Sri Lanka’s President Ranil Wickremesinghe announced a debt restructuring deal with countries including India, France, Japan, and China in a televised address to the nation Wednesday. The agreement marks a key step in the country’s economic recovery after defaulting on debt repayment in 2022.
Sri Lanka is under an International Monetary Fund bailout program and the debt treatment deal is expected to reopen the doors to bilateral transactions and the resumption of foreign projects that stalled when the island nation defaulted.
“This morning in Paris, Sri Lanka reached a final agreement with our official bilateral creditors. Similarly, we signed another agreement with China’s Exim Bank today in Beijing. … Sri Lanka won,” Wickremesinghe said.
Sri Lanka declared bankruptcy in April 2022 and suspended repayments on some $83 billion in domestic and foreign loans amid a severe foreign exchange crisis that led to a severe shortage of essentials such as food, medicine, fuel, and cooking gas, and hours-long power cuts.
Sri Lanka’s crisis was largely the result of staggering economic mismanagement combined with fallout from the COVID-19 pandemic, which along with 2019 terrorism attacks devastated its important tourism industry. The pandemic also disrupted the flow of remittances from Sri Lankans working abroad.
Additionally, the then-government slashed taxes in 2019, depleting the treasury just as the virus hit. Foreign exchange reserves plummeted, leaving Sri Lanka unable to pay for imports or defend its beleaguered currency, the rupee.
Wickremesinghe said with these agreements, Sri Lanka will be able to defer all bilateral loan instalment payments until 2028. Furthermore, Sri Lanka will be able to repay all the loans on concessional terms, with an extended period until 2043.
According to a previous president’s office statement, the agreements would cover $10 billion, but further details on the mode of restructuring were not immediately announced.
By 2022, Sri Lanka had to repay about $6 billion in foreign debt every year, amounting to about 9.2 percent of gross domestic product. The agreement would enable Sri Lanka to maintain debt payments at less than 4.5 percent of GDP between 2027 and 2032.
As Wickremesinghe addressed the nation, his supporters watched the speech on a giant screen in the capital Colombo and celebrated the announcement by lighting firecrackers and partaking in traditional milk rice.
The economic upheaval led to a political crisis that forced then-President Gotabaya Rajapaksa to resign in 2022. The Parliament then elected Wickremesinghe as president.
Sri Lanka suspended repayment of its debt as it ran short of foreign currency needed to pay for imports of fuel and other essentials. Shortages led to street protests that changed the country’s leadership. The IMF approved a four-year bailout program last March.
The economic situation has improved under Wickremesinghe and severe shortages of food, fuel and medicine have largely abated. But public dissatisfaction has grown over the government’s effort to increase revenue by raising electricity bills and imposing heavy new income taxes on professionals and businesses, as part of the government’s efforts to meet the IMF conditions.
After Sri Lanka declared bankruptcy, all projects funded by foreign loans were also halted.
On Wednesday, Wickremesinghe said the new agreements would pave way to resume the foreign funded projects such as highways, light railway and airport development, and also initiate new projects too.