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Official creditors provide debt relief through maturity extensions and interest rate reductions, which do not immediately impact the nominal debt stock through restructuring, according to the Ministry of Finance. However, interest rate reductions will lessen the impact on Sri Lanka’s future budget deficits, thereby reducing additions to the debt stock as debt flow is reduced. Maturity extensions allow the economy to grow and improve debt service capacity, helping to reduce the debt-to-GDP ratio in line with IMF Debt Sustainability Analysis (DSA) targets. The Ministry clarified that nominal debt stock is not a useful measure of debt sustainability, as the IMF's DSA targets focus on the debt-to-GDP ratio and other debt flow measures like Gross Financing Needs and Forex Debt Service as a share of GDP. Nominal debt stock in Rupee or Dollar terms will continue to increase as long as the country has a budget deficit, which is common in many countries.
To manage debt sustainability, Sri Lanka aims to maintain a primary budget surplus through recent fiscal reforms and debt restructuring to meet DSA targets. The Finance Ministry outlined the next steps, including finalizing the restructuring agreement with the Official Creditor Committee (OCC) into individual bilateral agreements and completing domestic regulatory formalities with Exim Bank of China to implement the Amendment Agreements. This will facilitate the official restructuring process. Successful implementation of these agreements will boost negotiations with commercial creditors. Sri Lanka is actively engaging with its bondholders and their advisers to reach a restructuring agreement that meets DSA targets and aligns with the agreements made with the OCC and Exim Bank of China. With domestic debt restructuring completed and official restructuring agreements concluded, only the external commercial debt restructuring remains to finalize the overall debt restructuring process.
