Sri Lanka Nears Debt Sustainability with New Restructuring Agreements

Sri Lanka has taken a significant step towards achieving debt sustainability by signing agreements to restructure approximately $10 billion in bilateral debt, according to the International Monetary Fund (IMF). These deals, finalized with China and other creditor nations on Wednesday, mark a pivotal moment in the country’s economic recovery efforts.

The restructuring process, which began in September 2022 following Sri Lanka’s default on foreign debt due to record low reserves, saw the island nation finalize terms with the Official Creditor Committee (OCC). This committee, co-chaired by Japan, India, and France, has collectively lent Sri Lanka $5.8 billion.

In addition, the agreement with China EXIM Bank to restructure $4.2 billion is expected to ensure comparability of treatment, according to the OCC. Sri Lanka’s path to economic stability, however, still requires negotiations with bondholders to restructure $12.5 billion in international bonds.

“We hope that there will be swift progress on reaching agreements with external private creditors in the near future,” stated Peter Breuer, the IMF’s senior mission chief for Sri Lanka. Bilateral lenders have expressed the need for these agreements to be on terms as favorable as those offered by the OCC.

This restructuring is crucial for the $2.9 billion bailout program from the IMF, which has already helped Sri Lanka control inflation, stabilize its currency, and improve government finances. The Central Bank of Sri Lanka anticipates a 3% economic expansion in 2024 after a 2.3% contraction last year.

Once completed, the debt restructuring will enable Sri Lanka to reduce its foreign debt repayments significantly—from 9.2% of GDP in 2022 to 4.5% between 2027 and 2032. The government aims to cut its debt by $16.9 billion and plans to seek parliamentary approval for the agreements on July 2.

However, analysts caution that Sri Lanka must continue to improve governance and adhere to reform paths, including fiscal targets set by the IMF, imposing property taxes, and regulating state bank lending to loss-making state enterprises. Upcoming presidential elections before mid-October could pose additional challenges to this recovery process.