Sri Lanka Secures $12.5 Billion Bond Restructuring Deal Ahead of High-Stakes Presidential Election
The debt restructuring deal, a result of three rounds of negotiations, promises to alleviate Sri Lanka's severe financial woes
In a critical step toward economic recovery, Sri Lanka has reached a draft agreement with its creditors to restructure $12.5 billion in international bonds. This move comes just two days before the nation’s closely contested presidential election, offering a glimmer of hope for a country still reeling from its first-ever default on foreign debt in May 2022.
The debt restructuring deal, a result of three rounds of negotiations, promises to alleviate Sri Lanka's severe financial woes, which have been exacerbated by crippling debt and dwindling foreign reserves. The agreement will need formal approval from the International Monetary Fund (IMF) and the Official Creditors Committee, both of which have made adjustments to earlier versions of the deal to ensure compliance with the IMF-supported recovery program.
In parallel, Sri Lanka has secured a preliminary deal to restructure $3.3 billion in debt with China Development Bank. The Sri Lankan government now awaits official confirmation from the IMF, which it expects will greenlight both the Agreement in Principle and the "Local Option" to ensure compliance with global financial standards.
Notably, the latest restructuring terms include revised GDP thresholds, allowing bondholders to benefit from better payments if Sri Lanka's economy outperforms. The new thresholds range from $94 billion to $107 billion, a slight increase from the previous agreement, while coupon payments have been adjusted to lower some interest costs. The nominal value of existing bonds will see a 27% reduction, offering some relief to the embattled economy.
In a bid to accommodate domestic investors, the proposal allows local bondholders the option to swap into a mix of U.S. dollar-denominated and local currency bonds. In cases where dollar payments are unfeasible, the government can opt to make payments in Sri Lankan rupees.
"This is a significant milestone for Sri Lanka and a major step toward resolving our debt crisis," said Foreign Minister Ali Sabry. "With this, we will finally be out of what many have called bankruptcy."
The agreement's fate, however, is not entirely sealed. Sri Lanka’s presidential election, set for Saturday, introduces political uncertainty. Two leading candidates have expressed interest in renegotiating parts of the IMF bailout deal, which could delay or disrupt the bond restructuring process.
Bond prices showed optimism, rising between 53.3 and 54.5 cents on the dollar, according to Tradeweb data. However, the election’s outcome could determine the ultimate success of this crucial financial lifeline.
Reported by Reuters, this deal represents Sri Lanka’s hope to emerge from more than two years of economic turmoil. Whether the restructuring moves forward as planned may depend as much on the political will of the incoming leadership as on international financial support.
