This restructuring will provide significant relief to Sri Lanka, will enable greater allocation of funds for essential public services and access to concessional financing facilities to improve the country’s infrastructure.
Accordingly, the Sri Lankan Ambassador to China, Majinda Jayasinghe, signed an MoU in this regard at the Sri Lankan Embassy in China.
After that Chinese Ambassador to Sri Lanka Qi Zhenhong and Treasury Assistant Secretary A.K. Senaviratna exchanged MoUs.
Sri Lanka this morning (26) concluded debt restructuring talks with its main official bilateral creditors in Paris and reached a final agreement with the Official Creditors Group.
Also, Sri Lanka today reached a final agreement with China’s Exim Bank in Beijing regarding debt restructuring and a memorandum of understanding was also signed.
Along with these agreements, Sri Lanka has successfully completed debt restructuring agreements with its major official bilateral lenders.
This official creditor group was co-chaired by Japan, India and France. Other members of this group of official creditors were Australia, Austria, Belgium, Canada, Denmark, Germany, Hungary, Korea, Netherlands, Russia, Spain, Sweden, United Kingdom and the United States.
The combined value of debt to be restructured by official lenders and China Exim Bank is USD 10 billion. In 2022, following the economic crisis, Sri Lanka lost its foreign exchange reserves. Thus declaring the country insolvent.
Talks were held with the International Monetary Fund to bring Sri Lanka back to normalcy. Sri Lanka began its sovereign debt restructuring process because the International Monetary Fund was unable to lend to countries whose debt was unsustainable.
The IMF’s Debt Sustainability Analysis (DSA) initially determines the amount of debt relief through the debt restructuring process.
Thereafter, the respective creditors and the debtor country must fulfill the necessary tasks to achieve the target shown by the IMF’s debt sustainability analysis. To this end, Sri Lanka continued to pursue debt restructuring negotiations.
The debt relief offered varies from country to country based on the targets outlined in the IMF’s Debt Sustainability Analysis.
Lending countries offer debt relief in different ways. Official lenders such as the Official Credit Union and China’s Exim Bank judge these differently.
Debt relief is provided by extending tenure, easing terms and lowering interest rates.
Both the Official Creditor Group and the restructuring agreements with China’s Exim Bank have provided significant debt relief to Sri Lanka.
This will reduce the current debt burden for Sri Lanka in the short term until debt servicing capacity improves in the future as the economy recovers.
To assess this, debt relief is provided during the program implementation period with the IMF through restructuring agreements with the Official Creditors Committee and the China Exim Bank.
While carrying out debt restructuring with each creditor, the IMF must meet the target set in the debt sustainability analysis. Also, it should be comparable with debt restructuring agreements reached with other lenders.
As a next step, Sri Lanka will expedite reaching final debt restructuring agreements with commercial bondholders. Successfully concluding formal debt restructuring agreements will facilitate this process.
Debt restructuring agreements reached today include the following benefits:
1. Financial Relief:
Sri Lanka’s tax revenue can be used for essential public services instead of debt servicing. This gives the economy time to recover.
2. Foreign Funding:
Access to bilateral financing facilities for major infrastructure projects can be resumed. This has a significant impact on the availability of short-term foreign finance to support capital expenditure of the budget.
This will have positive effects on sectors like construction and medium to long term positive effects on critical infrastructure development.
3. Credit Grading:
The conclusion of the official debt restructuring will be an important step towards restoring Sri Lanka’s credit rating. After the loans of the commercial bond holders are also quickly restructured, it leads to a rise in the credit rating.
The conclusion of official debt restructuring will provide significant benefits through channels such as easier access to foreign financing and lower costs. This will impact all sectors from trade finance to interbank financing.
