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Sri Lanka seeks financing assurances of creditors for debt restructuring

Sri Lanka held a productive meeting with its bilateral creditors, which include India and China, on Thursday as the country looks to restructure its debt and carve a path out of its worst financial crisis in decades.

As at end-June 2022, Sri Lanka’s total public debt was US$ equiv. 79.9bn including arrears. The end-June 2022 foreign and local currency stock (including arrears) of Central Government debt, guaranteed SOEs loans and CBSL debt, amounted to $ 70.1bn, $ 6.6bn and $ 3.2bn, respectively.

It also reported that the country’s total debt was US $ 36 billion at the end of 2021. Of this, Sri Lanka owes $ 7.1 billion to China, which is 20% percent of its debt.

The total public debt, which was 115.3% of the gross domestic product (GDP) at the end of December 2021, has now gone up to 143.7% of GDP by end-June 2022. Of this, the bilateral debt has climbed from 12.7% of GDP to 20.4% of GDP.

Sri Lanka held a “productive” second round of crucial talks with its bilateral creditors, the finance ministry said on Thursday, as the crisis-hit island nation attempts to get assurances on debt restructuring from them to close a deal with the IMF.

It has now engaged with all its official bilateral creditors as well as International Financing Institutions (IFIs) with a view to obtain financing assurances for debt restructuring, Finance Ministry sources revealed.

In practice, financing assurances from official bilateral creditors are obtained once each bilateral creditor (or all official bilateral creditors collectively) officially confirms its (or their) commitment to grant Sri Lanka a debt treatment compatible with the macroeconomic and debt sustainability frameworks supporting the IMF programme.

In order obtain these creditors consent and assurances as soon as possible the Finance Ministry has made a virtual investor Presentation on October 23 2022 with 637 registered attendees and it enabled the Sri Lankan Authorities (the “Authorities” or “we”) to provide an update on the ongoing process and the next steps related to the engagement with the IMF and the creditors.

Continuing this process Sri Lankan authorities held a virtual meeting with Sri Lanka’s official creditors on Thursday (3). The meeting was chaired by the Secretary to the Treasury and the Ministry of Finance, K M Mahinda Siriwardana, and the Governor of the Central Bank P. Nandalal Weerasinghe.

Addressing the meeting State Finance Minister Shehan Semasinghe said that Sri Lanka is at a critical stage, and we are seeking IMF program approval as soon as possible to restore macroeconomic stability.

Since the IMF Staff Level Agreement (“SLA”) is still pending, the government authorities have intensified their efforts to complete the prior actions agreed with IMF staff and to obtain bilateral creditors’ financing assurances, to ensure that Sri Lanka’s IMF program can be formally adopted by the IMF Board in the targeted timeframe before mid-December 2022.

However Sri Lanka is likely to miss the December deadline for securing an IMF loan, as the main bilateral debtor, China, was involved in the 20th Chinese Communist Party (CCP) National Congress, and had little time for holding debt restructuring talks with Sri Lanka government.

The next meeting of the IMF Executive Board is in March 2023 and therefore the consent of the Board is expected in that meeting.

The IMF programme and economic reform agenda will reconstitute Sri Lanka’s financial buffers, Central Bank Governor Nandalal Weerasinghe.said adding that the official creditors have been given an opportunity to discuss Sri Lanka’s current financial position and progress on reforms.

Regarding prior actions, the Authorities are working hand in hand with IMF staff to ensure that all prior actions are satisfied as soon as possible.

Sri Lanka is currently on track to complete all prior actions before yearend. Prior actions included parliament approval of a revised 2022 budget, revenue measures to support fiscal consolidation and annual budget for 2023 in line with the IMF programme

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