US Court extends stay for third time on litigation over SL ISBs by Hamilton Reserve Bank

By Ashwin Hemmathagama 

in New York

The US District Court for the Southern District of New York has recently granted Sri Lanka’s motion to extend the stay of litigation involving the nation’s defaulted international sovereign bonds (ISBs) until the end of this month. 

This decision marks the third extension in the high-stakes legal case brought against the Democratic Socialist Republic of Sri Lanka by Hamilton Reserve Bank Ltd., which claims over $ 240 million in unpaid bonds. The litigation stems from Sri Lanka’s financial default in 2022, a direct result of the economic turmoil that has engulfed the island nation in recent years.

Sri Lanka, grappling with one of its worst economic crises in history, defaulted on its ISBs in May 2022. This marked a significant blow to the country’s financial stability and reputation on the global stage. 

Since then, Sri Lanka has been striving to restructure its debt under the framework of a $ 2.9 billion International Monetary Fund (IMF) Extended Fund Facility (EFF). The program aims to provide financial relief in phases over four years, contingent on implementing critical economic reforms and successful agreements with sovereign and private creditors.

In recent months, Sri Lanka has made significant progress in its debt restructuring efforts under former President Ranil Wickremesinghe. The country finalised agreements with sovereign creditors, including the Paris Club members, and secured terms with the Export-Import Bank of China. Additionally, a crucial agreement with private bondholders was reached in September 2024, backed by consultations with the IMF. These developments underscore Sri Lanka’s commitment to resolving its financial obligations while navigating a complex global economic environment. However, challenges persist as the nation works against tight deadlines to implement its restructuring plans.

The Court’s decision to extend the stay highlights its recognition of Sri Lanka’s progress and the critical need to maintain stability during this delicate restructuring process. The stay has been instrumental in allowing the country to finalise its debt agreements without the distraction of ongoing litigation. 

Hamilton Reserve Bank, the plaintiff in the case, has raised concerns over the repeated delays, arguing that Sri Lanka might indefinitely seek stays to avoid fulfilling its bond obligations. Nevertheless, the Court emphasised that each extension has been assessed on its own merits, and Sri Lanka’s demonstrated progress has justified the delays.

This legal development coincides with a transformative political shift in Sri Lanka. In September, National People’s Power leader Anura Kumara Dissanayake was elected as the President of Sri Lanka. His party secured a decisive two-thirds majority at the 14 November General Election, marking a turning point in Sri Lanka’s political landscape. This landslide victory reflects a strong mandate from the Sri Lankan public, who have grown increasingly dissatisfied with years of economic mismanagement and political instability under previous administrations. Dissanayake’s leadership promises a new era of reform-oriented governance aimed at rebuilding trust and steering the nation toward stability. 

However, with the Court’s decision granting a critical window of opportunity, Sri Lanka now stands at a crossroads. The international spotlight is firmly fixed on its next steps, and the world waits to see whether the island nation can capitalise on this extended timeline to secure a sustainable future. For President Dissanayake and his Government, the coming weeks will be a defining moment in their quest to rebuild a nation shaken by crisis and poised for recovery.

President Dissanayake has assured both domestic and international stakeholders of his administration’s unwavering commitment to the IMF-backed debt restructuring program. 

In a statement to the Court, officials confirmed that the Government would uphold the program’s targets and accelerate the implementation of the restructuring plan. This assurance seeks to address concerns raised by creditors and observers that political changes might derail Sri Lanka’s fragile recovery process. Dissanayake’s administration appears poised to leverage its electoral mandate to push through critical reforms, although balancing the competing demands of creditors and the public remains a daunting task.

The Parliamentary Election victory has fortified the Government’s ability to implement reforms, providing a semblance of political stability amid economic uncertainty. However, Sri Lanka’s road to recovery is fraught with challenges. The Government must navigate the intricacies of international negotiations while addressing domestic economic woes, including high inflation, unemployment, and public discontent over austerity measures. The delicate interplay of economic recovery and political reform will determine the success of Sri Lanka’s efforts to emerge from its multifaceted crisis.

While the US Court’s ruling provides a temporary reprieve for Sri Lanka, it also underscores the urgency of swift and decisive action in the coming weeks. The stay extension grants the nation additional time to finalise and launch its formal bond exchange offer, a critical step in its debt restructuring plan. 

Citigroup Global Markets Inc. has been appointed to oversee the execution of this complex process, which includes legal documentation, consent solicitation, and the formal exchange of bonds. The Government has indicated that this process should be completed by the end of the year, aligning with the extended timeline granted by the court.

The international community has largely supported Sri Lanka’s efforts. Members of the Paris Club, including France, Canada, and the United Kingdom, have commended the country’s progress and advocated for the continuation of the stay to facilitate ongoing negotiations.

The United States has also expressed its support through multiple Statements of Interest, underscoring the importance of a stable resolution to Sri Lanka’s debt crisis. This international backing has been crucial in enabling Sri Lanka to navigate the complexities of its restructuring process while maintaining confidence among creditors.

The stakes remain high as Sri Lanka races against the clock to implement its restructuring plan. The outcome of these efforts will not only shape the nation’s financial future but also influence its political trajectory under President Dissanayake’s leadership. The successful completion of the debt restructuring program would provide much-needed relief to the country’s economy, potentially paving the way for renewed investment and growth.

However, failure to meet these objectives could exacerbate existing challenges and undermine public confidence in the new administration.