Foreign debt restructuring: A breather for Sri Lanka to repair its low reserve buffers

By Sanath Nanayakkare

Sri Lanka is currently negotiating with foreign creditors to reduce the country’s high share of foreign currency debt liabilities because it would give Sri Lanka a breather and space to rebuild its reserve buffers, a press conference at the Central Bank revealed.

In this exercise, Sri Lanka is looking to build USD 10 billion worth of foreign reserves while keeping to a maximum forex debt service target of 4.5% of GDP in 2027-2032, Dr. Nandalal Weerasinghe, the Governor of the Central Bank of Sri Lanka (CBSL) said on August 24, 2023.

“We are negotiating to restructure our foreign debt because our forex reserves are not sufficient repay those loans as they are. The whole purpose of foreign debt restructuring is to avoid ending up in another economic crisis; otherwise there would have been no need for foreign debt restructuring,” the Governor explained.

He made these remarks during the Q&A session at the press conference held to enlighten on the newest monetary policy review of the Bank.

When our sister paper Divaina asked if the country could fall back into a crisis again by September- October 2023 when Sri Lanka begins to repay its suspended foreign loans, the Governor said that it is less likely to happen.

“Our core target post-foreign debt restructuring is to increase the foreign reserves. We are negotiating to restructure our foreign debt because our capacity and foreign exchange reserves are insufficient to make the debt repayments as they occur. Otherwise, there would have been no need for foreign debt restructuring,” he emphasized.

The Governor went on to say that a loan extension agreement with foreign creditors would help Sri Lanka to re-commence payments of the suspended foreign loans at a feasible level while accumulating foreign reserves.

“We hope to negotiate a maximum forex debt service target of 4.5% of GDP in 2027-2032 as the Finance Ministry has envisaged in its report ‘Debt service payments as a percentage of GDP’. Currently, this ratio is 9.4%. So we are asking to reduce it by a half. Thus if we can bring down foreign loan repayments of USD 6 billion down to USD 3 billion per annum, repaying that USD 3 billion won’t be unfeasible. Discussions are in progress to achieve this,” he said.

The Governor pointed out that Sri Lanka has consistently honoured repayment of loans obtained from the World Bank and the Asian Development Bank, and as foreign reserves position is getting better the country has started repaying loans taken from Bangladesh as well.

“Amid these positive developments, we are negotiating to extend the period of foreign debt in a manner the repayments are able to be sustained. That is why we are discussing a grace period, reduction of interest costs or a haircut in this regard. Once our foreign debt is restructured, new loans would flow in from the World Bank and the ADB, in addition to the assistance from the IMF. Further, Japan will start its projects and those loans will come in too. Receipts from Tourism and Exports with which we have managed so far are also there. So, in my view, re-commencing to pay foreign debt won’t have a big impact on the foreign reserves level as some have feared,” he said.

“This issue feared in some quarters is either without awareness or for some other reason would arise only if foreign reserves begin to dip after we have begun to repay foreign debt. The programme in 2027-2032 to manage our foreign currency debt liabilities at 4.5% of GDP should help us build our foreign reserves to 10 USD billion from its 3 billion. So, foreign debt restructuring will bring us two-fold relief. One is reducing the burden of foreign loan repayments and at the same time being able to accumulate our foreign reserves to make the economy stronger,” the Governor elucidated.

Restoring public debt sustainability is one of the key objectives of Sri Lanka’s IMF Program which requires policy actions and comprehensive debt treatment. There are several key pillars of Sri Lanka’s USD 3 bn IMF programme approved on 20 March 2023. They are namely: revenue-based fiscal consolidation, fiscal structural reforms, protect the poor and vulnerable, restore price stability and rebuild external buffers, safeguard financial system stability, growth-enhancing reforms, and last but not least, reducing corruption vulnerabilities.