Sri Lanka’s debt trap and shifting global order

Sri Lanka's foreign reserves, as projected by government estimates, were expected to reach $8,000 million by December 2026. However, by late September, reserves had dwindled to $6,851 million. To achieve this target, the state would need to accumulate approximately $383 million each month—a feat seemingly unattainable given that Sri Lanka's current account deficit has worsened as imports now outweigh exports.

The country is grappling with a severe foreign currency shortage, primarily due to foreign debt repayments that exceed $5,000 million annually and insufficient worker remittances. Without a proactive strategy, Sri Lanka is at risk of falling deeper into a chronic balance-of-payments crisis. This domestic predicament is occurring amidst turbulent global shifts.

In the West, the neoliberal economic model is facing unprecedented challenges. US Treasury yields have crossed the 5% mark due to soaring national debt surpassing $40 trillion and a growing global resistance to dollar hegemony.

As BRICS nations and other economies shift away from the US dollar to avoid financial weaponization by the US, similar debt and inflation pressures are causing widespread civil unrest in France, Germany, and the UK. Moreover, persistent energy shocks and a speculative AI stock bubble are further destabilizing the Western-led global financial order.

However, Sri Lanka seems to be moving in the opposite direction. The administration recently missed a strategic opportunity by declining an invitation to the BRICS summit, despite a personal request from Russian President Vladimir Putin. Despite this, the country persists in adhering to the dollar-dominated Western framework, even importing US fuel at high logistical costs, despite Henry Kissinger's warning that "to be America's friend is fatal."

For an import-dependent economy like Sri Lanka, which lacks alternative reserve buffers such as gold, rising US interest rates pose a grave danger. As borrowing costs in international markets increase, Sri Lanka will likely be compelled to borrow foreign currency merely to service existing debt, thus perpetuating a vicious cycle of dependency.

Essentially, this perpetual debt trap is a result of decades of policy decisions that have compromised national sovereignty, transferring economic surplus to external creditors and imperial structures instead of promoting genuine domestic resilience.