Milestone in External Debt Restructuring

The provisional agreement entered into with a selected group of bondholders in terms of restructuring about $ 12.5 billion ISBs owed by Sri Lanka, reflects an important landmark in the nation’s economic recovery. Nevertheless, it must be noted that the deal with the bondholders needs to be approved by the members of the Official Creditor Committee (OCC) as well as the IMF. 

The positive development comes in the backdrop of the island achieving a critical milestone in its efforts towards economic recovery by reaching final agreements on rearrangement of $ 10 billion debt owed to the members of the OCC of Sri Lanka’s major bilateral lenders and the Exim Bank of China. Initially, there were doubts whether China would be amenable to restructure the loans that were extended via its Exim Bank. China is Sri Lanka’s largest bilateral lender and its involvement was essential towards successfully finalising bilateral debt.

Contrary to the popular opinion, Sri Lanka did not declare bankruptcy in April 2022, instead, what the Government announced was a temporary moratorium on the repayment of selected external debt. A false narrative is being communicated that no debt was repaid over the last two years. However, the truth of the matter is the domestic debt was serviced without interruption and even with regard to foreign debt, loans obtained from multilateral agencies like the World Bank and Asian Development Bank were continued to be repaid.

Sri Lanka’s usable foreign reserves declined to less than $ 50 million in mid-2022, precipitating a harrowing time for the populace. When Gotabaya Rajapaksa became President in November 2019, the country possessed $ 7.5 billion worth gross official reserves. His ill-advised tax cuts together with the drop in tourist arrivals and remittances following the COVID-19 pandemic dried up the sources of foreign exchange. Consequent to the adverse developments, Sri Lanka’s credit rating was downgraded by international rating agencies, resulting in the country becoming unable to access international capital markets. 

Almost every country in the world borrows debt like individuals and businesses, but the debt needs to be sustainable. States worldwide (even developed economies) rarely pay off their entire debt and what happens in practice is the refinancing of debt by obtaining fresh financing facilities. To maintain that debt management framework, a sovereign needs to assure international lenders of their capacity to repay its obligations as and when they fall due ideally by maintaining investment-grade credit ratings.

The successful conclusion of bilateral debt restructuring would enable the resumption of foreign-funded, capital expenditure-related projects, providing a welcome relief to the construction sector which has been in doldrums for almost five years now. President Wickremesinghe declared in Parliament that as a result of the deal with bilateral creditors, the Government will realise $ 5 billion in terms of interest savings. Undoubtedly, such a relief would reduce the pressure on the country’s external sector while providing the fiscal space to allocate more resources towards meeting the essential needs of communities.

Special tribute must go to the  Treasury Secretary Mahinda Siriwardana and Central Bank Governor Nandalal Weerasinghe for competently implementing the corrective monetary and fiscal policy measures that have resulted in the successful implementation of the IMF-imposed economic reforms. It must also be noted that despite having an IMF program, the salaries of public servants were increased while the poor and vulnerable families were provided financial assistance through Aswesuma. 

The decisive political leadership of President Wickremesinghe during this recovery period needs to be commended as he demonstrated his astuteness by taking unpopular decisions without considering the political ramifications. The veteran political leader took the helm probably at the most difficult time in Sri Lanka’s post-independent history and he had to walk a tightrope, characterised by having to manage conflicting domestic and geopolitical challenges, like Grusha in the celebrated German play Caucasian Chalk Circle who rescued the abandoned child Michael by crossing over a dangerous vine bridge despite tremendous obstacles.