Civil society calls for debt cancellation and end to IMF-mandated austerity as cyclone devastates Sri Lanka
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Article summary
- Cyclone Ditwah intensifies calls for large-scale debt cancellation as Sri Lanka struggles to respond to crisis.
- Civil society and economists argue IMF-mandated austerity limits Sri Lanka’s ability to invest in development and climate resilience.
The catastrophic impacts of Cyclone Ditwah across Sri Lanka in November 2025 have intensified calls for large-scale debt cancellation when disasters strike.
Sri Lanka was in a deep debt crisis before the cyclone hit. In April 2022, the country defaulted on its external sovereign debt, after it reached 128 per cent of its gross domestic product (GDP). Soon after, the government turned to the IMF for a 48-month extended arrangement under the Fund’s Extended Fund Facility, its 17th IMF loan programme (see Observer Summer 2025, Spring 2024).
In December 2025, a group of 38 Sri Lankan civil society organisations (CSOs) called for a renegotiation of the IMF loan’s conditions. The statement noted, “the IMF controlling government spending not only restricts the ability of the government to respond to the ongoing humanitarian crisis, but severely impedes investing in infrastructure, recuperating livelihoods and adapting to further climate change impacts.” In parallel, 121 economists called for immediate and “significant debt cancellation – with no punitive conditions – to free up fiscal space for disaster recovery, social protection, reconstruction and development.”
IMF – the handmaiden of austerity
According to the IMF Sri Lanka’s current programme aims to help “restore debt sustainability” through the “restructuring of public debt” and the “implementation of primarily revenue-based fiscal consolidation.” Because Sri Lanka was classified as a middle-income country when it defaulted, it was ineligible for the G20 Common Framework and has had to negotiate debt restructuring with creditors on an ad-hoc basis. According to UK-based CSO Debt Justice, the restructuring is expected to reduce the net present value of Sri Lanka’s debt by around 17 per cent overall – 26 per cent for bondholders and bilateral creditors. Yet this still leaves the country with some of the highest repayment burdens globally, among lower-income countries.
Based on the IMF’s widely criticised debt sustainability assessment (DSA; see Observer Autumn 2023), the Fund projects that Sri Lanka needs to maintain a primary budget surplus of 2.3 per cent of GDP from 2025 onwards. To achieve this, the country has been implementing far-reaching austerity reforms (see Observer Summer 2025), including adjusting electricity tariffs to “cost-recovery” levels, even though tariffs had already risen by 75 per cent in August 2022 and a further 66 per cent in February 2023. Value-added tax (VAT) also nearly doubled to 15 per cent between June and September 2022 and, although the government initially tried to soften the impact by keeping VAT exemptions on basic food items, the Fund called for “abolishing the vast majority of VAT exemptions.” The IMF still cautioned in June 2024 that “the path to debt sustainability remains knife-edged,” with the country facing an estimated 50 per cent probability of a renewed default.
With Cyclone Ditwah being just one of the shocks facing the country and the escalating war in Iran adding further risks, Charith Gunawardena, co-founder of the Sri-Lankan-based Institute of Political Economy, argues:
“The IMF’s DSA constrains Sri Lanka’s fiscal space to prioritise people’s wellbeing and the environment, undermining its economic sovereignty,” adding that “Sri Lanka will be a key test of whether the international financial system can address urgent questions of sovereign debt relief and deliver even a modicum of justice in debt negotiations – crucial not only for Sri Lankans, but for restoring faith in a multilateral system already under fire for its lack of legitimacy.”
