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Foreign debt restructuring is vital to ensure the continuation of the IMF programme, financial stability and growth. Furthermore, the repayment conditions of the foreign debt have to be less onerous for the country to repay its debt obligations.  The reduction of the foreign debt and a longer repayment period are imperative.

Foreign reserve

In the current foreign reserve position of US$ 3.5 billion, a foreign debt repayment of US$ 4 billion that was mentioned earlier is not feasible. This is so even if foreign reserves increase to US$ 5 billion by the end of the year. Therefore, a more favourable restructuring of the foreign debt is of utmost importance.

IMF condition

Furthermore, the restructuring of the foreign debt is a condition for continuing the IMF’s Extended Finance Facility (EFF). The continuation of the IMF programme is imperative for financial and economic stability and economic growth. The stabilisation and growth of the economy that have been achieved could be negated by a withdrawal of the IMF facility and programme.

Negotiations

Although President Ranil Wickremesinghe was confident of a favourable outcome, the first round of negotiations for foreign debt restructuring has failed. However, the IMF’s Asia Pacific Director, Krishna Srinivasan, who is also a member of the IMF Review Mission, has expressed optimism regarding the prospect of a deal with Sri Lanka’s sovereign bondholders following further discussions. We must hope that this expectation will be realised soon.

Proposals

Various innovative proposals, including governance-linked bonds proposed by Verite Research, are being discussed as a solution of mutual benefit to both parties. The bondholders, we hope, will accept such a solution rather than demand the pound of flesh.

Reserves

In the current foreign reserve position of US$ 3.5 billion and even with an expectation that foreign reserves may increase to about US$ 5 billion, it is not possible for the country to repay a foreign debt of about US$ 4 billion. Although remittances and earnings from tourism are increasing, there are downside risks. Furthermore, the trade deficit is widening and offsetting the gains from remittances and tourism. Therefore, the foreign debt repayment has to be reduced to enable its repayment.

IMF condition

Moreover, the continuity of the IMF Extended Finance Facility (EFF) requires foreign debt sustainability. The IMF-supported programme explicitly assists Sri Lanka’s efforts to restore macroeconomic stability and debt sustainability, safeguard financial stability, and enhance growth-oriented structural reforms on the condition that a restructuring of foreign debt repayment is implemented.

Negotiations

There has been a stalemate in the negotiations to restructure the foreign debt. This delay in reaching an agreement on foreign debt repayment will no doubt delay the third tranche of the IMF’s Extended Finance Facility, as the IMF-supported programme explicitly assists Sri Lanka’s efforts to restore macroeconomic stability and debt sustainability, safeguard financial stability, and enhance growth-oriented structural reforms on the condition that foreign debt sustainability is achieved.

The failure to conclude foreign debt restructuring would delay the IMF board review, the third tranche of the IMF’s Extended Finance Facility (EFF), and the implementation of the country’s reform programme.

Moreover, the impending presidential and parliamentary elections exert pressure on the government to fast-track the negotiation process, raising concerns about the sustainability of any deal struck with bondholders hastily under such circumstances. In this context, there is a possibility of reaching an adverse agreement for the country, the IMF spokesman opined, adding that if this happens, the debt repayments agreed upon may become a difficult task for Sri Lanka in the coming years and could lead to a second default. There is a dark cloud of uncertainty about a new regime not agreeing to the IMF conditions.

Summing up

The first round of direct discussions in London about two weeks ago ended in a deadlock, but both sides have pledged to continue negotiations to explore bonds linked to economic performance.

Hopefully, the setbacks in the first round of sovereign bond restructuring talks in London will be overcome by an innovative solution that satisfies both the creditors and the debtors. As far as Sri Lanka is concerned, a significant haircut and a long period of repayment are needed.

The Sri Lankan official negotiators and bondholders have pledged to continue the dialogue to arrive at a consensus within a few weeks.

Concluding reflection

The restructuring of foreign debt is vital to ensure the repayment of foreign debt and continuing with the IMF programme to stabilise the economy and ensure economic growth. Furthermore, in the current foreign reserve position of US$ 3.5 billion, a foreign debt repayment of US$ 4 billion is not feasible.

The delay in reaching an agreement could be a stumbling block for Sri Lanka’s upcoming IMF executive board review, which is scheduled for June. For these reasons, debt restructuring is a foremost condition for the stability and growth of the economy.

Moreover, the impending presidential and parliamentary elections put the continuation of the IMF arrangement in some doubt. If this happens, the economy could be in a severe crisis.