14/09/2026
⭕️⭕️The Cassandra of Colombo: Everyone Praised the IMF—Until the Balance Sheet Spoke⭕️⭕️
📍📍Why Sri Lanka’s apparent stability is not the same as economic recovery📍📍
In January 2026, Dr. Kenneth De Zilwa warned that Sri Lanka’s celebrated economic stability was fragile. He argued that the country had not achieved a genuine recovery because the underlying national balance sheet remained damaged.
Inflation had moderated. The immediate foreign-exchange crisis had been contained. Debt restructuring had created breathing space. The IMF programme was being presented as proof that Sri Lanka had finally turned the corner.
Many people laughed at the warning. Some dismissed it as unnecessary pessimism. Others declared that the IMF programme was the best thing that had happened to Sri Lanka.
But Dr. Kenneth was making a distinction that the public debate had largely ignored:
«Stabilisation is not recovery.»
A fall in inflation is not the same as a rise in productive capacity. A temporary improvement in reserves is not the same as a stronger foreign-exchange earning base. Debt restructuring is not the same as debt repayment capacity. And an IMF assessment declaring that debt sustainability has been restored does not mean that the underlying risks have disappeared.
The IMF’s subsequent assessments used much more cautious language. Debt sustainability may have been restored after restructuring, but debt-sustainability risks remained high. That does not mean that every part of Dr. Kenneth’s analysis was formally endorsed by the IMF. It does, however, reinforce the central warning he made: Sri Lanka had stabilised the crisis without yet repairing the balance sheet that created it.
🚩🚩Dr. Kenneth’s warning was about the national balance sheet
Dr. Kenneth’s statement was not that every IMF statistic was fabricated or that the IMF could do nothing useful. His argument was more fundamental.
The public was being encouraged to confuse temporary financial stabilisation with genuine economic recovery.
«“I warned in January 2026 that Sri Lanka’s so-called economic stability was fragile because the underlying national balance sheet had not been repaired. The country had not rebuilt its productive capacity, export strength, foreign-exchange earning ability or national savings. Instead, the crisis had been temporarily contained through debt restructuring, fiscal compression, import restraint and external financing.
Many people laughed at that warning and declared that the IMF programme was the best thing that had happened to Sri Lanka. But the IMF’s own subsequent assessment acknowledged that, although debt sustainability had been restored after restructuring, debt-sustainability risks remained high. That is precisely the distinction I was making.
A country does not recover simply because inflation falls, reserves temporarily improve or debt repayments are rescheduled. Those are signs of stabilisation. Recovery requires the rebuilding of the national balance sheet—productive assets, industrial capacity, competitive businesses, exports, foreign earnings, employment, savings and a stronger Net International Investment Position.
Sri Lanka has not yet solved the crisis. It has mainly moved the repayment dates. A repayment schedule is not a source of foreign exchange, and debt restructuring is not the same as economic development.”»
That is the issue Sri Lanka must now confront.
The IMF can help a country manage an immediate balance-of-payments crisis. It can support debt restructuring, impose fiscal conditions, restore access to financing and provide a framework for monetary and exchange-rate policy. Those functions have value.
But the IMF cannot, by itself, create competitive industries, build productive companies, develop technology, establish export markets, improve management quality, generate private-sector investment or build national wealth.
Those are the foundations of recovery.
🚩🚩The illusion created by short-term stability
The language of economic stability often focuses on a narrow group of indicators: inflation, interest rates, reserves, the exchange rate, fiscal balances and debt-service payments.
These indicators matter. But they are not the whole economy.
A country can reduce inflation while households become poorer. It can improve its fiscal balance by cutting public investment. It can increase tax revenue by raising taxes on an already weakened private sector. It can improve reserves through borrowed funds. It can restructure debt without increasing its capacity to generate foreign exchange.
These are not necessarily signs of a healthy economy. They may simply indicate that the crisis has been compressed, postponed or transferred from one balance sheet to another.
This is where the Balance Sheet Economic Model becomes essential.
The traditional policy discussion tends to focus on flows:
- GDP growth;
- tax revenue;
- exports;
- imports;
- the current account;
- the budget deficit;
- inflation;
- annual debt-service payments.
🚩🚩The BSEM asks a different set of questions:
- What productive assets does the country own?
- What is the condition of its infrastructure?
- How strong are its companies?
- How much foreign debt and foreign liability does it carry?
- What is the country’s Net International Investment Position?
- How much foreign exchange can it generate independently?
- Is national savings sufficient to finance investment?
- Is the country building wealth or merely managing obligations?
Flows are important because they change the balance sheet. But flows cannot be mistaken for the balance sheet itself.
A country may report GDP growth while its foreign liabilities continue to rise. It may collect more taxes while private investment collapses. It may record higher exports while imports, debt service and profit repatriation absorb the foreign exchange earned.
The question is not simply whether the economy is growing.
The question is whether the country is becoming financially stronger by strengthening it's national balance sheet more importantly the external balance sheet.
🚩🚩Debt restructuring is not debt repayment capacity not balance-sheet capability
Sri Lanka’s debt restructuring was necessary because the existing debt burden had become unmanageable. But restructuring does not erase the underlying economic problem.
It changes the timing, terms or structure of liabilities. It may reduce immediate repayment pressure. It may create fiscal space. It may allow the country to avoid disorderly default.
But the debt still has to be serviced.
The country must still generate foreign exchange. It must still collect revenue. It must still refinance or repay obligations. It must still absorb external shocks. It must still finance imports of fuel, machinery, medicine, food, technology and industrial inputs.
The IMF’s later assessment acknowledged that debt sustainability had been restored after restructuring, but also stated that debt-sustainability risks remained high.
That distinction is critical.
A debt position can be considered manageable under a particular set of assumptions while remaining highly vulnerable if those assumptions fail.
The assumptions may include:
- continued fiscal discipline;
- stable political conditions;
- sustained growth;
- favourable interest rates;
- adequate reserves;
- exchange-rate flexibility;
- no major external shock;
- successful implementation of reforms;
- continued access to financing;
- no serious climate disaster;
- no renewed collapse in investor confidence.
The problem is that countries do not operate inside spreadsheets. They operate inside an unpredictable world.
A war, commodity-price shock, climate event, global recession, political change or sudden capital-flow reversal can destroy the assumptions on which a debt sustainability projection depends.
That is why Dr. Kenneth’s warning remains relevant.
«“A repayment schedule is not a source of foreign exchange.”»
🚩🚩The rupee depreciation trap
One of the central weaknesses in Sri Lanka’s economic policy debate is the belief that currency depreciation automatically improves exports.
The textbook argument is familiar. If the rupee depreciates, Sri Lankan goods become cheaper for foreign buyers. Exports should increase. Imports become more expensive, so imports should decline. The trade balance should improve.
That argument assumes that the country has unused productive capacity, competitive firms, sufficient investment, strong foreign demand and the ability to replace imported inputs.
Sri Lanka does not operate under those conditions.
A large part of domestic production depends on imported fuel, machinery, raw materials, chemicals, pharmaceuticals, packaging, technology and intermediate goods. When the rupee depreciates, the cost of these inputs rises.
The IMF destruction chain is therefore more complicated for the ordinary consumer to understand:
Rupee depreciation → higher import costs → higher production costs → inflation → weaker household demand → lower business margins → reduced investment → weaker productive capacity → limited export growth → continued foreign-exchange pressure.
Depreciation can increase the rupee value of exports without producing a meaningful increase in the volume or competitiveness of exports.
A company may receive more rupees for the same dollar revenue while paying more for imported inputs, debt service, machinery and working capital. Its nominal turnover may rise, but its real balance sheet may deteriorate.
The same problem affects the state.
Foreign-currency liabilities become more expensive in rupee terms. Public corporations with dollar-linked obligations face larger losses. Energy, transport and infrastructure costs rise. The government requires more rupees to meet the same foreign-currency obligation.
This is why depreciation is not automatically a growth strategy.
A weak currency cannot substitute for productive capacity.
Sri Lanka’s debt problem is a stock problem
Sri Lanka’s debt crisis is often discussed through annual deficits and debt-service payments. But the deeper problem is the accumulation of liabilities over time.
Historical central-government debt data show a dramatic increase in the stock of public debt over the past two decades. The country moved from a debt stock measured in trillions of rupees at the beginning of the 2000s to a much larger domestic and external liability burden in the years that followed.
The precise annual flow of borrowing matters, but the accumulated stock matters more.
Debt is not reset at the end of every financial year. It remains on the balance sheet.
Interest compounds. Currency depreciation increases the domestic value of foreign liabilities. Refinancing creates new risks. Weak growth reduces the government’s ability to collect revenue. Higher interest costs crowd out public investment.
This is why a government can achieve a primary surplus and still remain financially vulnerable.
A primary surplus measures the difference between revenue and non-interest expenditure. It does not automatically prove that the national balance sheet is becoming stronger.
If the government is collecting more taxes by weakening private-sector cash flows, cutting infrastructure investment and reducing household purchasing power, the primary surplus may come at the cost of future growth.
A country can improve today’s fiscal number while damaging tomorrow’s productive capacity.
That is not sustainable development.
🚩🚩The state balance sheet is built over generations
One of the most damaging features of the current debate is the tendency to judge public infrastructure as if it were a private company’s quarterly profit-and-loss statement.
Large infrastructure projects do not always produce immediate financial returns. Their payback periods may extend over 15, 25 years or longer.
That is not necessarily a weakness. It is the nature of infrastructure investment.
A road, port, airport, power system, irrigation project, railway or digital network creates a platform on which private-sector activity can develop. The state builds the platform. Businesses build operations on that platform.
The benefits may appear gradually through:
- lower transport costs;
- reduced travel time;
- improved logistics;
- wider labour markets;
- greater tourism access;
- new industrial zones;
- private investment;
- higher land values;
- stronger regional commerce;
- increased productivity;
- new tax revenue;
- greater export capacity.
The state’s return is therefore not always captured through tolls, fees or direct operating profit.
The return may be embedded in the wider economy.
«“The state builds the platform. The private sector builds businesses on that platform.”»
This is a central principle of the Balance Sheet Economic Model.
Public infrastructure should be assessed as a long-term national asset, not merely as an annual expense.
That does not mean every infrastructure project is automatically good. Projects must still be evaluated for cost, financing terms, location, demand, governance, construction quality, operating efficiency and strategic value.
But rejecting a project simply because it does not generate an immediate cash surplus is economically illiterate.
🚩🚩The expressway was called a white elephant
Sri Lanka’s expressway network was criticised by many people as a white elephant. The criticism focused heavily on traffic volumes, toll revenue and the immediate financial cost of construction.
But the economic value of an expressway cannot be measured only by the money collected at toll booths.
An expressway changes the geography of economic activity.
It reduces travel time between production centres and markets. It improves access to tourism destinations. It lowers uncertainty in logistics. It allows businesses to reach suppliers, workers and customers more efficiently. It can encourage property development, warehousing, hotels, distribution centres and new commercial activity.
The benefits may take years to mature.
A road built today may support private-sector investment for decades. The government may not capture all the benefits directly, but the economy can gain through higher productivity, employment, tax revenue and investment.
The relevant question is not simply:
“How much toll revenue did the expressway generate this year?”
The better questions are:
- How much time did it save?
- How much did it reduce logistics costs?
- What new businesses became viable?
- How did it improve tourism?
- What private investment followed?
- What regional markets became accessible?
- What tax revenue can be generated over its lifetime?
- How much productive capacity did it create?
This is how a national balance sheet must be assessed.
🚩🚩Hambantota Port and the danger of short-term judgment
Hambantota Port was also labelled a white elephant. The criticism was understandable in the early years because the port did not immediately operate at the scale required to justify its cost.
But ports are not ordinary retail businesses. Their success depends on networks, shipping routes, industrial tenants, logistics systems, warehousing, customs efficiency, energy supply, road and rail connections, and long-term commercial confidence.
A port may require many years before its full economic ecosystem develops.
The value of Hambantota Port cannot be assessed only through its initial operating performance. It must also be considered as a strategic national asset that could support:
- transshipment;
- vehicle handling;
- bulk cargo;
- industrial activity;
- logistics;
- warehousing;
- energy-related investment;
- regional trade;
- manufacturing;
- export-oriented businesses.
Public material has also referred to Hambantota receiving recognition in the Asian port and logistics sector, including the 2019 Asian Freight, Logistics and Supply Chain Award for Best Container Terminal in Asia in the under-four-million-TEU category.
That recognition does not prove that every decision surrounding the port was correct. Nor does it erase concerns about financing, governance, commercial performance or strategic ex*****on.
But it does demonstrate why simplistic labels such as “white elephant” are inadequate.
A national asset must be judged over its useful life.
The real question is whether Sri Lanka can connect the port to an integrated economic strategy involving industrial zones, logistics, shipping, energy, road and rail infrastructure, investment promotion, customs reform and export development.
🇱🇰A port without an economic industrial ecosystem will struggle.
🇱🇰A port integrated into a productive national balance sheet can become a long-term engine of growth.
🚩🚩The IMF cannot build the productive economy. It's a destroyer of productive capability.
The IMF’s role is to help restore macroeconomic stability and external viability. It is not a substitute for national economic strategy.
Sri Lanka still needs to build:
- stronger domestic companies;
- modern manufacturing;
- competitive agriculture products;
- export-oriented services;
- technology capabilities;
- energy security;
- logistics capacity;
- research and development;
- skilled employment;
- capital-market depth;
- national savings i.e. profits ;
- private investment via strong balance sheets;
- infrastructure that support private-sector profitability.
These are not created by fiscal compression and IMF regressive textbook economics.
They require patient capital, credible policy, stable institutions, entrepreneurial confidence and a long-term development strategy.
They also require the state to understand that its balance sheet is not merely a list of liabilities. It includes roads, ports, energy systems, education, technology, institutions, public land, infrastructure and the productive capacity of its people.
When public investment is cut indiscriminately to meet short-term fiscal targets, the country may improve the appearance of its budget while weakening its future earning capacity.
That is the opposite of balance-sheet economics.
🚩🚩The real measure of recovery
Sri Lanka should stop asking only whether the IMF programme is on track. It should ask whether the country is becoming stronger.
A genuine recovery would be visible in:
1. Higher productive investment.
2. Stronger private-sector balance sheets.
3. More competitive companies.
4. Greater industrial capacity.
5. Higher-quality exports.
6. Increased foreign-exchange earnings.
7. Better national savings i.e retained earnings
8. Improved infrastructure utilisation.
9. Stronger employment and wages.
10. A more sustainable Net International Investment Position.
11. Lower dependence on emergency financing.
12. A national balance sheet capable of absorbing external shocks.
Without these changes, Sri Lanka risks becoming trapped in a cycle of repeated stabilisation programmes.
The country borrows or restructures, tightens policy, reduces demand, achieves temporary stability, faces renewed pressure and then returns for another rescue.
That is not development.
It is crisis management.
The warning was not false
Dr. Kenneth De Zilwa’s warning was not that the IMF could not help Sri Lanka. It was that the IMF could not build Sri Lanka’s economy for Sri Lanka.
The IMF can restructure liabilities. It can impose fiscal conditions. It can support monetary discipline. It can help restore confidence in the short term.
But only Sri Lanka can build the productive assets, companies, industries, infrastructure, technology, exports and national savings required for lasting recovery.
🚩🚩The warning was not false.
The falsehood was the belief that debt restructuring meant economic recovery.
Sri Lanka has not yet fully escaped the crisis. It has moved away from the immediate cliff edge, but it remains exposed to the weaknesses of its national balance sheet.
It is still heavily dependent on assumptions about growth, reserves, fiscal discipline, external financing and global conditions.
The country is not yet living in recovery.
«Sri Lanka is living between repayment dates.»
The path forward requires more than celebrating stabilisation. It requires a national economic strategy that rebuilds the balance sheet over decades.
Infrastructure must be judged by its long-term contribution. Companies must be strengthened. Exports must become more sophisticated. Foreign-exchange earnings must rise. Savings and investment must increase. The productive economy must be rebuilt.
The IMF can manage the debt.
«Sri Lanka must build the economy.»
