Delay in bond restructure to block IMF board review on Sri Lanka’s reform progress
Having encountered “some setbacks” in the first round of sovereign bond restructuring talks in London last week, the Steering Committee of the Ad Hoc Group of Bondholders
and the Sri Lankan official negotiators have pledged to continue the dialogue to arrive at a consensus within a few weeks, Finance Ministry sources confirmed.
The delay in reaching an agreement could be a stumbling block for Sri Lanka’s upcoming IMF executive board review, which is scheduled for June a high official of the ministry said adding that as debt restructuring is a foremost condition for the IMF, it would have an impact on the board approval.
The IMF supported programme explicitly assists Sri Lanka’s efforts to restore macroeconomic stability and debt sustainability, safeguard financial stability, and enhance growth-oriented structural reforms.
Moreover, the nation’s impending presidential election exerts pressure on the government to fast-track the negotiation process, raising concerns about the sustainability of any deal struck with bondholders hastily under such circumstances. In this context, there is a possibility of reaching an adverse agreement for the country, he said, adding that if this happens the debt repayments agreed may become a difficult task for Sri Lanka in the coming years which could lead to a second default.
However Krishna Srinivasan, Director of the Asia and Pacific Department at the International Monetary Fund, has expressed optimism regarding the prospect of a deal with Sri Lanka’s sovereign bondholders following further discussions.
The first round of direct discussions in London has ended in a deadlock, he confirmed disclosing that the Sri Lanka government has expressed willingness to explore bonds linked to economic performance.
Bondholders have submitted a proposal for governance-linked bonds as an alternative for defaulted bonds towards finding mutually beneficial solutions, he disclosed.
Sri Lanka has proposed a 28 per cent haircut with a 1.8 per cent upfront fee, aligned with the IMF baseline, with alterations based on economic performance a former treasury secretary divulged to the Business Times.
He said that bondholder’s proposal of governance-linked bonds would be an issuance of cash coupons commencing from 2028 with interest rates ranging between 8 and 9.5 per cent, conditional on the maturity.
According to the indicative term sheet for Macro-Linked Bonds put forward by the bondholder’s side private creditors will get a high interest rate if the country gains high GDP growth during the period of 2025-2027.
This is because the interest rate is proportionate to the GDP, the former treasury secretary disclosed pointing out that the Sri Lanka side rejected it as debt restructuring process is aimed at reducing the interest rates paid to creditors.
Under this set up the steering committee did not agree to an extension of the restricted discussions upon expiration of the current restricted period, finance ministry sources said.
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