Sri Lanka’s newly-elected government has approved a contentious restructuring deal for US$14.7 billion (RM62 billion) in foreign commercial credit, a plan tentatively agreed upon by the previous administration led by former President Ranil Wickremesinghe. The move has sparked widespread discussion both domestically and internationally, as the debt restructuring is seen as a critical step in the country’s ongoing economic recovery efforts, but it also exposes deep-rooted political and social challenges.
The Ministry of Finance confirmed today that the new administration, under President Anura Kumara Dissanayake, will move forward with the agreement despite its earlier calls for better terms. This development comes after two days of intense talks with an International Monetary Fund (IMF) delegation in Colombo.
Sri Lanka’s journey to this point has been fraught with hardship. The island nation was plunged into its worst economic crisis in decades in 2022, which saw a 7.8% contraction of its economy. A combination of poor fiscal management, external shocks such as the COVID-19 pandemic, and skyrocketing international energy prices resulted in an external debt default and a severe shortage of foreign exchange. This shortage left the government unable to pay for even the most basic imports like food, medicine, and fuel, leading to widespread suffering and political unrest.
The crisis was so profound that it prompted mass protests, which culminated in the resignation of then-President Gotabaya Rajapaksa. In the aftermath, Wickremesinghe assumed leadership, taking over a deeply fragmented and financially crippled country. He negotiated an IMF bailout worth US$2.9 billion, a lifeline for the country but one that came with stringent conditions, including severe austerity measures.
As part of the IMF agreement, Sri Lanka needed to demonstrate a credible plan for restructuring its foreign debt, which at the time of default in 2022, stood at a staggering US$46 billion. Of this, US$12.5 billion was held in international sovereign bonds, while US$2.2 billion was owed to the China Development Bank.
In one of his final acts as president, Wickremesinghe announced a deal with the sovereign bondholders and the China Development Bank on September 19, just two days before he lost the presidential election. The agreement, which included a 27% haircut on loans and an additional 11% reduction on interest owed, was met with mixed reactions.
Private creditors holding more than half of Sri Lanka’s international sovereign bonds and commercial loans agreed to these reductions, providing some relief to the cash-strapped nation. However, the deal has been described as controversial due to concerns over its long-term sustainability and the potential economic sacrifices it demands from the population.
Upon taking office, President Dissanayake, a left-leaning leader with a strong focus on social equity, initially criticized the terms of the agreement, calling them insufficient. He advocated for a more favorable restructuring that would alleviate the burden on the working class, who have borne the brunt of the crisis through higher taxes, inflation, and cuts to public services.
Nevertheless, after holding two days of talks with the visiting IMF delegation, Dissanayake’s administration confirmed it would endorse the terms agreed upon by Wickremesinghe’s government. “Sri Lankan authorities confirm their endorsement of… the agreement in principle terms as announced on September 19,” the finance ministry stated.
The endorsement of this deal now sets the stage for a showdown in parliament, where the restructuring must be ratified. However, the political landscape is far from stable. Just days after assuming office, Dissanayake dissolved the parliament and called for snap elections, which are scheduled for November 14, a full year ahead of the original timeline.
This move has been widely interpreted as an effort to consolidate power, particularly as Dissanayake seeks a parliamentary majority to push through the government’s economic agenda, which includes further negotiations with international lenders. However, the country remains deeply polarized, and the upcoming elections are expected to be hotly contested.
Public opinion on the restructuring deal is equally divided. Many Sri Lankans, especially those from lower-income groups, are disillusioned by the impact of austerity measures imposed under the IMF bailout. These policies, while necessary to stabilize the economy, have exacerbated economic hardships for millions. Inflation soared to over 50% at its peak, and while it has since moderated, the cost of living remains high. Electricity tariffs, fuel prices, and food costs continue to strain household budgets.
For many, the debt restructuring agreement is viewed with suspicion. Critics argue that the concessions made to international creditors come at the expense of ordinary Sri Lankans, who are already shouldering the burden of economic mismanagement. Leftist and nationalist factions have voiced concerns that the deal represents a loss of sovereignty, as it prioritizes the repayment of foreign creditors over domestic welfare programs.
On the other hand, supporters of the agreement, particularly from the business community and international observers, see it as a necessary evil. Without restructuring the debt, they argue, Sri Lanka’s path to economic recovery would be blocked, jeopardizing any chance of restoring investor confidence or accessing international capital markets.
The IMF has played a pivotal role throughout Sri Lanka’s economic crisis. Its US$2.9 billion bailout package, which was secured last year, helped prevent a complete financial meltdown. The fund has been cautiously optimistic about the country’s prospects, noting that Sri Lanka has returned to growth after the sharp contraction in 2022.
However, the IMF has also warned that Sri Lanka is “not out of the woods” yet. The recovery remains fragile, and significant challenges lie ahead, including high levels of public debt, rising inflation, and weak domestic demand.
A key condition of the IMF package is that Sri Lanka must demonstrate a sustainable debt profile, which is why the restructuring of its foreign debt is so crucial. The September 19 agreement with private creditors was seen as a major milestone in meeting the IMF’s demands, but its implementation will depend on the outcome of the November elections and the ratification of the deal in parliament.
Moreover, the IMF has stressed the need for further structural reforms to address the root causes of Sri Lanka’s economic woes. These include improving governance, tackling corruption, enhancing tax collection, and reducing the country’s reliance on expensive fuel imports. In a country where political patronage has long dictated economic decisions, implementing these reforms will be no easy feat.
As Sri Lanka navigates this complex economic and political landscape, the stakes could not be higher. The November 14 election will not only decide the composition of the next parliament but will also determine the country’s approach to its long-term recovery.
For President Dissanayake, securing a mandate in the upcoming election is crucial. His leftist platform, which emphasizes social justice and economic equity, has resonated with a significant portion of the electorate. However, he faces the difficult task of balancing these ideals with the practicalities of governing an economy that remains deeply in debt and dependent on international assistance.
If Dissanayake’s government fails to secure a parliamentary majority, it could face significant obstacles in pushing through its policy agenda. This would prolong political instability at a time when Sri Lanka desperately needs unity and coherent leadership to navigate the economic crisis.
For now, the approval of the debt restructuring deal is a positive step in Sri Lanka’s recovery process, but it is far from a panacea. The real challenge lies in ensuring that economic stability translates into improved living conditions for the millions of Sri Lankans who have borne the brunt of the crisis.
Sri Lanka’s economic crisis has exposed the vulnerabilities of its political and financial systems, and the country’s path to recovery remains uncertain. While the endorsement of the US$14.7 billion debt restructuring deal marks a significant moment, the road ahead is filled with political risks, economic challenges, and social tensions.
The outcome of the November elections and the subsequent ratification of the restructuring deal will be crucial in determining whether Sri Lanka can emerge from its economic woes or if it will continue to struggle with instability. One thing is clear: Sri Lanka’s crisis is far from over, and its future hangs in the balance.
