Sri Lanka makes progress on debt restructuring signalling economic recovery

Sri Lanka is on the verge of securing a formal agreement with its external creditors regarding debt restructuring.

Sri Lanka is on the verge of securing a formal agreement with its external creditors regarding debt restructuring, a crucial development that will pave the way for the International Monetary Fund (IMF) to complete its initial review of the USD 2.4 billion bailout sanctioned in March of this year, according to President Ranil Wickremesinghe’s announcement on Wednesday.

The nation faced its most severe economic crisis when foreign exchange reserves reached a critically low level, prompting public outcry over shortages of fuel, fertilizers, and essential commodities.

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President Wickremesinghe revealed during the Sri Lanka Economic Summit 2023 that China’s Exim Bank has given its preliminary agreement, emphasizing expectations for a similar commitment from the official creditor committee. In October, Sri Lanka confirmed a preliminary debt restructuring deal with China, marking a significant stride in the country’s economic recovery.

China currently holds approximately 52 percent of Sri Lanka’s USD 46 billion external credit. The agreement on key principles and indicative terms of debt treatment with China’s Export-Import Bank has been reached, while discussions with private creditors are ongoing. Successful debt restructuring, along with necessary financial assurances, will facilitate the IMF’s completion of the first review of the USD 2.4 billion bailout approved in March.

The debt restructuring talks are going slowly, causing a delay in getting the second part of the four-year funding plan worth $330 million. The Central Bank Governor, Nandalal Weerasinghe, said last week that once this money is released, it will bring support from the Asian Development Bank and the World Bank, along with help from the IMF to support the budget. President Wickremesinghe is hopeful that Sri Lanka will overcome its current economic challenges by December.

In April 2022, Sri Lanka faced its first-ever sovereign default since gaining independence in 1948. This led to the removal of the Gotabaya Rajapaksa government in the middle of the year. The highest court blamed the Rajapaksas and their financial leaders for the economic troubles in response to fundamental rights petitions.