Chethana Gomis

Extending the principal loan repayment grace period till 2028 will save the country $500 crores. Sri Lanka has also concluded a debt restructuring agreement with International Sovereign Bondholders.

Sri Lankan foreign debt amounts to USD 37 billion, comprising USD 10.6 billion in bilateral debt. Regarding accusations from many parties that the Government has not requested a reduction in the principal debt, President Ranil Wickramasinghe clarified that official bilateral creditors typically do not reduce the principal amount outright. Instead, they offer concessions such as extended repayment periods, loan grace periods, and lower interest rates.

In an address to Parliament, President Ranil Wickramasinghe announced that Sri Lanka has negotiated a grace period extending up to 2028 for the initial loan repayment. Additionally, significant reductions in interest rates have been secured, with plans to maintain rates at 2.1% or lower. Consequently, Sri Lanka has an extended timeframe of 8 years beyond the original schedule to fully repay its debts, aiming to complete the repayment by 2043.

Commenting on these developments, Mr. Nishan de Mel expressed his views via Twitter, highlighting concerns regarding the absence of a “haircut” (a reduction in the principal amount) in the bilateral debt restructuring process. He noted that while haircuts directly reduce the Net Present Value (NPV) of debt, alternative methods such as interest rate reductions and term extensions can also achieve NPV reduction. De Mel suggested that once detailed restructuring terms are disclosed, stakeholders can accurately assess the extent of NPV reduction achieved.

After lengthy negotiations, Sri Lanka has successfully reached a debt restructuring agreement with International Sovereign Bondholders (ISB). International sovereign bonds account for $12.5 billion of Sri Lanka’s total foreign debt of $37 billion. The government has announced that it has finalized a deal with private creditors to restructure $12.5 billion in international bonds, marking the country as the first to utilize a Sovereign-Linked Bond (SLB). This innovative financial instrument, developed by the Colombo Verite Research Institute, adjusts repayments based on the country’s adherence to mutually agreed governance benchmarks. Upon meeting these benchmarks, bondholders receive a risk-free dividend, while Sri Lanka benefits from reduced repayment obligations.

International bondholders have agreed to a 28% debt write-off for Sri Lanka, amounting to approximately $9.36 billion in exchange for new bonds. This agreement will reduce the country’s debt burden by nearly $3 billion. Additionally, the maturity of the bonds has been extended from 2033 to 2038.

The Ministry of Finance press release can be found here >>

Its highlights are as follows:

  • The negotiated Joint Working Framework enables a fair sharing of upside or downside between creditors and Sri Lanka in case of an economic over-performance or under-performance by Sri Lanka.
  • The baseline scenario results in a NPV effort of 40% at a discount rate of 11% whilst the scenario with the highest payments by Sri Lanka (resulting from the most significant economic over-performance) would result in a NPV effort of 27% at a discount rate of 11%.
  • Any upside payouts would only occur in a manner that does not compromise Sri Lanka’s longer-term debt sustainability.
  • The risk of higher payouts being triggered whilst capacity to pay is weak is mitigated by the inclusion of a control variable. Therefore, any increased payments would to a great extent be balanced by enhanced capacity to pay.

Dr. Nishan De Mel said that the Ministry of Finance press release titled “Sri Lanka’s International Sovereign Bond Restructuring” both understates and overstates NPV reduction. “Understates reduction as 40% @11% discount factor. It’s actually 49%. MOF calculations omitted accrued interest on pre-restructure stock. Overstates, because NPV reduction is actually 30% @5% discount factor, which is the standard calculation,” he expressed in X.

Debt Restructuring Deal Details

Detail Information
Total Foreign Debt USD 37 billion
Bilateral Debt USD 10.6 billion
International Sovereign Bonds USD 12.5 billion
Principal Loan Repayment Grace Period Extended till 2028
Interest Rates Reduced to 2.1% or lower
Debt Write-Off by International Bondholders 28%
New Maturity for Bonds Extended from 2033 to 2038
Net Present Value (NPV) Effort 40% at 11% discount rate in baseline scenario
Highest NPV Effort 27% at 11% discount rate with significant economic over-performance
Expected Debt Repayment Completion By 2043
Sovereign-Linked Bond (SLB) Adjusts repayments based on adherence to governance benchmarks

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