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New analysis released today 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 Institute of Political Economy, 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.
Amali Wedagedara, Senior Researcher, Bandaranaike Centre for International Studies and member of IPE and Yukthi, 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.”
Ahilan Kadirgamar, Senior Lecturer, University of Jaffna and member of Yukthi, 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.”
Jerome Phelps, Head of Advocacy at Debt Justice, 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 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 now, Sri Lanka will still be paying more to bondholders than government creditors.
|
Restructuring agreement |
Original amount lent |
Net present value of new payments (5% discount rate) |
Amount creditors will receive for every $1 lent |
|
Bilateral creditors |
|||
|
Baseline deal |
$11.4 billion |
$7.7 billion |
67 cents |
|
Bondholders |
|||
|
Baseline (2025-2027 GDP $88.6bn) |
$12.55 billion |
$9.996 billion |
80 cents |
|
2025-2027 GDP $92 billion |
$12.55 billion |
$10.836 billion |
86 cents |
|
2025-2027 GDP $96 billion |
$12.55 billion |
$11.822 billion |
94 cents |
|
2025-2027 GDP $100 billion |
$12.55 billion |
$12.303 billion |
98 cents |
|
2025-2027 GDP $86.7 billion |
$12.55 billion |
$9.364 billion |
75 cents |
|
2025-2027 GDP $84.7 billion |
$12.55 billion |
$8.782 billion |
70 cents |
The Net Present Value concept [2], 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.
Notes
Debt Justice (formerly Jubilee Debt Campaign) is a UK charity working to end poverty caused by unjust debt through education, research and campaigning: https://debtjustice.org.uk/
Institute of Political Economy (IPE), Sri Lanka, is a network of progressive global academics, economists and professionals, engaged in research, teaching and dissemination of critical analyses of economic policy and development: https://ipe-sl.org/
Yukthi is a plural research forum supporting working people’s movements and people’s struggles for democracy and justice in Sri Lanka: https://yukthisl.org/
[1] The full analysis is available at: https://debtjustice.org.uk/wp-content/uploads/2024/07/Sri-Lanka-debt-restructurings_07.24.pdf
[2] Net Present Value
Net present value is a way of calculating debt owed including the interest and principal payment schedule. The concept is based on the idea that the same nominal payments in the future are worth less than now. The reason why future payments are worth less is different depending on whose perspective a deal is looked at, but include inflation, economic growth and where else the money could have been invested. The IMF uses a discount rate of 5%, which means a debt payment is worth 5% less each year into the future it is made. We have used the 5% rate in our calculations.