bad.
A country can borrow to build infrastructure, expand productive capacity, improve energy security and transport, and create the economic activity needed to repay that borrowing.
The problem begins when borrowing becomes a substitute for fixing underlying weaknesses in the fiscal system.
Sri Lanka has already experienced what happens when debt grows faster than the country’s ability to generate foreign exchange and government revenue.
The restructuring has given the country time.
What Sri Lanka does with that time will determine whether the crisis is truly over.
The Lakbima Investigation
The latest figures leave several questions that deserve clear answers from the authorities:
1. Which loans contributed to the US$540 million increase in external debt during the second quarter?
2. Which projects or government programmes received those funds?
3. What are the interest rates and maturity periods attached to the new borrowing?
4. What proportion of the new multilateral and bilateral financing is concessional?
5. How much foreign currency will Sri Lanka have to find each year to service its existing debt stock?
6. Is new borrowing financing productive investment — or recurring expenditure?
7. How much additional borrowing is expected during the remainder of 2026?
These questions are more important than whether the headline debt figure rises or falls by several billion dollars in any individual quarter.
The uncomfortable conclusion
Sri Lanka’s debt dynamics have changed.
Commercial borrowing has declined, while multilateral and bilateral creditors now account for a larger share of the country’s external debt.
That is not necessarily bad news.
In some respects, this may be the transition Sri Lanka needed after the 2022 crisis.
But debt restructuring does not mean debt eradication.
Sri Lanka still carries almost US$98 billion in gross public debt, while central government external debt remains above US$38 billion.
The real question is whether the government can make this new borrowing structure fundamentally different from the one that led to the 2022 crisis.
If new debt finances investment that generates economic growth and foreign-exchange earnings, Sri Lanka can gradually grow out of its debt burden.
If new borrowing is used primarily to plug recurring fiscal gaps, the country could eventually discover that it never truly escaped the debt trap.
It merely changed who was holding it.
