Sri Lanka’s exchange of defaulted local debt for new bonds brought it closer to completing its restructuring this year, after the nation’s worst economic crisis in decades led to mass protests and the ouster of its leadership in 2022.
(Bloomberg) — Sri Lanka’s exchange of defaulted local debt for new bonds brought it closer to completing its restructuring this year, after the nation’s worst economic crisis in decades led to mass protests and the ouster of its leadership in 2022.
The government accepted 3.2 trillion rupees ($10 billion) of offers from superannuation funds, according to a statement on the finance ministry’s website Tuesday.
The move boosts the chances Sri Lanka will pass the International Monetary Fund’s first review of its $3 billion bailout starting this week, paving the way for a disbursement of about $330 million by November. The focus now turns to the nation’s debt negotiations with holders of its foreign debt, including creditors such as China and India.
“It’s an important milestone for sure, but to complete the IMF review, the government will also need to reach an agreement with the bilateral lenders,” said Saurav Anand, South Asia economist at Standard Chartered Plc. The Sri Lankan president’s visit to China and IMF annual meetings next month are key developments to watch, he said.
Sri Lanka joins some of the world’s most distressed nations, including Zambia and Ghana, in making progress to resolve debt crises. Zambian President Hakainde Hichilema is on a state visit to China, after the nation became the first to win major debt relief through the Group of 20 nation’s Common Framework in June.
The island’s nation’s dollar bonds have handed investors a gain of 54% this year as inflows rebounded after it secured a bailout following months of food and fuel shortages. Zambian dollar bonds, which are also undergoing restructuring, are up 20% this year, while a Bloomberg gauge of emerging market sovereign debt has gained 3%.
On Tuesday, the Sri Lankan rupee slipped 0.2%, while foreign currency bonds maturing in 2030 were steady at 45.4 cents on the dollar, according to indicative pricing compiled by Bloomberg.
Troubled countries that investors feared could be the next to default are wrestling with measures the IMF demands to keep funding flowing, evident in efforts to sell state assets in Egypt and to cut energy subsidies in Pakistan, despite the political risks they carry.
The economic meltdown in Sri Lanka spiraled into a political chaos last year, leading to the formation of a new government. President Ranil Wickremesinghe, who was elected by parliament after his predecessor Gotabaya Rajapaksa fled the country, is trying to push through economic and constitutional reforms to help turn the tide.
Sri Lanka is in talks with China, which has committed to help the nation’s debt restructuring, junior finance minister Shehan Semasinghe said this month. China is an observer at a creditor platform organized by India, Japan and the Paris Club.
(Updates with details throughout.)
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