Sri Lanka’s Debt Restructuring gains momentum
Sri Lanka’s efforts to address its debt crisis have gained significant momentum as bondholders representing the country’s US $12.55 billion in International Sovereign Bonds (ISBs) have committed to debt restructuring.
This process aims at offering the government substantial relief, with both foreign and local bondholders signaling readiness for participation.
The Ad Hoc Group of Sri Lanka Bondholders, holding 40 per cent of ISBs, and the Local Consortium of Sri Lanka-LCSL, composed of local banks and financial institutions have both expressed full support for the debt exchange proposal launched by the government.
The initiative includes macro-linked bonds that adjust in line with GDP growth. Central Bank Governor Nandalal Weerasinghe reassured stakeholders of the plan’s sustainability, rejecting claims that repayment challenges would arise in 2028.
He noted that only 4.5 per cent of GDP is allocated annually for foreign debt payments, with major repayments deferred to between 2032 and 2040.
“The exchange offers bondholders adequate incentives to participate, including fees as well as growth-linked terms,” he said.
Dr. Weerasinghe emphasised that this restructuring also is in line with the best international practice and is non-negotiable for Sri Lanka’s financial recovery.
In tandem, the Central Bank unveiled a key monetary policy move by adopting the Overnight Policy Rate (OPR) at 8 per cent and abandoning the dual-rate system.
This is to take immediate effect from November 27, to enhance the transmission of policy rates to market rates for financial stability.
The Monetary Policy Board also voted to cut the effective policy interest rate by 50 basis points, in support of the Flexible Inflation Targeting framework.
These developments saw an immediate response in the Treasury bill market, with adjustments in order consistent with the Central Bank’s objectives. Dr. Weerasinghe explained that this move was unrelated to the IMF programme and was fully in line with best practices in inflation targeting.
This debt restructuring and policy revamp is a crucial component of Sri Lanka’s approach to the rebuilding of its economy, restoring market confidence, and achieving sustainable growth.
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