Cash-strapped Sri Lanka reaches crucial debt-restructuring agreement with bondholders

Colombo has announced a long-delayed debt restructuring agreement with its sovereign bondholders bringing a much-needed relief to the cash-strapped island nation. In a statement on October 4, the Ministry of Finance said it reached an agreement with representatives of its international and local holders of International Sovereign Bonds (ISB) on September 19. 

Sri Lankan authorities have “completed their consultations with Sri Lanka’s Official Creditor Committee (OCC) and the International Monetary Fund (IMF),” the official statement said. It added that the agreement is compatible with the comparative treatment principle. 

The announcement came after the new government formed by President Anura Kumara Dissanayake’s National People’s Power (NPP) expressed willingness to accept the agreement during the talks held with the visiting IMF delegation in Colombo on October 3 and October 4. 

The IMF made external debt restructuring conditional to the $2.9 billion four-year facility clinched in March 2023 by the Ranil Wickremesinghe administration. 

Sri Lanka has already obtained three tranches of about $360 million each under the Extended Fund Facility. The third tranche of the bailout package was released in mid-June as the Washington-headquartered global lender said on August 2 that Sri Lanka’s economic reform programme had yielded good results. 

Days before the presidential elections, the then Wickremesinghe-led government, which undertook the task of debt restructuring, announced an in-principle agreement with external commercial creditors for the restructuring of approximately $17.5 billion of external commercial debts. 

Wickremesinghe, who was also the finance minister, was defeated in the presidential election last month. 

The NPP in the run-up to the election had called the IMF deal a “death trap” and vowed to renegotiate it. 

In April 2022, the island nation declared its first-ever sovereign default since gaining Independence from Britain in 1948. The financial crisis led Gotabaya Rajapaksa to quit office in 2022 amid a massive civil unrest. 

The Official Creditor Committee (OCC), led by Japan, France and India, covers about $5.9 billion of Sri Lanka’s outstanding external debt of $37 billion, according to the country’s finance ministry. The Export-Import Bank of China (EXIM) covers about $4 billion of outstanding debt, government data showed. 

Among bilateral creditors, Sri Lanka owed China $4.7 billion with debt to India standing at $1.74 billion. Japan, a part of the Paris Club group, was owed $2.68 billion. China, Sri Lanka’s largest bilateral lender, is not an official member of the OCC. 

(With inputs from agencies)