Three years before the World Bank introduced its first structural adjustment loan in 1980, Sri Lanka had embarked on a process of economic liberalization. The outcomes of this have been documented at the end of the 1980s. The events explain the difficulties of managing the transition from a closed to an open economy. However, very little attention has been paid to tension between different needs of stabilization and adjustment. Why Sri Lankan liberalization faltered during this period has still not been adequately explained. This paper attempts to provide an answer to this crucial question.