Sri Lanka Completes International Sovereign Bonds Exchange Offer to Enhance Debt Sustainability

Sri Lanka has successfully concluded its International Sovereign Bonds exchange offer, with 98% of bondholders participating. This achievement is crucial for restructuring the nation's debt and securing new securities. The government announced this development on Friday, following the ratification of a USD 14.2 billion debt restructuring agreement, essential for maintaining debt sustainability as required by the International Monetary Fund (IMF).

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President Anura Kumara Dissanayake, also serving as finance minister, praised the high participation rate as a sign of confidence from both international and local stakeholders. "The Ministry of Finance is pleased to announce the expiration of its Consent Solicitation and Exchange Offer related to its International Sovereign Bonds ISBs, with preliminary results indicating a very high participation from market participants," stated the Treasury.

Debt Restructuring Agreement

On November 25, Sri Lanka invited two main groups of ISB holders to exchange their bonds for new debt instruments. This move followed an agreement in principle reached on September 19 with two representative groups of holders. These groups include international investors and domestic financial institutions, collectively holding about 50% of the total outstanding ISBs.

The debt restructuring agreement was initially reached in September during former President Ranil Wickremesinghe's regime, just before presidential elections. A cabinet spokesman announced on November 26 that a final consensus on restructuring debt by major bilateral creditors' Official Credit Committee members is expected by June 2024. An initial agreement with international bondholders was reached in September 2024.

IMF Support and Economic Challenges

A week before ratifying the debt restructuring agreement, the National People's Power government secured IMF approval for a staff-level agreement to obtain the fourth tranche of a nearly USD 3 billion bailout package. Despite earlier rhetoric to renegotiate terms with the IMF, President Dissanayake supported this move. The IMF's Extended Fund Facility (EFF) provides USD 2.9 billion to Sri Lanka.

Sri Lanka faced an economic crisis after declaring sovereign default in April 2022, its first since independence in 1948. This led to civil unrest and protests, resulting in then-President Gotabaya Rajapaksa fleeing the country. Wickremesinghe assumed leadership and initiated negotiations with the IMF, culminating in a bailout agreement in March 2023.

Current Debt Status

As of July 2024, Sri Lanka's external debt stood at USD 37 billion, comprising USD 10.6 billion in bilateral credit and USD 11.7 billion in multilateral credit. Commercial debt amounted to USD 14.7 billion, including USD 12.5 billion in sovereign bonds. The IMF mandated restructuring agreements with both bilateral and sovereign bondholders to ensure debt sustainability.

Deputy Minister of Finance Anil Jayantha Fernando highlighted that delays in debt restructuring over two years cost Sri Lanka an additional USD 1.7 billion in accumulated interest. "We are hoping to complete the restructure of bilateral debt and international sovereign bonds by December 31," Fernando stated while presenting the interim budget on December 6.

President Dissanayake expressed optimism about the future, stating that this debt exchange marks a new chapter for Sri Lanka after years of crisis. He emphasised that it will provide significant debt relief and free resources for development while ensuring long-term fiscal stability for the nation.