Sri Lanka’s announcement of reaching an agreement in principle to restructure approximately $17.5 billion of external commercial debt represents a critical milestone in the nation’s pursuit of financial stability. According to Murtaza Jafferjee, Chairman of the Advocata Institute and CEO of JB Securities, this agreement is a pivotal step toward achieving long-term debt sustainability and reshaping Sri Lanka’s economic future.
Jafferjee emphasized that this agreement has been a long time coming, reflecting on how the financial situation in the country had been deteriorating for years. He identified 2020 as the year when Sri Lanka shifted from a liquidity crisis to a solvency crisis, a perspective he had publicly advocated at the time. Despite his warnings, the country only began the debt restructuring process in April 2022, nearly two years later. This restructuring is seen as essential to resolving Sri Lanka’s financial issues.
While the recent agreement is a significant breakthrough, Jafferjee cautioned that Sri Lanka remains in selective default status. It will take several more months to finalize the restructuring, and only after that will the country be in a position to achieve an improved credit rating—ideally a triple C rating. He stressed the importance of achieving an investable credit rating to restore confidence among investors and fuel economic growth.
Debt sustainability, Jafferjee explained, is determined by factors like the debt-to-GDP ratio and the country’s gross financing needs, as assessed by the International Monetary Fund (IMF). According to IMF analysis, restructuring is necessary to make Sri Lanka’s debt manageable. He further warned against delaying the restructuring process, as continued delays would result in high-interest payments on the country’s international sovereign bonds, which currently range from 6.5% to 7%. With the new interest rate projected to be around 3%, delays are costly for the nation.
Looking ahead, Jafferjee noted that while the debt restructuring agreement is a major achievement, Sri Lanka must focus on enhancing its debt-carrying capacity by 2028, when much of the restructured debt will mature. Economic growth, along with increased investment, will be crucial in preventing future defaults and ensuring long-term stability.
Similarly, Professor Sirimal Abeyratne from the University of Colombo highlighted that the agreement marks a turning point in Sri Lanka’s economic history. He explained that lifting the restrictions on Sri Lanka’s access to international capital markets would help stabilize exchange rates and bolster the Central Bank’s foreign reserves. Moreover, the deal would pave the way for improving the country’s downgraded international credit ratings.
However, both Jafferjee and Abeyratne agree that this is only the beginning of Sri Lanka’s recovery journey. The country must continue to maintain economic stability and implement measures to reduce debt by 2030. For Sri Lanka to fully recover and avoid future crises, continuous economic growth, and disciplined financial management will be essential.
