Sri Lanka: OCC deal covers US$ 5.9 Bn of public debt; Finance Ministry discloses more details

COLOMBO (News 1st); Sri Lanka's Finance Ministry has disclosed certain details of the agreement in principle that was reached with the Official Creditor Committee  (OCC) on the financial terms of debt treatment.

According to the Finance Ministry the agreement in principle covers approximately US$ 5.9 Bn of  outstanding public debt, and consists in a mix of long-term maturity extension and reduction in interest rates.

It added that the agreed-upon debt treatment terms will be further detailed and formalized in a Memorandum of Understanding between Sri Lanka and the OCC.

Thereafter, it will be implemented though bilateral agreements with each OCC member, in accordance with their laws and regulations.

The Finance Ministry said that the Sri Lankan Government looks forward to a prompt implementation of the agreed terms. 

The statement from the Finance Ministry said that this agreement in principle, together with the agreement in principle reached with the Exim Bank of China, goes a long way in dealing with Sri Lanka's external bilateral debt restructuring.

It added that the next steps include finalizing similar agreements with Sri Lanka's remaining bilateral creditors, including Saudi Arabia, Pakistan, Kuwait, Iran, altogether representing a further US$ 274 million of outstanding claims.

The Finance Ministry also noted that the government intends to focus on efforts on reaching comparable debt restructuring agreements with external commercial creditors, in particular with its holders of International Sovereign Bonds (ISBs). 

Sri Lanka's Finance Ministry said that the agreement will facilitate a swift approval by the IMF Executive Board of the First Review of Sri Lanka's IMF-supported program, allowing for the next tranche of IMF financing of about US$ 334 million to be disbursed. 

Sri Lanka & Official Creditor Committee reach agreement:

An agreement in principle has been reached between the official creditor committee, and Sri Lanka on Debt Restructuring.

A statement from the Paris Club noted that an Official Creditor Committee (OCC) co-chaired by India, Japan and France, and Sri Lanka agreed on the main parameters of a debt treatment consistent with those of the Extended Fund Facility (EFF) arrangement between Sri Lanka and the IMF. 

It said that this agreement will allow the IMF staff to present to the IMF Executive Board the first review of Sri Lanka’s EFF arrangement and open the way for approval of the second disbursement under the arrangement. 

The Official Creditor Committee (OCC) said that it stands ready and looks forward to formalizing this agreement in the coming weeks in a Memorandum of Understanding with the Sri Lankan authorities. 

The OCC expects other bilateral creditors to consent to sharing, in a transparent manner, the information necessary for the OCC to evaluate comparability of treatment regarding their own bilateral agreement.

The OCC also expects that the Sri Lankan authorities will continue to engage with their private creditors to find as soon as possible an agreement on terms at least as favorable as the terms offered by the OCC.

These engagements will ensure that the overall debt treatment granted to Sri Lanka is consistent with the IMF program parameters.

The OCC commends the Sri Lankan authorities for their continuous efforts in implementing the reforms necessary for their country’s return to a sustainable path.

Following the launch event in April 2023, 17 countries formally formed, on May 9, an Official Creditor Committee (OCC) co-chaired by India, Japan and France (as chair of the Paris Club) to respond to the Sri Lankan authorities’ request for a debt treatment. 

The committee includes India and Hungary in addition to Paris Club creditors. Since then, the OCC has engaged extensively with the Sri Lankan authorities, the IMF, the World Bank as well as China, and Sri Lanka’s private creditors.

Review of IMF program will be complete in December:

Sri Lanka President Ranil Wickremesighe has expressed optimism that the IMF Board would conclude the first review of Sri Lanka’s EFF program within the month of December.

The President outlined the ongoing discussions with external private creditors, emphasizing the government’s commitment to reach an agreement on specific restructuring terms with them shortly. 

A focal point of the restructuring strategy is a reliance on a long-term extension of the debt, with economic principles guiding future negotiations and operations, said the President's Media Division quoting the President's speech to the 2023 Sri Lanka Economic Summit.

In his address, President Wickremesinghe touched upon the necessity of adhering to the agreed-upon framework, stressing that deviation could lead to adverse consequences with creditors. 

He urged the nation to embrace the radical restructuring as a last chance for economic stability, emphasizing the need to break away from the cycle of seeking external aid due to mismanagement.

President Wickremesinghe drew attention to the dangers of remaining a “beggar nation” and the unsustainable practice of seeking financial assistance without addressing the root causes of economic instability. He questioned the wisdom of repeatedly asking other countries for help, emphasizing the need for internal reform and competitiveness.

The President underscored the importance of a competitive, export-oriented economy, outlining the government’s vision for a digitalized and green economy. 

Sri Lanka debt deal could help board clear first bailout review:

Sri Lanka’s in-principle pact with creditor nations to restructure its debt prepares the way for the International Monetary Fund (IMF) to consider clearing the first review of a bailout next month, the global lender said on Thursday.

The deal comes about a month after Sri Lanka’s agreement with the Export-Import Bank of China covering about $4.2 billion of outstanding debt, while clearing the IMF review could trigger a second tranche of about $334 million in funds.

“These understandings pave the way for the IMF Executive Board to consider completion of the first review of Sri Lanka’s four-year Extended Fund Facility Arrangement,” Peter Breuer, IMF’s mission chief for Sri Lanka, said in a statement.

“We look forward to the Executive Board taking up this review by mid-December and the continuation of our productive collaboration with Sri Lanka in the period ahead.”

Sri Lanka plunged into its worst financial crisis in seven decades last year after its foreign exchange reserves dwindled to record lows.

But since locking down the IMF bailout of $2.9 billion in March, the South Asian island nation has managed to partly stabilise its economy, bring down runaway inflation and rebuild currency reserves.

After receiving the IMF money, Sri Lanka could get further funding from the Asian Development Bank and the World Bank, bringing the total amount to around $900 million, central bank Governor P. Nandalal Weerasinghe said last week.

Sources: Reuters / Paris Club / President's Media Division / Finance Ministry