Sri Lanka’s external debt restructure faces obstacles amidst complex issues
Sri Lanka’s bargaining power will be weakened by the current default and new court case against it. If the New York Federal Court delivers its judgement in favour of Hamilton Reserve, Sri Lanka will have to make the full payment on 25 July.
If it does so, the other creditors will also ask for the same treatment on the principle of equal treatment. Then, the debt restructuring plan will come to a standstill, economic experts claimed.
These lenders who take the borrowers to courts are called ‘holdout investors’ and they stand outside the negotiating creditors putting a hold on the ongoing restructuring plan. And these litigations may take many years for conclusion, they added.
The country’s external debt restructure has become a complex issue as the Government has to get creditors consent for repayment plan amidst severe economic crisis and preemptive debt default, several economic experts warned.
The International Monetary Fund (IMF) has made debt restructure a prerequisite for the country to seek the approval of the IMF executive board to obtain the Extended Fund Facility (EFF) of US$ 2.9 billion, Peradeniya University economics Prof O.G Dayaratne Banda said.
He added that some of the details in economic reform programme (a realistic macro-economic and fiscal framework) and repayment plan cannot be revealed as it might affect the negotiations with creditors that are still to be commenced under post default situation.
Basically the economic reform programme will be devised by the Sri Lanka side with the consent of IMF staff mission aiming at addressing the balance of payment and exchange rate stabilisation, he disclosed.
At this juncture it is not possible to divulge market sensitive information such as debt restructuring parameters, he claimed.
The IMF staff level agreement has been reached on Thursday 01 of this month to support Sri Lanka’s economic policies with a 48-month arrangement under the EFF.
It has also arrived at a consensus on new Fund-supported programme prepared by state monetary and fiscal authorities to restore macroeconomic stability and debt sustainability.
It will be safeguarding financial stability, protecting the vulnerable, and stepping up structural reforms to address corruption vulnerabilities and unlock Sri Lanka’s growth potential.
The government has already taken preliminary measures towards this end by implementing some of these commitments proposed in the Interim budget 2022.
Based on these developments the IMF staff will prepare a report that, subject to management approval, will be presented to the IMF’s Executive Board for discussion and decision, IMF sources revealed.
But due to the present state of preemptive debt default, the government authorities have to submit a plan on debt sustainability to the IMF executive board separately after reaching consensus with creditors on debt restructure.
The IMF executive board will not endorse the releasing of $ 2.9 billion four year EFF tranches till the assurance of Sri Lankan authorities on debt sustainability with the consent of creditors on their debt restructure.
Without the “assurances” from those creditor countries, the Fund’s money cannot flow, Senior IMF Mission Chief Peter Breuer emphasised at a recent media conference held in Colombo.
According to Finance Ministry statistics endorsed by the IMF, the country’s bilateral debt stock as at end 2021 spear headed by loans taken from China , India and Japan was $ 9.6 billion while the total external debt excluding commercial loans and additional payments amounting to around $ 22 billion.
However several economic experts said China India, multilaterals and global asset managers should agree on debt restructuring with sizable cuts on capital or interest or both of their borrowings.
Under restructuring, both the borrower and the lender will agree to a new repayment plan with a waiver of the interest or some part of the principal or a combination of both
Normally according to international stipulation, this maximum hair cut would be around 50 percent and foreign creditors will have to give their consent to write off 50 percent of total external debt of $ 22 billion which is equalled to $ 11 billion or 50 percent waver of total accumulated interest.
Under restructuring, both the borrower and the lender will agree to a new repayment plan. That should necessarily be repayment of less than the full amount. It can be waiving of the interest or waiving of some part of the principal or a combination of both Central Bank Governor Nandalal Weerasinghe has previously stated Sri Lanka can reach debt sustainability without re-structuring domestic debt.