Rethinking the Indebted Sri Lankan Economy
We live in volatile times, unprecedented by many accounts. For highly indebted countries like Sri Lanka, navigating this instability by assuming we turn to old rulebooks may be folly, especially as almost the entire world faces Trump’s tariffs. Sri Lanka needs to address the structural inequities and conditions exacerbated during four decades of neoliberal policies, as a multipolar world order emerges.
Looking South, looking East, working together as regional entities may be the way to go. These anchors should shape Sri Lanka’s new government. The global turmoil is also an opening, offering Sri Lanka the chance to free itself from neo-colonial strictures. The current global financial architecture has not only precipitated global indebtedness again (globally, the debt crisis is not new), but also littered the world with war, genocide, poverty and hunger.
The World Bank (2024) records the dismal place the world finds itself in: some 44% of the global population remains poor. In Sri Lanka, inequality and poverty have been galloping towards the same direction. This has been especially so since the onset of the debt crisis, with some 33% of our population living under the poverty line and inequality rising from circa 11% to 33% according to the UNDP’s (2024) study on multiple vulnerabilities within Sri Lanka (1).
The existing terms of trade, which the country has embraced for the past four decades, have not delivered the working classes living wages or significant social mobility and equity. The need to address these “Dilemmas of Humanity” was a theme covered at a recent event in São Paulo, Brazil, which brought together delegates from across the southern hemisphere to underline South-South commonalities. Sharing strategies amongst the global South, as Jayati Ghosh (2025) mentioned in an interview with Niresh Eliathamby at a Face-to-Face interview for News 1st, was being echoed thousands of miles away around the same time (2). It is better than naïve approaches advocating to deal directly with a bullying nation, or by reducing tariffs, or assuming the technicalities on different elasticities of goods become the grounds for Sri Lanka to go it alone and suppose it will advance the country’s chances.
Political problems created by a tariff war are political. To quote, Umesh Moramudali, “the fallout isn’t about Sri Lanka, but about U.S. politics…with long-term consequences far beyond this immediate policy shift” (3). Once the politics of a global trade war is identified, calling for technocratic economic solutions to reduce the tariffs and level the field in Sri Lanka, when the global terrain is politically tumultuous and uneven, suggests a poverty of imagination.
For Piketty (2025), a world-leading economist, the tariff war exemplifies the waning economic powers of the USA and underlines a defunct liberal multilateralism (4). He and Jayati Ghosh, for instance, say that economists and policymakers need to take note and draft a new rulebook, inclusive of the global South (4, 5). Piketty explicitly calls for those countries in the global South to propose the establishment of a new social and environmental multilateralism. Their calls show how Sri Lanka is not alone. Being part of the vanguard calling for fiscal justice (such as by Brazil) and voting for frameworks on fair taxation at the United Nations are just two of the initiatives that Piketty outlines. This is what Sri Lanka needs to do globally.
At the Dilemmas of Humanity event, scholar and activist Vijay Prashad underscored the critical importance of strengthening regional blocs among countries in the Global South to formulate coordinated responses and assert greater economic sovereignty (6). He advocated for a multi-point policy framework, which by no means is exclusive, aimed at endowing developing nations along the following lines:
(1) Reclaim control over our economic pathways. Among these proposals should be a ban on the export of unprocessed raw materials, intended to promote local value addition, create employment, and enhance export revenues through higher-value goods.
(2) Stringent measures to halt transfer pricing manipulation, a practice where multinational corporations distort trade prices between related entities to avoid taxation.
(3) To counter capital flight and financial opacity. This should be done by following the United Nations-led framework convention on international tax cooperation. It helps to strengthen capital controls and support mandatory country-by-country reporting.
(4) A need to reduce interest rates on commercial loans to make credit more accessible for developmental purposes.
(5) Another key measure involves public holding of citizens’ savings; thus, insulating them from the volatility and speculative tendencies of global finance.
(6) Establishing a government-backed public remittances bank to reduce transaction costs, improve efficiency, and enhance financial inclusion, particularly for low-income and rural households.
(7) Finally, imposing greater conditions on foreign direct investment (FDI) and aligning it with national development priorities, upholding environmental and social safeguards, and generating equitable benefits for host countries.
These policy proposals collectively offer a strategic blueprint for countries like Sri Lanka to build a more self-reliant, just, and sustainable economic future. Vijay Prashad proposes this transformative agenda because the existing mechanisms for financing development are hardly a win-win for countries in the global South. Even the World Bank’s Chief Economist, Indermit Gill, said in December 2024, months before the current turbulence unleashed by the USA, said:
“It’s time to face the reality: the poorest countries facing debt distress need debt relief… Sovereign borrowers deserve at least some of the protections routinely offered to debt-strapped businesses…under national bankruptcy laws. Private creditors that make risky, high-interest loans to poor countries ought to bear a fair share of the costs when the debt goes bad” (7)
The World Bank is hardly a hotbed of radicalism. When the World Bank’s Chief Economist is spelling out the perilous position of countries like Sri Lanka, it is time for the country’s think tanks, policymakers, policy analysts and (orthodox) economists to be attentive to changing winds.
There is no reason for Sri Lanka to forsake our economic sovereignty by being bound to a dated script or collectively adhere to WTO rules, when the tariffs will hurt the working poor, when they already bear the burden of the debt crisis and austerity policies. For there to be equitable social transformation, there needs to be a materialist understanding of historical processes that explicitly acknowledges the politics of the current conjuncture. Without it, Sri Lanka will be groping in the dark if it thinks one small island nation will get a better deal than all its competitors, also placed in similarly precarious positions in other parts of the world.
References
(1) UNDP (2023) Understanding Multidimensional Vulnerabilities: Impact on the People of Sri Lanka Colombo: UNDP.
(2) News 1st (2025) “Trump’s Tariffs – World on a Rollercoaster!” Professor Jayati Ghosh on The People’s Platform with Niresh Eliathamby. April 11thhttps://www.youtube.com/watch?v=LaYMJelOYxw
(3) Kuruwita, Rathindra (2025) “Can Sri Lanka turn crisis into reform?” The Sunday Observer, April 4th 2025, pp 4.
(4) Piketty, Thomas (2025) “Rethinking the World Without US” Le Monde, April 15th 2025
(5) Ghosh, Jayati (2025) “The Global South Will pay for Trump’s Tariff Wars” Project Syndicate April 16th 2025
(6) Prashad, Vijay (2025) “Opening Panel – Dilemmas of Humanity” São Paulo, Brazil. April 7th 2025
(7) Jones, Tim (2025) “US tariffs will intensify debt crisis in lower-income countries” UK – Debt Justice April 4th2025
Co-authors:
Kanchana N Ruwanpura is Professor of Development Geography, University of Gothenburg, Sweden, Fellow Centre for South Asian Studies, University of Edinburgh, Scotland and co-founder of the Institute of Political Economy, Sri Lanka.
Charith Gunawardena is a co-founder of the Institute of Political Economy, Sri Lanka and former Councilor for the Green Party in London. E-mail: charith@ipe-sl.org Twitter handle: @ipe_sl
Image: Dilemmas of Humanity Event, Sao Paulo, Brazil, Aug 7-10 2025 (thetricontiental.com)