Deal with bondholders next in Sri Lanka’s debt restructuring agenda

• Sri Lanka strikes in-principle deals with Paris Club creditors and China
• Sri Lanka owes more to commercial creditors or the bondholders
• As at June 30, 2023 Sri Lanka owed US$ 14.73bn to commercial creditors 

With Sri Lanka striking preliminary deals with Paris Club creditors and China on restructuring its debt, the focus of the authorities would now be on striking a similar deal with the country’s bondholders. 

Sri Lanka’s Official Creditor Committee (OCC) co-led by India, Japan and France yesterday announced that they have reached an agreement in principle with Sri Lankan authorities on the restructuring of the island nation’s debt.
The Finance Ministry said this agreement would cover US$ 5.9 billon of government debt and consists in a mix of long-term maturing extensions and reduction in interest rates.

In October, Sri Lanka struck a deal with Exim Bank of China for the restructuring of debt worth US$ 4.2 billion.
Following the Paris Club agreement, the Finance Ministry said it intends to enter into a similar deal with the remaining bilateral creditors including Saudi Arabia, Pakistan, Kuwait and Iran, cumulatively representing US$ 274 million outstanding claims.

According to the most recent data released by the Finance Ministry, Sri Lanka’s total external debt amounted to US$ 36.6 billion as at June 30, 2023. Out of this, bilateral credit accounted for US$ 10.94 billion. However, Sri Lanka owes more to commercial creditors or to the bondholders. As per the Finance Ministry data, Sri Lanka owed US$ 14.73 billion to commercial creditors as at June 30, 2023.

According to International Monetary Fund (IMF) estimates, Sri Lanka needs an overall debt reduction of US$ 17 billion to restore its debt sustainability. 

Sri Lanka in October snubbed a proposal from a group of bondholders who have organised themselves under the banner ‘Ad hoc group of bondholders’ over the potential issuing of GDP-linked bonds to restructure their debt.
A Finance Ministry statement expressed “serious reservations” about the proposal and asked the group to continue to engage with the country’s debt advisors “to progress the matter in a reasonable and viable way.”

A case has also been filed in a New York court by a bondholder named Hamilton Reserves Bank against Sri Lanka after the country defaulted on its debt in April 2022. In early November, the court granted Sri Lanka’s request for a six-month halt to facilitate the restructuring of the country’s external debt.

Meanwhile the Finance Ministry expects that the OCC agreement will clear the way for Sri Lanka to obtain the US$ 330 million second tranche of the US$ 3 billion IMF Extended Fund Facility.

The second tranche will be disbursed once IMF’s Executive Board clears the review. The Board is expected to take up Sri Lanka’s review by mid-December.