Sri Lanka’s Cabinet has given its approval to a program aimed at restructuring the country’s domestic debt, as the island nation grapples with a deep economic crisis that has plagued it since the previous year. The domestic debt restructuring initiative is a crucial component of the bailout package received from the International Monetary Fund (IMF), which will disburse nearly $3 billion in government budgetary support over multiple stages. Sri Lanka currently carries a total debt of over $83 billion, with $41.5 billion as foreign debt and $42.1 billion as domestic debt.
The program for domestic debt restructuring received the Cabinet’s endorsement during a special meeting held on Wednesday, as confirmed by the president’s office in a statement. However, specific details of the program were not disclosed, and it will be submitted to Parliament for approval during a dedicated session scheduled for Saturday.
President Ranil Wickremesinghe stressed the necessity of restructuring both foreign and domestic debts to overcome the ongoing crisis. He assured that the program’s implementation would not jeopardize the stability of state-owned and commercial banks or affect the deposits in approximately 50 million accounts.
Last year, Sri Lanka announced the suspension of foreign loan repayments due to a severe foreign currency crisis triggered by the COVID-19 pandemic, extensive government borrowing, and efforts by the central bank to stabilize the Sri Lankan rupee amid scarce foreign reserves. Seeking assistance, Sri Lanka turned to the IMF, which approved a bailout package in March.
To address the country’s foreign debt, Sri Lanka aims to reduce it by $17 billion through restructuring efforts. Talks have already commenced with foreign creditors, including groups like the Paris Club, as well as countries such as India and China, with the objective of renegotiating the terms of the debt.
Debt restructuring can take various forms, including bailouts, loan term renegotiation, and partial or complete write-offs. Sri Lanka’s economic crisis, considered the worst in its history, resulted in severe shortages of essential commodities like food, medicine, fuel, cooking gas, and electricity last year. These circumstances led to widespread street protests, ultimately forcing then-President Gotabaya Rajapaksa to leave the country and resign from office.
Since assuming the presidency in July of the previous year, Wickremesinghe’s tenure has shown promising signs of economic improvement. The alleviation of shortages, the end of power cuts, and the strengthening of the rupee indicate progress towards stabilizing the economy.
The approval of the domestic debt restructuring program represents a significant step forward in Sri Lanka’s efforts to address its economic crisis. It is hoped that these measures, alongside ongoing negotiations to restructure foreign debt, will contribute to the country’s long-term economic recovery and pave the way for a more stable and prosperous future.
