Treasury Secretary highlights debt restructuring pivotal for fiscal and macroeconomic stability

• Says success hinges on the country’s ability to maintain disciplined economic management
• Demands adherence to revenue targets, prudent governance and strong institutional frameworks 
• Calls for broad political consensus on fiscal and monetary policies to avert future crises

Treasury Secretary Mahinda Siriwardana last week said the country’s debt restructuring program marks a crucial step towards restoring fiscal and macroeconomic stability.

Making a presentation on ‘Sri Lanka’s Public Debt Restructuring: The Need, Overall Outcome, and Future Policy Direction to ensure Fiscal and Debt Sustainability,’ he outlined a combination of flawed domestic policies and global shocks, whilst underscoring the measures taken for fiscal discipline under the reform program.

He said the restructuring provides significant relief and fiscal space, but its success hinges on the country’s ability to maintain disciplined economic management. 

“Adherence to revenue targets, prudent governance and strong institutional frameworks will be critical to ensure the relief gained translates into sustainable economic growth,” he opined.

The Treasury Secretary also underscored the necessity of building a broad political consensus around sound fiscal and monetary policies to prevent a recurrence of the crisis. 

Noting that they country launched a comprehensive reform strategy built on five key pillars; fiscal consolidation, monetary stabilisation, strengthening social safety nets, governance reforms and economic growth initiatives, he opined that the reforms have borne fruit with the primary Budget deficit of 5.7% of GDP in 2021 transforming into a surplus of Rs. 831 billion by October 2024. “Inflation which peaked at 70% in September 2022 has given way to deflation of -1.7%, whilst foreign reserves have been replenished to $ 6.5 billion,” he added.

Siriwardana also said the State-owned-Enterprises (SOEs), which was considered a burden to the Government coffers, posted a remarkable turnaround, shifting from losses of Rs. 775 billion in 2022 to profits of Rs. 456 billion in 2023. Governance reforms, including the passage of the Anti-Corruption Act and Public Financial Management Act, he said have further boosted confidence in Sri Lanka’s economic stewardship.

He said the key to economic recovery was the restructuring of its $ 46 billion public debt. The country secured agreements with creditors, including japan, India, France and China EXIM Bank. “These agreements offer maturity extensions, reduced interest rates and capital grace period till 2028. The restructuring of International Sovereign Bonds (ISBs) introduced innovative Macro-Linked Bonds (MLBs) that tie repayments to GDP growth, ensuring balance between creditor returns and economic recovery,” he explained.

The ISB restructuring has already provided $ 9.6 billion in debt service relief over the next four years, with bond holders accepting a 40% reduction in the net present value of their holdings under baseline conditions. 

He also said Fitch Ratings responded by upgrading Sri Lanka’s credit rating to CCC+ from Restricted default, a significant vote of confidence in the country’s economic management.

Despite the milestones, he acknowledged challenges as well. “The IMF has set a public debt-to-GDP target of 93% by 2032, a significant improvement from the current 128%. “However, achieving these goals requires strict adherence to fiscal discipline, export-drive t growth and continued governance reforms,” he elaborated.

The Treasury Secretary highlighted the importance of a societal shift towards demanding macroeconomic stability, urging collective responsibility among policymakers, institutions and citizens.