Sri Lanka’s New Govt Approves Controversial $14.7B Debt Restructure

AFP/APP

Colombo: Sri Lanka’s new government has approved a contentious $14.7 billion foreign commercial debt restructuring plan initially agreed upon by the previous administration, according to a statement from the finance ministry on Saturday.

Former president Ranil Wickremesinghe announced the agreement with international sovereign bondholders and the China Development Bank just two days before losing the presidential election last month.

Despite new President Anura Kumara Dissanayake’s calls for improved terms, his government has decided to honor the deal after two days of discussions with an IMF delegation in Colombo.

“Sri Lankan authorities confirm their endorsement of… the agreement in principle terms as announced on September 19,” the finance ministry said in its statement.

This debt restructuring is a key requirement from the International Monetary Fund (IMF) to help rebuild Sri Lanka’s economy, which experienced its worst crisis in 2022, shrinking by 7.8 percent. In June, the government reached an agreement with bilateral lenders to restructure $6 billion in official credit.

Under the September 19 deal, private creditors, holding more than half of Sri Lanka’s international sovereign bonds and foreign commercial loans, agreed to a 27 percent reduction in their loans and an additional 11 percent cut on the interest owed. Of the $14.7 billion in foreign debt, $12.5 billion is in international sovereign bonds, with $2.2 billion owed to the China Development Bank.

Sri Lanka’s external debt stood at $46 billion at the time of its foreign debt default in 2022, when it ran out of foreign reserves to finance essential imports like food and fuel. The endorsed restructuring plan must still be approved by parliament.

President Dissanayake dissolved the assembly shortly after taking office and called for a snap election on November 14, a year ahead of schedule. The legislature is expected to hold its first session on November 21.

While austerity measures linked to the IMF’s $2.9 billion bailout loan helped stabilize the economy, they have caused severe hardships for low-income Sri Lankans. Although the IMF has noted Sri Lanka’s return to growth, it warned that the nation’s economy remains fragile.