Sri Lanka fails to agree on restructuring terms with bondholders

Colombo — Sri Lanka failed to strike an agreement on restructuring about $12bn of debt with its bondholders, the government said on Tuesday, complicating the nation’s plans to meet the requirements of an IMF programme.

The steering committee did not agree to extension of restricted discussions, it said in a regulatory filing to the London Stock Exchange.

After talks with bondholders on the sidelines of the IMF and World Bank Spring meetings in Washington, Sri Lanka said it failed to reach consensus on the bondholders’ proposal submitted earlier in the month.

Sri Lanka disagreed with the bondholders’ proposals for debt repayment since they differed from an analysis of the country’s debt worked out by the IMF and how to include the bondholders’ plan to link repayments to the country’s future macroeconomic growth, through macro-linked bonds, in the restructuring plan, the filing showed.

After the announcement, Sri Lanka’s bonds were down 2.3c-2.8c, leaving them at just over half their original face value at 53c-55c on the dollar.

The agreement in principle was needed for the island to finalise the second review of a $2.9bn programme with the IMF and get executive board approval for the release of about $337m. 

“Completing the IMF review by June becomes difficult now because there will have to be more talks,” said Udeeshan Jonas, chief strategist at equity research firm CAL. “It will also mean that foreign investment will not come any time soon to financial markets. But business sentiment around overall growth prospects will not change.”

Sri Lanka said it looked forward to continuing talks with bondholders as soon as possible ahead of the second review of the IMF programme.

Sri Lanka plunged into its worst financial crisis since independence from the British in 1948 after its foreign exchange reserves fell in early 2022, leaving it unable to pay for essentials including fuel, cooking gas and medicine.

The island nation defaulted on its foreign debt in May 2022 and began negotiations with bilateral creditors several months later, eventually securing an agreement in principle with China, India and the Paris Club last November. Sri Lanka also needs agreements with each of the bilateral creditors, including the Export-Import Bank of China, to complete the IMF review process.

Supported by the IMF programme, Sri Lanka has seen its once soaring inflation moderate to 0.9% in March and its currency appreciate 7.6% so far this year. The overall economy is expected to return to growth after contracting 2.3% in 2023.

Ghana this week has also failed to agree a deal with bondholders to restructure $13bn of international bonds, hurting its efforts to emerge from default.

Reuters