On April 16, the Sri Lankan government announced that the country’s debt restructuring process with private bondholders had hit a roadblock. The Ministry of Finance said in a press release that despite “constructive discussions” with some of the Steering Committee members of the Ad Hoc Group of Bondholders, which consists of some of the country’s biggest private holders of debt, the two sides could not reach agreement on “restructuring terms.”
The Steering Committee comprises 10 of Sri Lanka’s largest bondholders and the Ad Hoc Group controls “approximately 50 percent of the aggregate outstanding amount of [international sovereign bonds] ISBs.” These bondholders hold about $12 billion of Sri Lanka’s total debt.
On March 11, the Ad Hoc Group, which is advised by White & Case and Rothschild & Co., sent their debt treatment proposal to the government. The government sent its proposals to the group on March 25, which were rejected by the Steering Committee of the Ad Hoc Group when the two sides sat down for discussions on March 27 and 28.
Before the meetings, the International Monetary Fund (IMF) conducted an initial, informal evaluation of the proposals regarding their alignment with Sri Lanka’s IMF-supported program parameters and goals for debt sustainability.
IMF officials determined that the debt treatment scenario outlined in the Sri Lankan government’s proposal was in line with the debt sustainability targets of the IMF-supported program, whereas the scenario outlined in the Ad Hoc Group’s March proposal was not.
In its proposal, the Ad Hoc Group calls on the Sri Lankan government to issue a Macro-Linked Bond (MLB) as a part of new securities that will be offered to those who hold existing bonds. In a press release issued on October 2023, the Group stated that the MLB is designed to be “liquid and index-eligible,” with payouts that “are linked to the evolution of Sri Lanka’s gross domestic product.”
According to the finance ministry, issues relating to MLBs are the main stumbling block in reaching an agreement.
The Ad Hoc Group proposal recommends a combination of cash and payment-in-kind coupons, with cash coupons starting from 2028 offering interest rates ranging between 8 and 9.5 percent, depending on the maturity.
The Ad Hoc group believes that Sri Lanka and the IMF have underestimated the country’s GDP growth. In 2022, the GDP of Sri Lanka was $74.85 billion. In 2023, the GDP declined by 2.3 percent. However, the country’s GDP is to grow by 2.2 percent and 2.5 percent in 2024 and 2025, respectively. The bondholders propose that Sri Lanka’s GDP would grow at a higher rate and thus, the country can pay higher interest rates for the new series of bonds it will issue when restructuring privately owned debt.
However, critics of the government’s restructuring efforts claim there are only minute differences between the proposals of the Ad Hoc Group and the government. Critics argue that the alleged impasse between the two sides is only an attempt by the government to convince Sri Lankans, in an election year, that it is trying its best to get a good deal from the private creditors.
Economic analyst Dhanusha Gihan Pathirana told The Diplomat that ideally, when restructuring debt, efforts should be made to reduce the interest rates paid to creditors. However, the suggested interest rates, by both parties, hover around 9 percent, which is significantly higher than the average commercial loan rates of 5 to 6 percent. He said that the proposed terms stipulate that Sri Lanka must pay an interest rate of 9.75 percent starting in 2028, contingent upon the country’s cumulative GDP growth surpassing 5.3 percent from 2024 to 2028. This creates a disproportionate scenario where the interest rate far exceeds the anticipated growth rate.
According to economic theory, maintaining a balance between growth rates and interest rates is crucial to avoid exacerbating inequalities. When the profit rate significantly outpaces the growth rate, it leads to substantial disparities. Therefore, the proposals of both the bondholders and the government seem to disregard fundamental economic principles.
“Given that there is virtually no difference between our proposals and the private creditors’ proposals, all these discussions are performative. The current government will likely sign a disastrous agreement with the creditors, leading to trouble in the future,” Pathirana said.