Sri Lanka secures external debt restructuring in a complex bargain
The Sri Lankan government has secured debt restructuring agreements with both commercial creditors and key bilateral lenders following tough negotiations and complex bargaining, the Finance Ministry’s recent report highlighted.
The ministry expects the International Monetary Fund (IMF) to confirm soon whether Sri Lanka’s restructuring framework for International Sovereign Bonds (ISBs) complies with its programme parameters.
By the end of June this year, more than US$11.5 million had been paid to two foreign companies Lazard and Clifford Chance LLP (legal and financial advisors), hired for intermediary activities in connection with the restructuring of foreign debt.
Initially, it was agreed that the relevant tasks would be completed by the end of June 2023. However, the process has not yet been completed, and the government has not announced a target date for its completion
These recent agreements in June 2024 involve restructuring the country’s ISBs which accounted for $12.5 billion of Sri Lanka’s $37 billion external debt by the end of 2023.
Commercial creditors, who hold the ISBs, agreed to a 28 per cent nominal reduction in the bonds’ principal.
However, the agreement includes Macro-Linked Bonds (MLB), where payouts are tied to economic growth, and potentially governance-linked bonds.
While this deal is presented as a 28 per cent “haircut” for bondholders, there is a possibility that it could be reduced to just 15 per cent under certain conditions, an advisor to the president said.
Under the terms of the agreement, Sri Lanka will pay a low interest rate of about 3.75 per cent until 2028, he confirmed.
However, after 2028, the country will face a weighted interest rate of 8.2 per cent if its GDP exceeds $100 billion.
Given that Sri Lanka’s GDP increased by approximately 14 per cent in 2023, this scenario seems likely. This makes the deal particularly favourable for bondholders, as the original interest rates ranged between 5 per cent and 7 per cent.
On June 26, 2024, Sri Lanka reached a final agreement on its debt treatment with the members of the Official Creditor Committee (OCC), which includes major bilateral lenders such as Japan, India, France, and the United States, the ministry report added.
Additionally, the country concluded Bilateral Debt Treatment Agreements with China’s Exim Bank. These agreements involve the treatment of $10 billion in debt owed to these creditors.
The successful conclusion of these agreements brings several benefits for Sri Lanka. First, it enables the resumption of bilateral lending, which is crucial for supporting economic growth.
This will have positive implications for sectors like construction and overall infrastructure development in the country, the ministry pointed out.
Second, the restructuring provides significant fiscal relief, as the foreign currency debt service cost is expected to decrease from 9.2 per cent of GDP in 2022 to less than 4.5 per cent of GDP on average by 2027-2032.
This reduction in debt servicing costs allows the government to allocate more resources to essential public services.
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