Can good governance tackle bad debt? The political economy of public debt management

The causes of sovereign debt crises are complex and varied, from structural inequities in the global financial system to volatile external shocks. Yet a recurring and often decisive feature of these crises lies in domestic governance failures – the ways in which powerful local constituencies, in collusion with external actors, are able to generate and sustain unsustainable debt. Traditional ‘good governance’ reforms promoted by the IMF and World Bank have largely failed to prevent such crises or to foster genuine accountability.

Nonetheless, improving debt governance remains essential – not only to reduce the likelihood of repeated defaults but also to assure donors and creditors that debt relief will not be followed by another round of fiscal irresponsibility. The problem is not a lack of recognition of corruption or mismanagement, but rather a lack of feasible, politically grounded strategies for addressing them.

This research examines the political economy of public debt management in Sri Lanka and Bangladesh, analysing how the power, capabilities, and interests of key actors shape fiscal and economic decision-making. It challenges the assumption that transparency and accountability measures alone can safeguard debt sustainability, demonstrating that effective governance requires enforcement by actors with both the relative power and incentives to ensure compliance.