Through discussions with the Ad Hoc Group of Bondholders (AHGB), which represents international investors, and the Local Consortium of Sri Lanka (LCSL), which represents domestic financial institutions, an agreement was established with these international sovereign bondholders. These two groups collectively hold over 50 percent of Sri Lanka’s sovereign bonds.

Under the terms of this agreement, bondholders have agreed to grant relief based on a discount rate of 11 percent, resulting in a Net Present Value (NPV) of 40.3 percent. This agreement provides Sri Lanka with greater debt relief compared to the Integrated Operational Framework established in July 2024, and includes an additional reduction in interest payments as outlined in the new terms.

A policy agreement has been reached with the China Development Bank (CDB) regarding the key financial terms related to the restructuring of approximately USD 3.3 billion in sovereign debt.

As a result of agreements with the Export-Import Bank of China (EXIM), Sri Lanka’s official creditor committee (OCC), the China Development Bank (CDB), and the bondholders, Sri Lanka is expected to receive debt service relief exceeding USD 17 billion during the IMF program’s timeline.

It is particularly clear that a majority of bondholders, along with a consortium representing Sri Lanka’s financial institutions, have reached a policy agreement with China’s Export-Import (EXIM) Bank regarding the restructuring of Sri Lanka’s debt.

About two months ago, a final proposal was submitted by the bondholders, which was subsequently forwarded to the International Monetary Fund (IMF). The review process involved determining whether the international debt restructuring aligned with the IMF’s program and whether it matched the relief provided by bilateral creditors. After this assessment, the current agreement was reached.

Under this agreement, approximately USD 17 billion in international bonds will be restructured. The technical aspects of this restructuring are quite complex, making it difficult for the general public, who may not have a basic understanding of such matters, to fully comprehend. However, focusing on the progress Sri Lanka has made through this bond restructuring, this agreement can be seen as a significant achievement for the country for several reasons.

Key point

We must also focus on the global uncertainty currently affecting the world. Particularly, there is an ongoing war in the Middle East. The Russia-Ukraine war continues, and global political shifts are happening, especially in South Asia, where significant social and political upheavals are taking place. When we consider countries such as Bangladesh, the Maldives, and especially Pakistan, it is evident that considerable uncertainty prevails.

In summary, if Sri Lanka’s current foreign exchange inflows, such as from the tourism industry, were to collapse, or if there is uncertainty regarding remittances from overseas workers, or if the export sector were to decline – particularly due to instability in the Middle East – it could severely impact the tourism industry, export sector, and foreign remittances.

In such a situation, if debt restructuring is not carried out, Sri Lanka will not be able to secure international financial assistance, nor engage in trade deals with other countries. It would also be unable to borrow from international debt markets, increasing the likelihood of the country falling into a short-term debt crisis.

Recovery measures

There are many examples of this globally. Some countries, after adopting certain recovery measures, have faced collapse once again. This happens due to short-term shocks within and outside the country. In Sri Lanka’s case, the political upheavals of 2022 triggered a crisis, with various disruptions occurring internally. Climate-related shocks could also arise.

If the country adheres to debt repayment agreements and continues on that path, it will still have the ability to borrow in the future, even in times of economic difficulty. Throughout global history, countries that have faced debt crises often return to crises due to various reasons. In Sri Lanka’s case, alongside debt restructuring, the country has resumed some development projects that had stalled.

Over the past two years, investments have been hindered due to halted projects, which, while not a short-term issue, have contributed to the rapid decline of the economy in the long term. The stalled projects have prevented capital accumulation in the country. Without the Government’s encouragement, the private sector has also been slow to invest. However, with this new opportunity, the country can initiate development projects and plan new ones.

Presidential candidates often say that they will attract foreign investors to the country. However, it is well known that investors are reluctant to come to a country that has defaulted on its debt. These investors typically secure loans from banks to fund their projects, and when international banks lend to countries like Sri Lanka, they view it as a risky proposition.

While these banks may offer loans at an interest rate as low as one percent for other countries, they charge significantly higher rates, such as 5 percent, when investing in countries such as Sri Lanka. This discrepancy highlights the uncertainty in the economy and the international reputation damage caused by defaulting on debt.

As a result, attracting foreign investment cannot be achieved in the short term, but it is essential for any Government in power to create a conducive environment for investment in the long term.

The debt restructuring process sends a negative message to the international community. It suggests that the country does not take the issue of default seriously or is willing to overlook it. In many cases, countries provide loans through their pension funds or other similar mechanisms.

Failing to consider this deeply results in countries such as Sri Lanka being subjected to higher risk premiums and interest rates.

Even if Sri Lanka agrees to repay its debt, if it takes a long time to reach an agreement or resolve the issue, investors may conclude that the country is prone to defaulting. This perception would make it take a long time before any debt repayment processes actually start, further damaging the country’s reputation in the international financial markets.

The interest rate charged when lending to a country that defaults on its debt is significantly higher than the rate for countries that do not. As a country, when we quickly move forward with debt restructuring, the message we send to the world is that we do not neglect our debt obligations and that we are committed to honouring international agreements. Although this may not yield immediate short-term benefits, it is crucial for long-term progress.

This is crucial for any country, as lower interest rates help manage the cost of borrowing. Defaulting on debt leads to higher interest rates, which increases the overall debt burden. Therefore, taking steps to break this vicious cycle is essential.

After Sri Lanka’s international debt crisis, significant challenges arose in import-export activities. Acceptance of letters of credit issued by Sri Lankan banks decreased, and the risk premiums on imports to Sri Lanka increased. In fact, other countries became hesitant to engage in transactions with Sri Lanka.

Even in the private sector, when businesses engaged in import-export activities, there was scepticism. Exporters, in particular, became more cautious when placing orders with Sri Lankan companies.

This shows that a country’s failure to meet debt obligations not only affects its ability to secure loans but also disrupts its trade relationships and the overall perception of its reliability in the global market. Therefore, avoiding default and demonstrating commitment to repaying debt over time can help improve these conditions, even though it may take a while to see the full benefits.

When placing orders, one of the key concerns that arises for foreign countries is whether Sri Lanka can complete those orders on time, unlike other nations. There may be doubts about whether supply deliveries will be made due to various reasons.

Highly important

Sri Lanka’s reputation is highly important, especially in sectors such as imports, exports, and tourism. Defaulting on debt causes significant damage to a country’s image, but through restructuring and consistent efforts, we can restore that image.

Regardless of which Government is in power, restoring this reputation is critical for the nation.

Reaching a debt restructuring agreement in a short period is extremely important for Sri Lanka. Countries such as Ghana and Zambia took four years to finalise their debt restructuring processes. Ghana entered a debt crisis in 2020, and it took until 2024 to stabilise the situation and complete the restructuring process.

In comparison, although Sri Lanka experienced its first debt crisis, the country has made progress and reached a level of stability in a relatively short time. Moving forward systematically and consistently is essential for continued success.

Relief packages

Creditors may be less willing to offer generous relief packages, and the support provided could diminish. As more countries approach the brink of a debt crisis, creditors will prioritise those nations less, making it even more challenging to secure the necessary support.

Therefore, it is crucial for Sri Lanka to complete its debt restructuring process promptly. Since the Covid-19 pandemic, the number of countries in debt distress has increased, and with growing political instability, addressing a crisis at the earliest possible moment is vital. Delaying such action poses significant risks.

Once this process is successfully completed, whichever Government comes into power next must adhere to the international agreements in place. If Sri Lanka delays further by restarting negotiations with the IMF and engaging in new discussions with creditors, it could take another two and a half to three years to resolve the crisis. We can learn from examples such as Ghana, Zambia, and Greece, which provide valuable lessons.

Regardless of which Government is in charge, as a country, we are obligated to repay the debt we have taken on, and we must act responsibly to honour these commitments. Only by repaying our debt can we rebuild trust internationally.

Successfully completing debt restructuring under these terms is essential to achieving this goal.

Overcoming this crisis, despite the significant challenges we face, will be a remarkable achievement for Sri Lanka. We must express gratitude to all parties involved in this effort as a nation.

Translated by Sachitra Mahendra