SRI LANKA’S STATE OF DEFAULT
Tamara Rebeira describes the debt restructuring chaos amid IMF pressures
Creditors are increasingly unsettled and their patience is wearing thin as Sri Lanka grapples with fulfilling its debt restructuring obligations. Since the government’s April announcement of its inability to reach an agreement with international bondholders to restructure over US$ 12 billion in debt, as required by the IMF, chaos has set in.
The April announcement followed a meeting between the Ministry of Finance and representatives from both the Steering Committee and Ad Hoc Group of Bondholders, comprising some of the foremost private holders of debt in Sri Lanka.
This setback leaves Sri Lanka in a continued state of default, casting a shadow of uncertainty over its credit ratings and foreign investment prospects.
In March last year, the International Monetary Fund greenlit a US$ 2.9 billion bailout package, implementing a 48-month arrangement under the Extended Fund Facility (EFF) to reinforce economic policies and reforms.
Preceding the meetings, the global lender informally assessed the proposals to gauge their alignment with Sri Lanka’s IMF-supported programme parameters and debt sustainability goals. It was determined that the debt treatment scenario outlined by the government aligned with the IMF-supported programme’s debt sustainability targets whereas the Ad Hoc Group’s proposal in March did not.
Despite the prevailing uncertainty, Minister of Foreign Affairs Ali Sabry has remained optimistic, expressing confidence that the government aims to conclude the foreign debt restructuring process by June.
This anticipated outcome could potentially alleviate Sri Lanka’s debt burden by around US$ 17 billion. Sabry emphasised that the primary objective is to navigate the challenges associated with debt restructuring.
“Sri Lanka has tirelessly worked towards stabilising the economy, bolstering debt sustainability and enacting growth-oriented structural reforms,” he underscored.
In pomp, Sabry asserted that he anticipates unanimous agreement from all creditors regarding the debt restructuring measures, all aimed at facilitating Sri Lanka’s journey towards long-term debt sustainability.
Sabry highlighted the strides taken in external debt restructuring, following the completion of the domestic debt optimisation (DDO) programme. And he pointed out that Agreements-In-Principle have been negotiated with bilateral creditors with final agreements (currently in the preparation stage) expected to be signed imminently.
Despite the ongoing IMF programme, economic stability has been marred by certain critical shortcomings. While the Sri Lankan Rupee has appreciated and inflation has declined to below mid-single digits from a record high of over 70 percent, serious challenges persist as the public continues to be weighed down by taxes, relatively high interest rates and the perennially high cost of living.
Moreover, the upcoming presidential election is expected to be worked off between mid-September and mid-October this year, which inevitably means that the government is under pressure to fast track the negotiation process.
Despite facing obstacles in restructuring private creditor debt, the IMF has expressed cautious optimism about the potential for reaching a resolution in the near future. As for receiving the third tranche under the EFF, Governor of the Central Bank of Sri Lanka Dr. Nandalal Weerasinghe is optimistic that approval from the IMF Executive Board will be secured in June.
In parliament in April, President Ranil Wickremesinghe outlined key milestones including efforts to restructure debt, in another attempt to pacify all stakeholders. However, there are lingering concerns regarding the sustainability of these measures.
The disparity between government revenue and expenditure – with revenue at eight percent and expenditure at 20 percent of GDP – underscores the ongoing fiscal challenges facing the country.
Despite securing agreements in principle with foreign creditors, and ongoing discussions with official creditors and the EXIM Bank of China, formal agreements are pending. And this in turn raises uncertainty about the feasibility of the restructuring plans.
While the president’s statement acknowledged certain positive developments, ongoing challenges and uncertainties plague the country’s debt restructuring efforts – and indeed, the attainment of long-term debt sustainability goals.