SL downs in a whirlpool till 2028 after debt restructure: Global Analyst
By: Staff Writer
February 25, Colombo (LNW): Sri Lanka will face difficulties till 2027-28 in order to gain international market access due to high debt despite its post debt restructuring phase according to the Debt Sustainability Analysis (DSA) targets, a global sovereign debt expert said.
Speaking at the Committee on Public Finance (COPF) on Tuesday (20), Global Sovereign Advisory Research Analyst Theo Maret said that the International Monetary Fund (IMF) has used a different model to assess the DSA of Sri Lanka than it has used for low-income countries, providing higher DSA targets for Sri Lanka.
“The IMF used Sri Lanka the same model that applies to Japan, the US, France with a strong revenue base and these countries are able to sustain a higher debt than what Sri Lanka can reasonably sustain,” he said.
Maret said that this was due to the fact that Sri Lanka has graduated in the past as a middle-income country. Sri Lanka was downgraded to the low-income level in 2022.
Sri Lanka sent a new restructuring proposal to dollar bondholders through its adviser Lazard as the South Asian nation seeks to complete overhauling its defaulted debt, according to people familiar with the matter.
A counter proposal to a bondholder group’s offer in October for a 20% haircut and the issuance of macro-linked bonds was conveyed through Lazard, the people said, declining to be named because negotiations are private.
They did not elaborate on the details of the offer. Government representatives may travel to London soon to meet Sri Lanka’s commercial creditors, one of the people said.
Completing the overhaul of Sri Lanka’s $ 27 billion of foreign debt is critical to ensure financing from the International Monetary Fund bailout keeps flowing. President Ranil Wickremesinghe said this month that authorities expect to complete the restructuring within the first six months of the year.
Calls to Sri Lanka’s treasury secretary, junior finance minister and central bank governor went unanswered. Representatives of the bondholder group and Lazard weren’t immediately available for comment.
The Government had already struck restructuring deals with official creditors, including China, India and the Paris Club as well as with holders of its local debt.
He said that the IMF has provided a debt-to-GDP target of 60% for other low-income countries. In comparison, for Sri Lanka, the DSA target is 95% while in the case of Zambia, the external debt servicing target is more than double that of Sri Lanka although both countries will have a higher revenue base and a similar fiscal situation coming out of the debt restructuring.
“So in that regard, Sri Lanka will be exiting its restructuring even if it fits within the IMF targets with still a debt level that is quite significant,” he added.
He noted that Sri Lanka has to decide on what kind of proactive fiscal policies and debt management policies could be implemented to reduce the debt stock further and reduce refinancing risk in the years after restructuring because the market will probably still consider Sri Lanka in a precarious situation because of these high debt metrics.
“So it won’t be smooth sailing till 2027-28 when the country is supposed to regain access to international capital markets,” Maret said.
He added that this will require proactive debt management, medium-term debt strategies and annual borrowing plans trying to change the financing mix towards more concessional sources.
