October 19, Colombo (LNW) Sri Lanka, which entered a crucial debt restructuring agreement in September 2024, initially aimed for a 30% reduction in the net present value (NPV) of its debt under the ‘IMF baseline scenario.’
However, recent findings by Verité Research indicate that the country is likely to achieve a much lower reduction of 19.8%.
Based on official data, Verité’s analysis positions Sri Lanka in the fifth-highest (second-to-lowest) debt relief category, estimating a 19.8% reduction in NPV terms at a 5% discount rate, rather than the anticipated 30% reduction from the baseline scenario.
The core issue lies in Sri Lanka’s arrangement with international bondholders, which includes a Macro-Linked Bond (MLB) that ties debt relief levels to the country’s future economic performance, particularly its GDP growth.
Verité Research warns that the current growth projections used by the Sri Lankan government are overly optimistic.
The agreement indicates Sri Lanka expects to be in the third-highest debt relief scenario (baseline), but with the debt relief terms for official creditors undisclosed, there is a risk that the country could receive less than 20% in NPV reduction from these creditors as well.
The debt restructuring deal also introduces a Governance-Linked Bond (GLB), which restructures a portion of the $1,722 million in Plain Vanilla Bonds to include a future coupon step-down, offering a greater debt reduction than the alternative.
This GLB option, initially proposed in April based on Verité Research’s recommendations, ties a decrease in bond coupon rates to specific governance actions, providing a potential upside for Sri Lanka if implemented.
The GLB instrument is seen as an opportunity for the Government of Sri Lanka (GoSL) to lower debt servicing costs while simultaneously enhancing governance and confidence in its future debt management strategies.
The April proposal initially suggested structuring $0.5 to $1 billion of the Plain Vanilla Bonds as GLB with a 50-basis point coupon step-down by 2028, linked to three governance actions.
The September Agreement has since expanded this flexibility, allowing GoSL to increase the amount of Plain Vanilla Bonds structured as GLB and the extent of the coupon step-down.The political environment has become more conducive to adopting the GLB structure, especially following the
