July 01, Colombo (LNW): The Ministry of Finance has clarified that whilst debt relief provided by official creditors through maturity extensions and interest rate reductions does not immediately impact the nominal debt stock, it significantly reduces future budget deficits and subsequent additions to the debt stock.
In a statement aimed at informing the public about agreements signed on June 26, the Ministry explained that interest rate reductions will lower Sri Lanka’s future budget deficits, thereby reducing debt flow.
Maturity extensions will create room for economic growth and improved debt service capacity, helping to reduce the debt-to-GDP ratio in line with IMF Debt Sustainability Analysis (DSA) targets, the statement added.
“The nominal debt stock is not a useful measure of debt sustainability. This is why the IMF’s DSA targets focus on the debt-to-GDP ratio and other debt flow measures such as Gross Financing Needs and Forex Debt Service as a share of GDP,” the Ministry stated.
It further noted that the nominal debt stock, whether in Rupee or Dollar terms, will continue to rise as long as the country has a budget deficit, which is a common occurrence globally.
Ensuring debt sustainability requires maintaining a primary budget surplus through recent fiscal reforms and debt restructuring to meet DSA targets, thus restoring debt sustainability.
Regarding future steps, the Ministry outlined that the final restructuring agreement with the Official Creditor Committee (OCC), as reflected in the OCC Memorandum of Understanding, will be converted into individual bilateral agreements with each OCC member.
In parallel, Sri Lanka and the Export-Import Bank of China will conclude domestic regulatory formalities to implement the Amendment Agreements, facilitating the official restructuring process.
“The successful implementation of restructuring agreements with official creditors will boost negotiations with commercial creditors,” the Ministry stated.
It added that Sri Lanka remains engaged with its bondholders and their advisers, aiming to achieve a restructuring agreement that meets DSA targets and is comparable to those reached with the OCC and the Export-Import Bank of China.
As of now, the domestic debt restructuring has been completed, and the official restructuring agreements have been concluded, leaving only the external commercial debt restructuring to be finalised to complete the overall debt restructuring process.
