Sri Lanka has crossed another sensitive checkpoint in its long and complex debt restructuring journey, with the Official Creditor Committee (OCC) granting approval for the proposed repayment structure of the debt-linked to state-owned SriLankan Airlines. While the decision eases immediate pressure on the government, it also raises deeper questions about fiscal accountability, sovereign risk, and the future viability of the national carrier.
Treasury Secretary Harshana Suriyapperuma confirmed that the OCC has formally conveyed its “no objection” stance, allowing Sri Lanka to proceed with the settlement terms already shared with creditors. The approval relates specifically to a USD 175 million sovereign-guaranteed bond issued by SriLankan Airlines, which had gone into default amid the country’s broader external debt crisis.
The bond itself traces back to structural weaknesses within the airline. Losses escalated after the government removed Emirates as the managing shareholder during the Mahinda Rajapaksa administration, leaving the airline heavily dependent on state support. The sovereign guarantee effectively transferred commercial risk from the airline to taxpayers—a liability that crystallised when Sri Lanka defaulted on its external debt in 2022.
Under the newly approved restructuring framework, bondholders will absorb a 15 percent haircut. Creditors can opt for a combination of cash repayment and an exchange into a Sri Lankan government bond carrying a 4.00 percent coupon, amortising between 2026 and 2028. Up to USD 60 million will be allocated for a voluntary cash tender at 85 percent of total claims, while remaining balances will be converted into government securities.
From the government’s perspective, the OCC’s approval is strategically significant. Suriyapperuma noted that more than 90 percent of Sri Lanka’s restructured debt by value has now been agreed, bringing the country closer to finalising its IMF-supported recovery programme. The restructuring terms were also shared with the International Monetary Fund to ensure consistency with long-term debt sustainability targets.
However, the arrangement highlights a persistent moral hazard. Losses generated by a commercially struggling airline are once again being socialised through sovereign instruments. Even with a haircut, the exchange shifts SriLankan Airlines’ liabilities onto the government balance sheet, adding to medium-term repayment obligations at a time when fiscal space remains extremely limited.
The structure also creates unequal outcomes among creditors. Voluntary participants receive more favourable exchange ratios, while non-consenting bondholders face mandatory conversion at lower recovery values. Although legally permissible, this raises concerns about future investor confidence in Sri Lanka’s state-backed entities.
SriLankan Airlines Chairman Sarath Ganegoda welcomed the agreement, describing it as a pragmatic compromise that avoids prolonged litigation and allows the airline to focus on its operational future. Yet the fundamental question remains unresolved: whether SriLankan Airlines can operate without recurring reliance on sovereign guarantees.
As Sri Lanka edges closer to completing its debt restructuring, the airline deal underscores a recurring theme of the crisis: state-owned enterprises continue to pose systemic fiscal risks. OCC approval may close one chapter, but without deeper reforms to governance and commercial discipline, similar liabilities could re-emerge, undermining the very debt sustainability this process aims to restore.
