Sri Lanka Approves $14.7 Billion Foreign Debt Restructuring Deal

COLOMBO: In a significant move, Sri Lanka's new government has approved a controversial restructuring of $14.7 billion in foreign commercial credit. This decision comes after a tentative agreement was reached by the previous administration, led by former leader Ranil Wickremesinghe, just days before he lost the presidential elections last month. The finance ministry confirmed this development on Saturday, highlighting the urgency of addressing the nation’s financial crisis.

Wickremesinghe had previously announced a deal with international sovereign bondholders and the China Development Bank. However, the newly elected leftist President Anura Kumara Dissanayake had expressed the need for better terms. After two days of discussions with an International Monetary Fund (IMF) delegation in Colombo, Dissanayake's government decided to honor the agreement made by his predecessor. The finance ministry stated, "Sri Lankan authorities confirm their endorsement of… the agreement in principle terms as announced on September 19." This restructuring is crucial for the IMF, which has made it a key condition for rebuilding Sri Lanka's economy.

The island nation faced its worst economic crisis in 2022, with its economy shrinking by 7.8 percent. In June of the same year, the government had already reached a deal with its bilateral lenders to restructure $6 billion in official credit. Under the terms of the deal announced on September 19, private creditors holding more than half of the international sovereign bonds and foreign commercial loans agreed to a 27 percent haircut on their loans, along with an additional 11 percent reduction on the interest owed. This means that international sovereign bonds account for $12.5 billion, while the remaining $2.2 billion is owed to the China Development Bank.

At the time of its foreign debt default in 2022, Sri Lanka's external debt stood at a staggering $46 billion. The country found itself in a dire situation, running out of foreign exchange to finance essential imports such as food and fuel. Although the bond restructuring has been endorsed by the new government, it still requires ratification from parliament. Dissanayake has already dissolved the assembly 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 aligned with the IMF bailout loan of $2.9 billion secured last year have helped stabilize the economy, they have also led to severe hardships for low-income Sri Lankans. The IMF has indicated that Sri Lanka has returned to growth following the crisis, but it has also cautioned that the economy is still not completely out of danger.

The approval of this foreign debt deal marks a pivotal moment for Sri Lanka as it navigates through its economic challenges. The government's commitment to honor previous agreements reflects a desire to restore stability and regain the trust of international creditors. However, the path ahead remains fraught with difficulties, and the impact of austerity measures on the everyday lives of citizens cannot be overlooked. As the nation prepares for upcoming elections, the focus will undoubtedly be on how these financial decisions will shape the future of Sri Lanka and its people.