Sri Lanka unveils debt restructure to tackle economic crisis

Sri Lanka’s central bank has unveiled a far-reaching debt restructuring plan to restore stability after an unprecedented economic crisis last year that led to the toppling of former president Gotabaya Rajapaksa.

The move comes after Colombo cut subsidies, doubled taxes and promised to privatise hundreds of state enterprises under a $2.9 billion IMF bailout agreed in March.

That agreement requires Sri Lanka to reduce its debt servicing by two-thirds in the next four years to balance its books and restore the bankrupt island nation’s finances.

The bank, on said Thursday, announced it was offering a 30% reduction on dollar-denominated bonds, including the international sovereign bonds (ISB) that make up more than a quarter of Sri Lanka’s total foreign debt.

Bilateral lenders were spared but will be asked to extend the maturity of their loans up to 15 years at an annual fixed interest rate of 1.5, with a nine-year moratorium on interest payments.

Colombo had expected foreign debt restructuring to be completed by last August but it was held up when China, its largest single creditor, initially refused to take a haircut and instead offered more loans to pay off old debts.

China holds about 52% of the South Asian nation’s bilateral credit, with Japan and India the next biggest lenders.

Sri Lanka defaulted on its $46 billion foreign debt in April last year after running out of foreign exchange to finance food, fuel and medicine imports.

Inflation peaked at 69.8% in September and the economy shrank 7.8% in 2022.

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