Dhanusha Gihan Pathirana
Economist
Institute of Political Economy
Key Takeaways
- The revised bondholder agreement may cause balance of payments instability even in the short term. The ISB repayments will reach approximately US$ 1.85 billion in 2025 including interest on bilateral debt of US$ 420 million. Coupled with outflows of circa US$ 1.5 billion due to lifting the import ban on personal vehicles, an additional US$ 3.4 billion is required in 2025. Given the country’s current usable foreign reserves of US$ 5 billion, this excessively increases vulnerability to external shocks.
- The extended maturity period masks significant increases in total interest payments. From 2028,, the weighted coupon rate of interest can climb to 6.8% and following 2032, the rates surge up to 9.75% for the next six years.
- By relying on the Net Present Value analysis method, analysts and policymakers risk underestimating the true cost of debt restructuring.
- The IMF DSA target of 95% debt-to-GDP ratio assigned for Sri Lanka excludes the present value of interest payments, erroneously indicating that Sri Lanka’s capacity to repay is greater than the strongest economies as per IMF standards. Unbearable debt repayments will weaken the currency in the long run.
- Under the bondholder agreement-in-principle, Sri Lanka has effectively waived the legal right to secure a higher debt cancellation, creditors hold the right to alter the current governing law of Sri Lanka’s outstanding ISBs. There is no evidence that the external financial advisors of the government, who have a close commercial relationship with creditors, are working in the best interests of the people of Sri Lanka.
- Lender awareness that Sri Lanka debt exceeded government revenue by a factor of ten, is a clear indication of predatory lending practices. Established norms in lending were blatantly violated by creditors.