Sri Lanka’s political stability strengthens debt restructuring efforts
Sri Lanka’s newly elected administration has opened a window to its International Sovereign Bond holders to tender bonds in exchange for new instruments during a three-week period ending December 12, 2024.
This follows the endorsement and ratification of the debt restructuring deal negotiated with international sovereign bondholders by government authorities in an attempt to stabilise the economy that defaulted on external debt in May 2022.
The Finance Ministry in a statement said that Sri Lanka strongly encourages all holders to participate in the exchange process as early as possible. The features of the new instruments have been discussed in minute detail for over two years with holders in good faith, with the best possible outcome for all parties.
Some key components of this debt restructuring include the offering of a US$12.5 billion bond exchange and new financial instruments, including a GDP-linked and a governance-linked bond. These have gained support from major creditors such as Black Rock and Amundi. The bondholders shall have up to December 12, 2024, to reply to this.
This agreement would decrease the restructured bonds’ NPV (net present value) by 40.3 per cent and also links the payment to economic performance.
More than $17 billion NPV debt relief combined for the International Monetary Fund (IMF) programme period and which China has committed to under the restructuring package.
The Finance Ministry said consultations with the IMF and the Official Creditor Committee concluded on October 4, 2024.
This agreement is made with due regard for the principle of comparable treatment between official creditors and bondholders under the terms of the IMF programme, hence minimising the possibility that changes in policy may disturb this process.
In this regard, the Senior Mission Chief of the IMF for Sri Lanka, Peter Breuer, tackled how important that was: “Sri Lanka’s debt is now on a path toward sustainability. The next steps are to complete commercial debt restructuring, finalise bilateral agreements, and implement the terms of these agreements to restore debt sustainability.”
The debt swap will reduce Sri Lanka’s debt service payments by around $9.5 billion in the four-year IMF programme period.
It also includes shaving 31 per cent of bonds’ coupon rate to 4.4 per cent and extending the average maturity period by over five years.
The Sri Lanka external debt stood at $ 37.55 billion at the end of June 2024, increased to $ 38.27 billion at the end of September 2023, the third-quarter debt bulletin of Sri Lanka published by the Ministry of Finance revealed.
Under the Base Case Restructuring, the principal would be shaved off by 28 per cent, and the defaulted interest would be shaved off by 11 per cent, with an extra restructuring fee of $ 225 million to be paid.
The interest rates would be in the range of 3.5-5.5 per cent over the next eight years and then 8.75-9.75 per cent from 2033 onwards. The repayments of defaulted interest are scheduled between 2024 and 2028 and the principal repayments from 2029 until 2036.
This is a GDP-linked mechanism: the better the economy does with respect to IMF projections from 2025 to 2027, the more principal would be paid back, with interest rates higher. Conversely, if it is lower, then that would be reversed, so payment obligations are cut down.
This made the successful completion of the bond exchange of paramount importance to the sustainability of sovereign debt and the recovery of the economy. It is expected that governance reforms, fighting corruption, and inclusive growth will rebuild confidence in the economy of Sri Lanka for stability and long-term development.
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