By Asoka S. Seneviratne –

Introduction: A Crisis Beneath the Surface

Sri Lanka’s public debt crisis has attracted intense attention since the country’s historic default in 2022. Academics, policymakers, and international lenders have rightly focused on (a) fiscal mismanagement, (b) revenue gaps, and (c) debt restructuring strategies. At the recent Debt & Governance Conference, a wide range of topics—from revenue generation to institutional reform—were discussed with urgency and ambition. However, a crucial and highly significant issue was noticeably absent from the main agenda: off-balance sheet obligations (OBS).

These hidden liabilities—comprising state-owned enterprise (SOE) debts, government guarantees, public-private partnership (PPP) commitments, and other contingent liabilities—pose a silent but powerful threat to Sri Lanka’s fiscal future. Although they do not appear in official debt statistics, they exert significant pressure on the country’s finances and governance frameworks.

OBS obligations are not merely abstract accounting anomalies. They distort fiscal transparency, enable unchecked executive discretion, and mislead both domestic stakeholders and international creditors. When these liabilities inevitably surface—through SOE bailouts, failed PPPs, or sudden calls on sovereign guarantees—they impose unforeseen costs on the public purse, undermining efforts at recovery and reform.

In short, Sri Lanka’s debt crisis is not fully visible in the ledgers. A significant portion of the country’s fiscal exposure remains concealed, undocumented, or inadequately monitored. Unless these shadow debts are brought to light, no debt restructuring plan, however well-designed, will hold. Recognizing and integrating OBS obligations into national fiscal strategy is not optional—it is indispensable to restoring credibility, building resilience, and charting a sustainable path forward.

This article examines the nature, extent, and implications of Sri Lanka’s off-balance sheet obligations, providing clear policy recommendations to enhance transparency, oversight, and reform. The goal is to bring the unseen into view—and to argue that any serious governance reform must start with accounting for what is off the books.

What Are Off-Balance Sheet Obligations?

Off-balance sheet obligations refer to financial commitments not recorded as direct liabilities on the government’s official debt registers. These typically include:

* Government guarantees: Especially for loans taken by SOEs like the Ceylon Electricity Board (CEB) and Sri Lankan Airlines.

* Leasing arrangements & PPPs: Future payments for infrastructure projects, such as highways and airports, are financed through concession agreements.

* Letters of comfort and implicit support: Pledges of government backing that may not be formally recognized as debt but are de facto obligations.

* Pension & health liabilities: Unfunded obligations to public employees, largely unaccounted for in debt statistics.

Though not captured in headline debt figures (such as those reported to the IMF or World Bank), these commitments represent substantial fiscal exposure.

Scale and Examples in the Sri Lankan Context

Due to weak disclosure practices, the full extent of Sri Lanka’s off-balance sheet obligations remains opaque. However, several examples offer insight into the magnitude of the issue:

* Ceylon Electricity Board (CEB): Operates at persistent losses, financed through short-term debt often guaranteed or absorbed by the Treasury.

* Sri Lankan Airlines: Accumulated losses exceed LKR 372 billion, with many loans backed by sovereign guarantees.

* Highway PPPs: Large-scale projects, such as the Central Expressway, involve long-term payment commitments largely excluded from budget documents.

* Government guarantees: As of 2023, guaranteed debt exceeded 10% of GDP—a figure likely to rise amid SOE restructuring.

According to conservative estimates, Sri Lanka’s actual liability burden is approximately 112% of GDP, of which 35% lies off the balance sheet. These hidden obligations—including SOE debt, disaster exposure, and unrecorded foreign borrowing—represent real, contingent claims on public resources.

Summary: Sri Lanka’s Debt Burden (2023)

* Officially reported government debt: 77% of GDP

* Off-balance sheet obligations (OBS): 35% of GDP

* Total actual liabilities: 112% of GDP

Impact on Debt Sustainability

The most immediate result of OBS obligations is the misstatement of actual debt levels, which causes:

* Understated risk: International lenders may underprice Sri Lanka’s sovereign risk, facilitating excessive borrowing.

* Sudden crystallization: When SOEs default, the Treasury must absorb these liabilities, instantly expanding the national debt.

* Fiscal rigidity: Hidden liabilities limit policy flexibility, often necessitating cuts in social programs and public investment.

Even with effective debt restructuring, ignoring OBS liabilities undermines the credibility of medium-term fiscal targets.

Governance Risks and Lack of Accountability

Off-balance sheet financing has also become a mechanism for evading budgetary scrutiny. Significant governance risks include:

* Bypassing legislative oversight: Multi-year fiscal commitments are often made without parliamentary approval.

* Corruption and procurement risks: Reduced transparency enables rent-seeking and inflated contracts.

* Institutional fragmentation: Ministries and SOEs act independently, weakening centralized fiscal control.

In essence, OBS obligations expose both fiscal and governance vulnerabilities, creating a shadow system of liabilities beyond democratic accountability.

Global Lessons: Comparative Warnings

Sri Lanka is not alone in facing the risks of hidden fiscal exposures. Countries such as Ghana, Zambia, and Pakistan have suffered economic crises when off-balance sheet liabilities—particularly from SOE bailouts and undisclosed guarantees—unexpectedly emerged. In each case, these obligations were underestimated or deliberately obscured, providing a false sense of fiscal stability. Once these hidden debts materialized, they overwhelmed public finances, triggered sovereign downgrades, and led to IMF bailouts. The global lesson is unmistakable: OBS liabilities can unravel economies that appear sound on paper, until it is too late to act.

Policy Recommendations

To reduce the fiscal and governance risks posed by OBS obligations, the following reforms are essential:

1. Central registry of contingent liabilities: Create a transparent national database of all government guarantees, PPPs, and SOE debts.

2. Incorporate OBS data into annual fiscal risk statements and debt sustainability evaluations.

3. SOE reform and accountability: Establish performance-based oversight, independent audits, and a phased restructuring plan.

4. PPP legislation: Enact robust legal frameworks that ensure transparency and limit off-budget financing.

5. Parliamentary oversight: Require parliamentary approval for all large guarantees and long-term contingent commitments.

Conclusion: Making the Invisible Visible

If Sri Lanka is to restore debt sustainability and rebuild public trust, it must address liabilities outside official accounts. OBS obligations are not just theoretical threats—they are real, increasing, and mostly unregulated.

The path forward requires fiscal transparency, governance reform, and institutional accountability. Only by making the invisible visible can Sri Lanka build a debt governance framework that is credible, durable, and worthy of public confidence.

*The writer, among many, served as the Special Advisor to the President of Namibia from 2006 to 2012 and was a Senior Consultant with the UNDP for 20 years. He was a Senior Economist with the Central Bank of Sri Lanka (1972-1993), asoka.seneviratne@gmail.com