Colombo: Sri Lanka's government announced on Tuesday that it has officially ratified a 14.2 billion dollar debt restructuring agreement, originally sealed under the previous administration. This step is essential to maintain debt sustainability under the International Monetary Fund (IMF) framework, involving the exchange of new bonds for existing ones.
The decision follows the IMF's approval on Saturday of a staff-level agreement enabling the release of the fourth tranche, approximately 330 million dollars, of a 2.9 billion dollars bailout package. President Anura Kumara Dissanayake, despite his earlier campaign rhetoric to renegotiate IMF terms, has endorsed the program as vital for economic stability.
The debt restructuring deal was initially negotiated in September 2024, during the final days of former President Ranil Wickremesinghe's administration, and was preceded by a consensus among bilateral creditors in June 2024.
Announcing the Cabinet's ratification, a government spokesperson highlighted the agreement with international bondholders to restructure sovereign debt. This will involve exchanging existing bonds for new ones, guided by debt sustainability analyses conducted by the IMF and Sri Lanka’s financial advisors.
“This restructuring is a critical measure to ensure economic stability and address the composition of Sri Lanka’s international debt,” according to the statement.
Economic Crisis And Debt Challenges
Sri Lanka’s economic crisis began in 2022 when the country defaulted on its sovereign debt for the first time since independence in 1948. Widespread public protests and political turmoil led to the resignation of President Gotabaya Rajapaksa. Wickremesinghe’s government initiated negotiations with the IMF, securing a bailout in March 2023.
As of mid-2024, Sri Lanka’s external debt stood at 37 billion dollars, comprising 10.6 billion dollars in bilateral credit, 11.7 billion dollars in multilateral credit, and 14.7 billion dollars in commercial debt, with 12.5 billion dollars of the latter in sovereign bonds. The IMF has mandated restructuring agreements with both bilateral and commercial bondholders as a prerequisite for ensuring debt sustainability.
President Dissanayake’s Commitments
In his first parliamentary address after the National People’s Power (NPP) party’s landslide election victory on November 14, President Dissanayake reiterated his support for the IMF bailout and pledged to continue implementing the program initiated by his predecessor. He confirmed that separate agreements with individual creditors would soon follow, with a target to finalize all deals by the end of the year.
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The NPP made history by securing 159 seats in the 225-member parliament, achieving a two-thirds majority for the first time in decades. While the party had previously criticized the debt restructuring process, Dissanayake now emphasizes its importance for the country’s financial recovery.
Future Implications
The ratification of the debt restructuring agreement marks a significant milestone in Sri Lanka’s efforts to stabilize its economy and rebuild investor confidence. By addressing its debt obligations and aligning with IMF parameters, the nation aims to restore fiscal sustainability and lay the groundwork for long-term recovery.
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