Sri Lanka reaches deal with creditor nations over $5.8bn of debt

Sri Lanka has completed a restructuring of $5.8bn of debt owed to a group of creditor nations, marking a significant step in the cash-strapped south Asian nation’s efforts to exit a two-year-old default.

The finalisation of a deal with a committee of official lenders including India, Japan and France in Paris on Wednesday was a “significant milestone” in ending Sri Lanka’s debt crisis, the country’s finance minister Shehan Semasinghe said on Wednesday. The country was also in the process of signing a deal with China’s Export-Import Bank to restructure more than $4bn of debt, he added.

Sri Lanka has been struggling to overhaul its debts owed to both public and private sector creditors since a sharp economic downturn and currency shortages pushed it to default in 2022. President Ranil Wickremesinghe’s government is also racing to restructure a further $13bn of external debt owed to bondholders, as he tries to guide the country out of an acute economic crisis ahead of elections later in the year.

In a televised national address on Wednesday, Wickremesinghe said that under the deal, Sri Lanka would be able to defer all bilateral debt payments until 2028 with time to repay extended to 2043. 

Sri Lanka’s external debt payments were set to fall from over 9 per cent of GDP in 2022 to less than 4.5 per cent in 2027, Wickremesinghe added.

The country has been an important but volatile test case of how China will co-operate with other lenders to resolve defaults after its Belt and Road Initiative lending surge over the past decade made it the largest creditor to developing economies.

Early debt relief negotiations were beset by delays as Beijing eschewed the standard international framework for dealing with debt crises, and insisted on differing treatment for debts owed to a range of Chinese banks.

Sri Lanka also needs to finalise a separate deal with China Development Bank, which is classed as a commercial creditor that is owed about $2.1bn.

Details of the deal announced on Wednesday have not been disclosed. Full terms of the relief from China — which was not part of that deal — or other official creditors are yet to be disclosed. 

“The Export-Import Bank of China was the first to tentatively agree with Sri Lanka on debt treatment [in early 2023], which has been crucial for Sri Lanka to advance fiscal reform and win further support from international creditors,” China’s foreign ministry said on Wednesday.

Earlier this month, the IMF’s executive board called for the “comparable, transparent and timely completion” of talks with private creditors as it authorised the latest $336mn tranche of Sri Lanka’s bailout.

In return for accepting losses of roughly one-third, Sri Lanka’s international bondholders have proposed turning their debt into so-called “macro-linked” bonds, which would offer larger payouts if Sri Lanka’s economy outperforms IMF targets. A first round of talks ended in recent weeks with differences over how to define the GDP trigger for these bonds. Sri Lanka is due to resume the talks soon.