Sri Lankan President Ranil Wickremesinghe announced a debt restructuring deal with countries including India, France, Japan and China in a televised address to the country on Wednesday. The agreement is an important step in the country’s economic recovery after defaulting on its debt by 2022.
Sri Lanka President Media Division / Handout | Anadolu Agency Getty Images
Sri Lankan President Ranil Wickremesinghe announced a debt restructuring deal with countries including India, France, Japan and China in a televised address to the country on Wednesday. The agreement is an important step in the country’s economic recovery after defaulting on its debt by 2022.
Sri Lanka is under an International Monetary Fund bailout program and the debt treatment deal will reopen the door to bilateral transactions and resume foreign projects that were halted when the island nation defaulted.
“This morning in Paris, Sri Lanka reached a final agreement with our official bilateral creditors. In addition, we signed another agreement with the Exim Bank of China today in Beijing. … Sri Lanka won,” said Wickremesinghe.
Sri Lanka declared bankruptcy in April 2022 and suspended repayment of $83 billion in domestic and foreign loans amid a foreign exchange crisis that has led to shortages of essential goods such as food, medicine, fuel and cooking gas, and power outages for several -how many hours .
Sri Lanka’s crisis is largely the result of terrible economic mismanagement combined with the Covid-19 pandemic, which along with the 2019 terrorist attacks has devastated its vital tourism industry. The coronavirus crisis has also disrupted the flow of remittances from Sri Lankans working abroad.
In addition, the government then cut taxes in 2019, reducing the treasury during the virus. Foreign exchange reserves collapsed, leaving Sri Lanka unable to pay for imports or defend its beleaguered currency, the rupee.
Wickremesinghe said with the agreement, Sri Lanka will be able to defer all bilateral loan installment payments until 2028. Furthermore, Sri Lanka will be able to repay all loans on concessional terms, with a longer period until 2043.
According to the previous statement of the president’s office, the agreement will cover $10 billion, but other details of the restructuring mode were not immediately announced.
By 2022, Sri Lanka will have to pay off about $6 billion in foreign debt annually, about 9.2% of gross domestic product. The agreement will allow Sri Lanka to keep debt payments below 4.5% of GDP between 2027 and 2032.
As Wickremesinghe addressed the nation, supporters watched the speech on giant screens in the capital Colombo and celebrated the announcement by lighting firecrackers and eating traditional milk rice.
The economic upheaval led to a political crisis that forced the then President Gotabaya Rajapaksa to resign in 2022. Parliament then elected Wickremesinghe as president.
Sri Lanka is delaying debt repayment due to lack of foreign currency needed to pay for imports of fuel and other essential goods. Shortages led to street protests that replaced the country’s leadership. The IMF approved a four-year bailout program last March.
Economic conditions have improved in Wickremesinghe and shortages of food, fuel and medicine have generally eased. But public discontent is rising as the government tries to boost revenue by raising electricity bills and imposing heavy new income taxes on professionals and businesses, part of the government’s efforts to meet the IMF’s condition.
After Sri Lanka declared bankruptcy, all projects financed by foreign debt also stopped.
On Wednesday, Wickremesinghe said the new agreement would pave the way for the continuation of foreign-funded projects such as highways, light rail and airport development as well as the start of new projects.