Sri Lanka Fails to Reach Agreement with Bondholders on Debt Restructuring

Sri Lanka rejects bondholders' debt restructuring proposal, jeopardizing IMF support and delaying crisis resolution. Despite setbacks, the country aims to finalize agreements by June for the next IMF bailout review.

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Safak Costu
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Sri Lanka Fails to Reach Agreement with Bondholders on Debt Restructuring

Sri Lanka Fails to Reach Agreement with Bondholders on Debt Restructuring

Sri Lanka's government has rejected a proposal from international bondholders to restructure more than $12 billion in debt, putting at risk critical IMF support and delaying efforts to resolve a two-year-long debt crisis. The government cited issues with the "baseline parameters" of the bondholders' plan and their unwillingness to extend "restricted discussions" as the main reasons for not agreeing to the deal.

The South Asian nation had offered a 28.8% haircut on its $12.5 billion in outstanding International Sovereign Bonds, but this was rejected by bondholders, who instead proposed giving discounts only if Sri Lanka failed to meet IMF-set economic growth targets. The government said it was willing to consider the counter-proposal, but no agreement was reached.

Why this matters: Sri Lanka's failure to reach an agreement with bondholders complicates its plans to meet the requirements of an IMF program and secure the next tranche of funding. The country's ongoing debt crisis has had severe economic and social consequences for its citizens, and a resolution is imperative for the nation's recovery and stability.

Sri Lanka has already struck a deal with its main government creditors, but an "agreement in principle" with bondholders is also needed to secure IMF Board approval for the next $337 million installment of its $2.9 billion program. Failing to meet the June deadline for a debt restructure would halt future IMF bailout payments.

Despite the setback, Sri Lanka is moving in the right direction, with its once soaring inflation moderating and its currency strengthening. The overall economy is expected to return to growth after contracting in 2023. However, the modest economic recovery will be insufficient to reverse the welfare losses experienced during the crisis, and poverty is estimated to remain above 22% until 2026, according to the World Bank.

The Sri Lankan government said it is looking forward to continued engagement with bondholders to reach common ground in the next few weeks, ahead of the second review of the IMF-supported program. The country aims to finalize debt restructuring agreements with private creditors and sovereign bond-holders by June, in time for the next review of the IMF bailout program.

Key Takeaways

  • Sri Lanka rejects bondholders' debt restructuring proposal, jeopardizing IMF support.
  • Failure to reach agreement complicates Sri Lanka's plans to meet IMF program requirements.
  • Sri Lanka's economy is expected to return to growth after 2023 contraction.
  • Poverty is estimated to remain above 22% until 2026, despite modest economic recovery.
  • Sri Lanka aims to finalize debt restructuring agreements with creditors by June for IMF review.