Indian Council of World Affairs

Sri Lanka declared bankruptcy in April 2022 after it ran out of foreign exchange reserves. Since then, it has urged multilateral, bilateral and private creditors to restructure the debt and provide finances to overcome the economic crisis. Among the bilateral creditors, India was the first to respond and provide $4 billion worth of assistance. Other bilateral donors, such as China, Japan, Indonesia, Bangladesh and others, also stepped in to help the nation. The Official Creditor Committee (OCC), comprising 17 member countries, was formed in May 2022 to arrive at a common understanding among Sri Lanka’s creditor countries to address the debt burden of Sri Lanka. The OCC member countries include India, Japan, France, the United States, the United Kingdom, Spain, Sweden, Hungary, Korea, Germany, Denmark, Australia, Austria, Belgium, Canada, Russia and the Netherlands. The World Bank and the Asian Development Bank have also stepped in to help Sri Lanka and have provided concessional loans. Meanwhile, given the initial assurances by the OCC members, the International Monetary Fund (IMF) approved a nearly $3 billion bailout package under the Extended Fund Facility (EFF) programme in March 2023.To access the fund, Sri Lanka was asked to implement various economic reforms as per the requirements of IMF programme. The IMF also asked the Government of Sri Lanka to reach an agreement with bilateral creditors on external debt restructuring. 

In this background, Sri Lanka reached final debt treatment agreements with the OCC worth $5.8 billion, and a separate agreement was also signed with the Exim Bank of China for debt treatment worth $4.2 billion on 26 June 2024. These two agreements, in total, cover nearly $10 billion in debt treatment.[i] The long-awaited debt treatment agreements, according to the President of Sri Lanka, Ranil Wickremesinghe, ‘will help to defer all bilateral loan instalment payments until 2028 and repay all the loans on concessional terms, with an extended period until 2043’.[ii]This means Sri Lanka’s debt should be fully cleared by 2043. Sri Lanka’s ‘foreign debt amounts to $37 billion, comprising $10.6 billion in bilateral debt, $11.7 billion in multilateral debt, and $14.7 billion in commercial loans, including $12.5 billion in sovereign bonds’.[iii] 

In this context, the debt treatment agreements that were signed in June 2024 are seen as significant, as these agreements will pave the way for the full disbursement of the $3 billion IMF package to Sri Lanka in the coming months. So far, the Government of Sri Lanka has received the ‘first tranche of IMF bailout package in March 2023, the second in December 2023 and the third instalment in June 2024’.[iv] It will also enable the resumption of bilateral lending between Sri Lanka and its bilateral creditors, the flow of foreign capital for infrastructure development, fiscal relief and funding for essential public services etc.[v]The Government is also hoping to improve the country’s credit ratings to enable easy access to international financial markets. 

After the conclusion of agreement, the President of Sri Lanka specifically appreciated the efforts by the co-chairs of the OCC, Japan, India and France for playing an important role in the conclusion of the agreement.[vi]It also appreciated the efforts of the Paris Club Secretariat in encouraging negotiations with official bilateral creditors. Now Sri Lanka will look forward to formalise similar agreements with other smaller bilateral creditors, like ‘Saudi Arabia, Pakistan, Kuwait and Iran representing nearly $274 million outstanding claims’.[vii]However, the main challenge now for the Government is to conclude negotiations with commercial bondholders for debt restructuring, which has to be comparable to the debt restructuring agreed with the OCC members and Exim Bank of China.[viii] 

Domestic Response 

The signing of bilateral debt treatment agreements received a mixed response within Sri Lanka. The President of Sri Lanka described the development as a ‘significant milestone in the recent history of the country’.[ix]Soon after taking charge as the President of Sri Lanka in July 2022, Ranil Wickremesinghe presented a four-step plan to stabilise the economy[x]. The plan includes securing extended credit facilities in consultation with the IMF, collaborating with international financial and legal experts from Lazard and Clifford Chance to negotiate agreements with creditors, implementing policies, regulations and initiatives to attract foreign investment and transforming into a developed nation with a debt-free advanced economy by 2048.Therefore, the signing of agreements is projected as an achievement under his Presidentship. He addressed Parliament, on 2 July 2024 outlining the debt restructuring process. 

The main Opposition party, the Samagi Jana Balawegaya (SJB) welcomed the agreements but noted that the agreement ‘with bilateral lenders is not an individual achievement but an outcome of Sri Lanka’s longstanding relations with bilateral lenders’.[xi] The party also cautioned the Government about entering into possible unfavourable agreements with private commercial lenders. The party asked the Government to cap the haircut with international sovereign bondholders (ISB) at 20 percent, as the ISBs had previously agreed to this number.[xii]The SJB is also critical of the Domestic Debt Restructuring (DDR), implemented by the Government, as it has hit the pension funds of middle-class Sri Lankans,[xiii] including garment and estate workers, ‘while the treasury bonds held by banks, finance companies and well-off individual investors were not touched’.[xiv]The leader of the SJB, Sajith Premadasa, opined that the Government ‘failed to get a more favourable deal in the overall external debt restructuring exercise, as it only extended the loan payment’.[xv]The Opposition party, Janatha Vimukthi Peramuna (JVP), on the other hand downplayed the signing of the agreements, saying, it was just one part of Sri Lanka’s external debt restructuring process.[xvi]The Opposition parties have expressed their disappointment with the Government for not tabling the agreements signed with bilateral creditors before Parliament as promised by the President. 

The President, in his response, emphasised that ‘Sri Lanka, being a middle-income country, has to follow the IMF’s new debt sustainability analysis framework tailored for middle-income countries, in which the public debt must be reduced to below 95% of the GDP by 2032’.[xvii] He also stressed that ‘bilateral creditors can never reduce the principal amount but Sri Lanka can obtain concessions such as extended loan repayment periods, grace periods and reduce interest rates’.[xviii] 

Meanwhile, within Sri Lanka, various sections have expressed concern over the impact of economic reforms/austerity measures that are being implemented by the Government under the guidance of the IMF. Without a significant haircut on its external debt and an increase in domestic production of essential goods, experts fear Sri Lanka may knock on the doors of the IMF yet again in the near future.[xix]The country has been witnessing protests/strikes by workers across sectors in recent months, such as railways, plantations etc. On 9 July 2024, nearly 200 trade unions/public sector employees observed a strike, demanding a pay hike. The significant decline in the real income of the people in the last two years, combined with tax burden to boost government revenue, is resulting in scepticism about IMF led economic reforms pushed by the present Government. 

The IMF is in the process of evaluating the agreements signed by Sri Lanka with bilateral creditors to ensure that the agreements align with IMF guidelines. Given the mixed response/scepticism within Sri Lanka, to the overall debt restructuring process, questions remain about the full implementation of the IMF programme, especially in view of the forthcoming elections and the accompanying campaign promises.

*****

*Dr. Samatha Mallempati, Research Fellow, Indian Council of World Affairs, New Delhi.
The views expressed are personal.

End Notes

[i] Ministry of Finance, Economic Stabilisation and National Polices, Government of Sri Lanka, “Press Release: Sri Lanka Reaches Final Debt Treatment Agreements with the Official Creditor Committee and Exim Bank of China”, 28 June 2024, https://www.treasury.gov.lk/api/file/191d21b7-003e-4c94-90e9-8fe1f33d0260. Accessed on July 4, 2024.

[ii] Daily Mirror, “President speaking on debt restructuring says “International confidence in our country is reaffirmed””, 27 June 2024, https://www.dailymirror.lk/news-features/President-speaking-on-debt-restructuring-says-International-confidence-in-our-country-is-reaffirmed/131-285831. Accessed on July 3, 2024.

[iii] Economy Next, “Sri Lanka President’s speech after bilateral debt restructuring – full text”, 26 June 2024, https://economynext.com/sri-lanka-presidents-speech-after-bilateral-debt-restructuring-full-text-169741/. Accessed on July 8, 2024.

[iv] News.lk, “Misinformation Spread About Debt Restructuring and Related Matters”, 2 July 2024, https://www.news.lk/news/political-current-affairs/item/36540-misinformation-spread-about-debt-restructuring-and-related-matters. Accessed on July 5, 2024. Accessed on July 5, 2024.

[v] Ministry of Finance, Economic Stabilisation and National Polices, Government of Sri Lanka, “Press Release: Sri Lanka Reaches Final Debt Treatment Agreements with the Official Creditor Committee and Exim Bank of China”, 28 June 2024, https://www.treasury.gov.lk/api/file/191d21b7-003e-4c94-90e9-8fe1f33d0260. Accessed on July 7, 2024.

[vi] Economy Next, Op.ct.3.

[vii] Ministry of Finance, Economic Stabilisation and National Polices, Government of Sri Lanka, “Sri Lanka Reaches Agreement With Official Creditor Committee on Debt Treatment”, 29 November 2023, https://www.treasury.gov.lk/news/article/232. Accessed on July 5, 2024.

[viii] Ministry of Finance, Economic Stabilisation and National Polices, Government of Sri Lanka, “Press Release: Sri Lanka Reaches Final Debt Treatment Agreements with the Official Creditor Committee and Exim Bank of China”, 28 June 2024, https://www.treasury.gov.lk/api/file/191d21b7-003e-4c94-90e9-8fe1f33d0260. Accessed on July 9, 2024.

[ix] Economy Next, “Sri Lanka President’s speech after bilateral debt restructuring – full text”, 26 June 2024, https://economynext.com/sri-lanka-presidents-speech-after-bilateral-debt-restructuring-full-text-169741/. Accessed on July 5, 2024.

[x] Ibid

[xi]Darshana Abayasingha, “SJB says good job with bilateral debt deal but warns that’s not all”, 28 June 2024, https://www.ft.lk/top-story/SJB-says-good-job-with-bilateral-debt-deal-but-warns-that-s-not-all/26-763558. Accessed on July 8, 2024.

[xii]Ibid.

[xiii] Darshana Abayasingha, Op.Cit. No 11.

[xiv]Ahilan Kadirgamar, “IMF and the Great Bond Restructuring Sell Out”, 15 July 2024, https://www.dailymirror.lk/opinion/IMF-and-the-Great-Bond-Restructuring-Sell-Out/231-287216. Accessed on July 16, 2024.

[xv] “Sajith claims Govt. hadn’t secured better deal; exposes RW’s failure to talk directly to creditors”, 3 July 2024, https://www.ft.lk/front-page/Sajith-claims-Govt-hadn-t-secured-better-deal-exposes-RW-s-failure-to-talk-directly-to-creditors/44-763769. Accessed on July 5, 2024.

[xvi] Economy Next, “Sri Lanka opposition leaders downplay bilateral debt deal announcement”, 27 June 2024, https://economynext.com/sri-lanka-opposition-leaders-downplay-bilateral-debt-deal-announcement-169870/. Accessed on July 11, 2024.

[xvii] News.lk, “Misinformation Spread about Debt Restructuring and Related Matters”, 2 July 2024, https://www.news.lk/news/political-current-affairs/item/36540-misinformation-spread-about-debt-restructuring-and-related-matters. Accessed on July 7, 2024.

[xviii] Ibid

[xix]Ahilan Kadirgamar, Devaka Gunawardena and Sinthuja Sritharan, “Sri Lanka’s IMF Agreement Will Not Alter the Trajectory of a Collapsing Economy”, 22 March 2023, https://thewire.in/south-asia/sri-lankas-imf-agreement-debt-financing-. Accessed on July 5, 2024.