Sri Lanka Signs Partial Debt Deal for Post-Crash Recovery

In 2022, country defaulted on its foreign debt after running out of foreign exchange

Sri Lanka Signs Partial Debt Deal for Post-Crash Recovery

Islamabad: In a significant development towards economic recovery following a severe financial crisis in 2022, Sri Lanka announced on Wednesday that it has reached a comprehensive restructuring agreement with major bilateral lenders, covering debts amounting up to $5.8 billion.

The agreement marks a crucial step for Sri Lanka, allowing the nation to prioritize funding for essential public services and secure concessional financing aimed at promoting development.

Previously, Sri Lanka faced a foreign debt default in April 2022 after depleting its foreign exchange reserves, leading to unprecedented economic turmoil and the resignation of then-President Gotabaya Rajapaksa.

President Ranil Wickremesinghe's office confirmed the milestone in a statement, noting that the final restructuring agreement was reached with the Official Creditor Committee (OCC) of bilateral lenders in Paris, France. The OCC includes key members such as France, India, and Japan, with notable absence of China, despite being Sri Lanka's largest single bilateral lender. Sri Lankan officials indicated ongoing efforts to secure a similar agreement with Beijing.

This restructuring deal is a critical requirement for Sri Lanka's International Monetary Fund (IMF) bailout, aimed at stabilizing the country's distressed finances. Recently, the IMF disbursed $336 million as part of a $2.9 billion rescue package intended to rehabilitate Sri Lanka's economic outlook over the next four years.

According to treasury data, bilateral creditors constitute 28.5% of Sri Lanka's total foreign debt, which stands at $37 billion. Notably, China holds a significant portion with $4.66 billion, followed by Japan with $2.35 billion and India with $1.36 billion. Additionally, Sri Lanka has raised substantial sums through International Sovereign Bonds (ISB) and loans from institutions like the China Development Bank.

President Wickremesinghe is scheduled to address the nation later to provide further details on the restructuring agreement. As Sri Lanka prepares for a presidential election this year, opposition parties have expressed intentions to renegotiate terms of the IMF bailout. However, IMF's Sri Lanka mission chief Peter Breuer emphasized the importance of adhering to agreed benchmarks while remaining open to alternative proposals.

While acknowledging progress, Breuer cautioned that challenges persist, underscoring that Sri Lanka's path to economic stability remains fraught with uncertainties.