Sri Lanka’s local bond swap agreement brings it nearer to IMF bailout

After the country’s biggest economic crisis in decades caused widespread riots and the overthrow of its administration in 2022, Sri Lanka has moved closer to finishing its restructuring this year by exchanging defaulted local debt for fresh bonds.

Bloomberg cited a statement posted Tuesday on the website of the finance ministry wherein, the government accepted offers from superannuation funds worth 3.2 trillion rupees ($10 billion).

The decision raises Sri Lanka’s prospects of passing the IMF’s first review of its $3 billion bailout, which will begin this week, opening the door to a payout of approximately $330 million by November.

The nation’s debt negotiations with holders of its international debt, including creditors like China and India, are currently the centre of attention.

Bloomberg quoted the South Asian economist from Standard Chartered Plc., Saurav Anand as saying, “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.” He further said that next month’s IMF proceedings and the Sri Lankan president’s visit to China are important areas of focus at present.

Sri Lanka is making headway in resolving its financial issues, joining some of the most insolvent countries in the world, such as Ghana and Zambia. Zambia became the first country to receive significant debt relief through the Common Framework of the Group of 20 nations in June. Zambia’s president, Hakainde Hichilema, is currently on a state visit to China.

Dollar bonds issued by the island’s government have returned 54 per cent to investors this year as investment flowed back after it received a bailout following months of food and fuel shortages. While a Bloomberg indicator of emerging market national debt has increased 3 per cent this year, Zambian dollar bonds, which are also undergoing restructuring, have increased by 20 per cent this year.

The foreign currency bonds due in 2030 remained stable at 45.4 cents on the dollar on Tuesday, according to indicative pricing reported by Bloomberg, while the Sri Lankan rupee fell 0.2 per cent.

The struggle to comply with IMF demands to maintain funding is seen in Egypt's and Pakistan's attempts to sell state assets despite the political dangers involved. Investors feared that these troubled nations could be the next to default.

Last year, a new administration was formed as a result of the political upheaval brought on by Sri Lanka’s economic collapse. After his predecessor Gotabaya Rajapaksa fled the country, President Ranil Wickremesinghe was chosen by parliament and is working to enact economic and constitutional reforms in an effort to reverse the trend.

According to Shehan Semasinghe, a junior finance minister, Sri Lanka is in talks with China, which has agreed to support the country’s debt restructuring.

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