Crisis-stricken Sri Lankan government has announced the finalisation of a long-delayed debt restructuring agreement with its international sovereign bondholders. The Ministry of Finance confirmed that the agreement was reached on September 19, 2024, following extensive consultations with Sri Lanka’s Official Creditor Committee (OCC) and the International Monetary Fund (IMF).
This announcement, made public on October 4, 2024, comes after newly elected President Anura Kumara Dissanayake’s National People’s Power (NPP) government expressed willingness to proceed with the deal during talks with an IMF delegation earlier this week.
Debt Crisis and Economic Collapse
Sri Lanka has been financially struggling from April 2022, when the island nation declared its first-ever sovereign default since gaining independence in 1948. It led to widespread civil unrest and the resignation of then-President Gotabaya Rajapaksa.
What caused the Sri Lankan government to go Default? Mounting external debts, collapse in foreign reserves and COVID-19 pandemic, crippled the nation’s ability to import essential goods, caused severe shortages in food, fuel, and medicine.
In response, the previous government under President Ranil Wickremesinghe secured a $2.9 billion bailout from the IMF in March 2023. The bailout was conditional on an agreement to restructure Sri Lanka’s external debt, which stood at approximately $37 billion, of which $17.5 billion was owed to external commercial creditors. The Wickremesinghe administration worked tirelessly to negotiate the debt restructuring deal, which was finally announced just before the 2024 presidential elections.
New Leadership under Anura Kumara Dissanayake
The recent elections saw President Wickremesinghe defeated by Anura Kumara Dissanayake, leader of the NPP, which had campaigned vigorously against the IMF deal, describing it as a “death trap.”
Despite this, the new administration has accepted the terms of the debt restructuring agreement, albeit with reservations. During talks with the IMF, President Dissanayake emphasized the need to ease some of the IMF’s stringent conditions to provide greater relief to the public, who continue to suffer under the weight of the economic crisis.
Sri Lanka has already received three tranches of about $360 million each under the IMF’s Extended Fund Facility, with the third tranche released in mid-June 2024. The IMF has praised the progress of Sri Lanka’s economic reforms, crediting them with stabilizing the country’s macroeconomic situation and restoring some measure of fiscal discipline.
Role of International Creditors
Sri Lanka’s debt restructuring efforts have been complex, involving multiple stakeholders, including bilateral creditors such as Japan, France, and India, who collectively account for about $5.9 billion of Sri Lanka’s outstanding debt. China, Sri Lanka’s largest bilateral lender with $4.7 billion in loans, is not a formal member of the OCC but plays a crucial role in the restructuring process. The country also owes $1.74 billion to India and $2.68 billion to Japan.
In its statement, the Ministry of Finance stressed that the agreement adheres to the principle of “comparative treatment,” ensuring equitable terms for all creditors involved. The Sri Lankan government is optimistic that the restructuring deal will pave the way for long-term economic recovery, addressing both the immediate need for liquidity and the broader goal of sustainable growth.
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