Sri Lanka struck an initial deal with a group of key official creditors, including India and the Paris Club, to restructure about $5.9 billion of debt, a key step toward the nation’s efforts to recover from an unprecedented economic crisis.
The agreement covers a mix of long-term maturity extension and reduction in interest rate, the nation’s finance ministry said in a statement on its website Wednesday. The breakthrough is key for keeping its International Monetary Fund bailout on track, with the nation set for final approval of a $330 million payout in December.
“Sri Lanka now intends to focus its efforts on reaching comparable debt restructuring agreements with external commercial creditors, and in particular with its holders of international sovereign bonds,” the finance ministry said.
The nation’s dollar bonds have returned about 66% this year to become among the top performers in the world, as progress on debt restructuring and the IMF’s bailout spurred optimism over its fiscal recovery. Sri Lanka reached a tentative agreement with the Export-Import Bank of China to restructure $4.2 billion of debt last month and is in discussions on a proposal submitted by a group of dollar bondholders.
“We expect the bond complex to trade firm, the news is positive.” said Avanti Save, credit strategist at Barclays Plc. “The government is keen to keep inter-creditor comparability.”
Sri Lanka’s bonds due in 2030 were up 0.2 cents to about 50 cents on the dollar on Thursday after climbing 1.6 cents on Wednesday, according to indicative pricing compiled by Bloomberg.
The official creditors committee had delayed its proposal until it could review the Chinese deal. The deal also comes after the South Asian nation in September also restructured about $10 billion of local debt.
“The next steps will include finalizing similar agreements with our remaining official bilateral creditors, including Saudi Arabia, Pakistan, Kuwait and Iran, altogether representing a further $274 million of outstanding claims,” the finance ministry said.
Sri Lanka defaulted on its overseas debt for the first time in May last year as soaring food and oil prices during the pandemic depleted its dollar stockpile. While inflation has dramatically cooled and reserves have inched up to $3.6 billion in October, the nation remains dependent on the IMF to bolster its recovery after falling into a deep recession in 2022.
Central Bank Governor Nandalal Weerasinghe had said an official creditor proposal would pave the way for IMF board approval before the end of the year. China, which is Sri Lanka’s biggest bilateral lender, is an observer on the official creditors committee.
--With assistance from Asantha Sirimanne, Karl Lester M. Yap, Anusha Ondaatjie and Malavika Kaur Makol.
(Updates with bonds performance this year in fourth paragraph)
