Sri Lanka's central bank unveiled a debt restructuring plan yesterday to reinstate stability after last year’s economic crisis. It offered a 30 per cent reduction on dollar-denominated bonds, including international sovereign bonds (ISB) that comprise more than a quarter of the country’s total foreign debt.
Sparing bilateral lenders, the central bank will ask such lenders to extend the maturity of their loans up to 15 years at an annual fixed interest rate of 1.5 per cent, with a nine-year moratorium on interest payments, according to Sri Lankan media reports.
Sri Lanka defaulted on its $46-billion foreign debt in April last year after running out of foreign exchange to finance import of food, fuel and medicine.
The government's direct external debt is $36 billion, of which $13.52 billion is bilateral loans and ISBs are worth $12.5 billion.
The move follows Colombo cutting subsidies, doubling taxes and promising to privatise hundreds of state enterprises under a $2.9-billion bailout agreed to by the International Monetary Fund (IMF) in March this year.
Under that agreement, the country needs to reduce its debt servicing by two-thirds in the next four years to balance its books and restore its finances.
The government had expected foreign debt restructuring to be completed by last August, but that got delayed when China, its largest single creditor, initially refused to take a haircut, and instead, offered further loans to pay off old debts.
China holds about 52 per cent of the country’s bilateral credit, with Japan and India the next biggest lenders.
ISB holders and Sri Lankan nationals holding dollar bonds can opt for a 30 per cent reduction in capital in exchange for getting the rest of their money back in six years at a 4 per cent interest rate.
Dollar-denominated Sri Lanka Development Bonds will be treated comparably to foreign creditors. Around $1.48 billion worth such bonds are outstanding, official data shows.
The third option is to exchange the dollar bonds for rupee securities, which will mature in 10 years and attract a floating interest rate of 1.0 percentage point above the central bank's policy rate.
Some $10 billion in multilateral credit is not covered by the debt treatment.
Central bank governor Nandalal Weerasinghe said negotiations with bilateral creditors are under way.