New Delhi: The plan to restructure Sri Lanka’s debt could be completed by June, two people aware of the matter said, as the island-nation prepared to reach an agreement with its creditors in the coming months.
“We expect that the agreements will be finalized around June, which will help settle the debt restructuring process with Sri Lanka,” said one of the officials mentioned above, requesting anonymity.
In May 2022, India’s southern neighbour defaulted on its overseas debt after its worst financial crisis since independence in 1948 emptied out foreign exchange reserves.
In March 2023, Sri Lanka secured a four-year $2.9 billion bailout package from the International Monetary Fund (IMF), subject to the country ensuring debt sustainability in line with agreed targets.
Sri Lanka has also negotiated a preliminary deal to restructure about $10 billion of debt owed to bilateral creditors led by India, Japan and France.
Last October, Sri Lanka and China reached a deal to restructure $4.2 billion in debt. Last November, it reached an agreement with lenders, including China, to restructure nearly $5.9 billion in loans in order to continue accessing a $3 billion IMF bailout package.
The deal included a mix of extending the tenure and reducing interest on bilateral loans granted to the cash-strapped nation.
India, Japan and France co-chair the island nation’s official creditor committee. However, China, despite being Sri Lanka’s largest bilateral creditor, is an observer on the committee.
Sri Lanka’s total external debt was estimated at $36.6 billion, which includes $10.94 billion of bilateral debt, at the end of September 2023, according to Reuters.
“There is a willingness to resolve this at the earliest among the creditors and the Sri Lankan government,” said the second person mentioned above.
“They will need to secure agreements with creditors in the next few months to get past the second review of the IMF programme, which is due in the first half of calendar year 2024,” the person added.
Spokespersons of India’s finance and foreign ministries didn’t respond to emailed queries.
Sri Lanka’s ministry of finance also didn’t respond to emailed queries.
As things stand, Sri Lanka’s largest lender China has been reluctant to take a haircut on its loans, instead offering to extend the term of its loans and adjust interest rates.
While the other creditors including India have discussed taking haircuts, China favours extending tenures of loans apart from the reduction of existing interest rates, the second person added.
Sri Lanka’s president Ranil Wickremesinghe, who took over in mid-2022, recently said that the country hoped to implement the debt restructuring framework within the first six months of 2024.
India has been a strong ally of Sri Lanka, playing a pivotal role in helping its economy recover during the economic crisis.
During the crisis, which peaked in 2022-23, the island nation saw high inflation, near-depletion of foreign exchange reserves, shortage and an increase in prices of basic commodities.
While the IMF extended assistance of $3 billion, India has extended assistance of over $4 billion to Sri Lanka aiding its economic recovery.
Sri Lanka will also have a Presidential election in September-October 2024, with Wickremesinghe looking to continue in office.
Since taking office in 2022, Wickremesinghe has pushed for closer ties with India. During his visit to India in 2023, both sides agreed to push forward agreements on power grid connectivity and a petroleum pipeline.