COLOMBO/TOKYO: A group of Sri Lanka’s creditor nations and Colombo reached an agreement in principle on debt restructuring for the South Asian nation, Japanese top financial diplomat Masato Kanda said on Wednesday.
Japan co-chairs this group, together with France and India, which is comprised of 14 nations. China is Sri Lanka’s largest bilateral creditor and has not joined this group as a formal member.
Sri Lanka’s finance ministry said the agreement in principle covered approximately $5.9 billion of outstanding public debt and consisted of a mix of long-term maturity extension and reduction in interest rates.
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Mired in its worst financial crisis in decades, Sri Lanka has been trying to reach restructuring deals with creditors since last year.
“The fact that we agreed in principle with Sri Lanka today on debt restructuring conditions is a major achievement,” Kanda told reporters. “I expect this case will be applied as a leading case in dealing with debt problems in middle income nations.”
According to data from the finance ministry, Sri Lanka’s external debt was $36.6 billion at the end of June this year. Once the debt restructuring is completed, Sri Lanka hopes to reduce its overall debt by $16.9 billion.
The deal will help Sri Lanka clear the review of a bailout under the International Monetary Fund (IMF) executive board program by the year end, while securing a second IMF tranche of about $334 million.
“This is a key milestone for debt restructuring,” said Udeeshan Jonas, chief strategist at equity research firm CAL Group.
“The good news is that this activates the second IMF tranche and that also means ADB (Asian Development Bank) and other funding comes into place helping the government’s borrowing requirements to come down.”
“The next step will be for Sri Lanka to negotiate a deal with the sovereign bondholders,” Jonas added.
Kanda said negotiations were “on track” and creditors were working on details of a memorandum of understanding. He declined to comment on details such as the interest rates that would be applied to the restructured debt, or the repayment period.
The IMF did not immediately respond to request for comment.
“These engagements will ensure that the overall debt treatment granted to Sri Lanka is consistent with the IMF program parameters,” the official creditor committee said in a statement.
The agreement with the group of creditor nations came about a month after the debt-ridden island nation reached a deal with the Export-Import Bank of China covering about $4.2 billion of outstanding debt.
“As far as the information we have is concerned, conditions set by China are comparable to ours,” Kanda said.
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