Sri Lanka Faces Debt Risk as U.S. Blockade Hits Fuel

Sri Lanka has achieved initial macroeconomic stabilization following its 2022 crisis, with growth rebounding to 5 percent, inflation returning to single digits, and foreign reserves increasing to over 5 billion dollars. However, Gevorg Sargsyan and other experts warn that this recovery remains fragile and non-inclusive, with one in five citizens still facing poverty.

New geopolitical tensions are now threatening these gains. A naval blockade of the Strait of Hormuz announced by U.S. President Donald Trump has caused a sharp drop in tourism revenue and exposed Sri Lanka to fuel price shocks due to its reliance on imported distillates. This external pressure coincides with internal vulnerabilities, including an expanding money supply and declining worker remittances.

Financial analysts warn of a potential credit event by 2028 as debt restructuring relief windows close. Because of a low sovereign credit rating, the country may be unable to access international capital markets to roll over its debt. To mitigate these risks, the World Bank Group and local officials are urging a shift toward private sector-led job creation, trade liberalization, and the attraction of foreign direct investment in renewables and logistics to build long-term resilience.