In a televised address to the nation on Wednesday, President Ranil Wickremesinghe of Sri Lanka announced a debt restructuring deal with countries including India, France, Japan, and China. This agreement is a significant step towards the country’s economic recovery after defaulting on debt repayment in 2022.
Sri Lanka, currently under an International Monetary Fund bailout program, expects the debt treatment deal to reopen bilateral transactions and resume foreign projects that were stalled due to the default.
Wickremesinghe stated, “Sri Lanka reached a final agreement with official bilateral creditors in Paris this morning. We also signed another agreement with China’s Exim Bank in Beijing. Sri Lanka has emerged victorious.”
The country declared bankruptcy in April 2022, suspending repayments on approximately $83 billion of domestic and foreign loans. This decision was made amidst severe foreign exchange crisis and shortages of essentials such as food, medicine, fuel, and electricity.
The economic turmoil in Sri Lanka was a result of economic mismanagement and the impact of the COVID-19 pandemic, coupled with terrorism attacks in 2019 that severely affected the tourism industry. Reduced remittance flows from expatriate Sri Lankans due to the pandemic further aggravated the situation.
Furthermore, tax cuts in 2019 depleted the treasury, leading to a drastic decline in foreign exchange reserves and an inability to pay for imports or defend the local currency, the rupee.
With these new agreements, Sri Lanka will defer bilateral loan instalment payments until 2028 and repay loans on concessional terms until 2043. The total amount covered by the agreements is estimated to be $10 billion.
Prior to the restructuring, Sri Lanka had to repay around $6 billion in foreign debt annually, amounting to 9.2% of the GDP. The new agreement will reduce debt payments to less than 4.5% of the GDP between 2027 and 2032.
During Wickremesinghe’s address, supporters in the capital celebrated by lighting firecrackers and enjoying traditional milk rice. The economic crisis of 2022 led to a political change, with Wickremesinghe taking office as president.
Sri Lanka’s suspension of debt repayment due to foreign currency shortages resulted in street protests and ultimately changed the country’s leadership. The IMF approved a four-year bailout program in response.
Under Wickremesinghe’s leadership, the economic situation has improved, and shortages of essential goods have decreased. However, public dissatisfaction has grown due to increased taxes and electricity bills as part of meeting IMF conditions.
All projects funded by foreign loans were halted after Sri Lanka declared bankruptcy. The new agreements are set to resume these projects and initiate new ones such as highways, light railways, and airport development.