30 September 2024
On September 19, 2024, two days before Sri Lanka’s much awaited presidential election and after the election black-out period was announced, the Finance Ministry proclaimed that the government had reached an Agreement in Principle for debt restructuring with its commercial creditors. This debt restructuring process is based on a flawed Debt Sustainability Analysis (DSA) by the International Monetary Fund (IMF).
The DSA sets the target of 4.5% of GDP in external debt servicing – consisting of principal and interest repayments – by 2027. This is equivalent to 30% of projected revenues at the cost of public spending. Furthermore, the DSA seeks to facilitate Sri Lanka’s return to the capital market by the end of the IMF programme. Sri Lanka is expected to float 1.8% of GDP in International Sovereign Bonds (ISB) every year, which is USD 1.5 billion in 2027. Floating 1.8% of GDP in ISBs at very high interest rates is meant to service external debt of 4.5% of GDP. The IMF DSA is thus setting up a debt trap for Sri Lanka.
This bond deal also provides for macro-linked bonds, which are premised on higher interest and principal payments tied to the level of Sri Lanka’s dollar-GDP growth between 2025-2027. Since the DSA avoids repayment of any debt to the bilateral and commercial creditors during this period, the rupee is likely to appreciate leading to an increase in the country’s dollar GDP. Furthermore, the foreign earnings necessary for external debt servicing are also likely to decline due to the appreciated rupee.
This trend means that the debt relief from the bondholders is low, and Sri Lanka is likely to default on its debt when it must begin such high levels of debt servicing. This is a bad deal for Sri Lanka. The IMF is complicit with the bondholders, enabling them to extract as much wealth as possible.
The bond deal also sets a bad precedent for future debt restructuring by developing countries of sovereign debt contracts. Bondholders do not want the existing laws to affect the amount of value that they can recover. Accordingly, they are introducing a mechanism where they can request change of jurisdiction to English or Delaware law. This provides leeway for bondholders to ensure recovery of their loans even by changing the underlying laws, thereby constraining Sri Lanka and compelling the state to overlook the best interests of its citizens.
President Anura Kumara Dissanayake is under tremendous pressure from powerful international actors to accept this bond deal. Claims that exports will grow and tourist earnings will increase do not hold water. The global economic downturn has created a race to the bottom for countries attempting export-led growth, while the tourism sector has proven to be fickle and susceptive to external shocks.
YUKTHI calls on the President to reject this debt restructuring deal with bondholders. Sri Lanka should avoid extractive high-interest ISBs in the future, as that was the cause of the debt crisis in the first place. It should renegotiate the IMF program and ensure a new and sustainable DSA. Debt restructuring should ensure much higher haircuts so that public spending on social welfare to address the needs of crisis-ridden people can be achieved.
YUKTHI is a plural forum to support working people’s movements and struggles for democracy and justice in Sri Lanka.
Leave a comment