Alternative External Debt Restructuring Strategy Framework:
Aligning with Sri Lanka’s Foreign Currency Earnings and Capacity to Pay
Sri Lanka’s current debt restructuring framework falls short of delivering a meaningful reduction in the country’s debt burden, heightening the risk of a second default. The current bi-lateral and private bondholder debt restructuring agreements do not provide a viable, long-term solution aligned with Sri Lanka’s development goals or the 2030 United Nations Sustainable Development Goals (SDGs).
There is an urgent need to reframe the country’s debt strategy around transparency, equity, and sustainability, grounded in Sri Lanka’s actual capacity to repay.
Key Points:
- Risk of New Default: The current restructuring deal offers limited relief, threatening long-term solvency and risking another default by 2028.
- Unsustainable Framework: The IMF-backed programme lacks alignment with SDGs and fails to address core structural issues.
- Renegotiation Required: A revised deal is essential to avoid an economic slump and the prevent reduction of social wellbeing.
- Independent Debt Assessment: An external debt sustainability analysis must be commissioned to underpin a credible and just renegotiation.
- Transparency and Accountability: A full audit of external borrowings is necessary to expose illegitimate or unproductive loans and improve Sri Lanka’s negotiating position.
- People-Centred Approach: Citizens’ wellbeing must guide all restructuring decisions, not creditor demands.
Strategic Recommendations:
- Foreign Exchange-Based Targeting: Link debt repayments to a fixed share of current foreign exchange earnings, rather than GDP, to reflect real capacity to pay.
- Set Realistic Repayment Benchmarks: Cap total debt servicing (interest + principal) at a sustainable level—e.g., no more than 5% of current foreign exchange earnings.
- Avoid Costly Global Borrowing: Reduce and eventually eliminate reliance on volatile and high-interest global financial markets from 2028.
- Protect Economic Sovereignty: Resist IMF performance monitoring of domestic fiscal and monetary policy.
- Join the Global South Debtors’ Coalition: Collaborate with like-minded nations to pursue collective negotiation strategies and advocate for structural reform of the global financial system.
Charith Gunawardena
Co-founder, Institute of Political Economy
With kind assistance from
Jayati Ghosh
Professor of Economics, University of Massachusetts-Amherst, USA
