A new analysis shows that Sri Lanka’s bondholders are set to be repaid significantly more than Government creditors such as China, under the in-principle restructuring deal agreed in early July.

The calculations by UK-based Debt Justice, together with Sri Lankan campaigners Yukthi and the Institute for Political Economy (IPE), find that bondholders will be repaid 80 cents for every dollar lent, using the IMF’s own Net Present Value concept. 

This rises to 98 cents if Sri Lanka’s economy grows more than expected by the IMF. In contrast, Government creditors such as China are set to receive 67 cents for every dollar lent, with no increase in payments if economic growth is higher. This level of debt payments will leave Sri Lanka spending over 25% of Government revenue on external debt payments for years to come. 

At this level, Sri Lanka will remain one of the most indebted countries in the world, even after the debt restructuring.

Bandaranaike Centre for International Studies Senior Researcher and IPE and Yukthi member Amali Wedagedara said: “The debt restructuring deal signed with the bondholders reveals the real debt trap Sri Lanka is in, binding Sri Lanka into a vicious cycle of debt dependence and default. In contrast to restructuring external debt with bondholders and bilateral creditors, the Domestic Debt Restructuring process forced the low-wage working people in Sri Lanka to bear an exclusive burden by losing a substantial portion of their pension funds. Low-income working people, a majority of them women, will further be oppressed in the coming years as indirect taxes increase and fiscal austerity intensifies under the watch of the IMF. All Sri Lankans must rally to oppose the bond deal. Alternatively, we must demand to abolish odious debt, setting Sri Lanka towards real debt sustainability.”

University of Jaffna Senior Lecturer and Yukthi member Ahilan Kadirgamar said: “Sri Lanka, under a flawed IMF program with extreme austerity measures, is now being subject to a bad debt restructuring deal by a Government without legitimacy, and months before elections. Given the IMF’s high external debt servicing targets, Sri Lanka is likely to default again, and face cycles of debt crisis and social suffering. The Sri Lankan public should reject this undemocratic debt restructuring process by a Government that is objectively allied with Sri Lanka’s bondholders in a short-sighted and disastrous agreement.”

Debt Justice Head of Advocacy Jerome Phelps said: “Official creditors and the IMF should reject the deal with bondholders, as it leaves Sri Lanka with far too high a debt burden. Because it also does not ensure equal treatment with Government creditors, taxpayers around the world will be effectively subsidising private sector profit. The IMF should redo its debt analysis and push for a far larger cancellation of debt to allow Sri Lanka to meet essential needs and recover from the economic crisis.”

The deal with bondholders has to be agreed with Government creditors and the IMF before it is then put to a vote of bondholders. Under the deal, payments rise significantly if Sri Lanka’s GDP between 2025 and 2027 is higher than the $ 88.6 billion yearly average currently expected by the IMF. 

The IMF now expects Sri Lanka’s GDP to be $ 87.7 billion in 2024, suggesting that it is highly likely Sri Lanka will be left making the higher level of payments to bondholders. Even in the unlikely event that Sri Lanka’s GDP is significantly lower in 2025-2027 than it is now, Sri Lanka will still be paying more to bondholders than Government creditors.

The Net Present Value concept, with a 5% discount rate, assumes payments by the Sri Lankan Government cost 5% less every year into the future, based on expected US dollar inflation and economic growth. It is therefore a hypothetical figure. If Sri Lanka is hit by shocks, devaluations, and shortages of foreign currency, then the relative size of the post-restructuring debt payments will be significantly higher.

• Using IMF’s own Net Present Value concept, UK-based Debt Justice, together with Sri Lankan campaigners Yukthi and Institute for Political Economy, release new analysis
• Suggests official creditors and IMF should reject deal with bondholders as it leaves Sri Lanka with far too high a debt burden
• Warns Sri Lanka will remain one of the most indebted countries in the world, even after debt restructuring
• Debt restructuring deal signed with bondholders reveals the real debt trap Sri Lanka is in
• Alleges Lanka, under flawed IMF program with extreme austerity measures, is now being subject to a bad debt restructuring deal by a Govt. without legitimacy, and months before elections
• Opines given the IMF’s high external debt servicing targets, Sri Lanka is likely to default again

The full analysis is available at: https://debtjustice.org.uk/wp-content/uploads/2024/07/Sri-Lanka-debt-restructurings_07.24.pdf

Jerome Phelps

Amali Wedagedara

Ahilan Kadirgamar

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