• Says through interest rate reductions impact on Sri Lanka’s future budget deficits will be reduced
• Points out maturity extensions provide space for economy to grow and improve debt service capacity

Since official creditors provide debt relief through maturity extensions and interest rate reductions, there is no immediate impact on the nominal debt stock through restructuring, the Ministry of Finance said. 

However, through interest rate reductions, the impact on Sri Lanka’s future budget deficits will be reduced, thereby reducing additions to the debt stock as debt flow is reduced, the Finance Ministry said in a statement that was shared to provide clarity to the general public regarding the agreements inked on 26 June.

Maturity extensions provide space for the economy to grow and improve debt service capacity, enabling debt to GDP to reduce in line with IMF DSA targets. 

“The nominal debt stock is not a useful measure of debt sustainability which is why the IMF’s DSA targets do not consider nominal debt stock but instead the debt to GDP ratio and other measures of debt flow such as Gross Financing Needs and Forex Debt Service as a share of GDP,” the Finance Ministry said.

It added that the nominal debt stock in Rupee or Dollar terms will continue to increase as long as the country has a budget deficit, as in any other country. 

Debt sustainability has to be managed by ensuring the country maintains a primary budget surplus through the recent fiscal reforms, along with debt restructuring to achieve the DSA targets to restore debt sustainability. 

Outlining the next steps that will follow, the Finance Ministry shared that the final restructuring agreement with the OCC reflected in the OCC Memorandum of Understanding will be translated into individual bilateral agreements with each member of the OCC. 

Similarly, domestic regulatory formalities will be concluded by Sri Lanka and Exim Bank of China to give effect to the Amendment Agreements. This will enable the official restructuring to be implemented. 
“The successful implementation of the restructuring agreements with official creditors will provide an impetus to the negotiations with commercial creditors,” the Ministry said.

It went on to state that Sri Lanka continues to engage with its bondholders and their advisers which is expected to yield a restructuring agreement that meets the DSA targets and is comparable to the agreements reached with the OCC and Exim Bank of China. 

“As of now, the domestic debt restructuring has been completed, the official restructuring agreements have been concluded, leaving only the external commercial debt restructuring to be concluded for the overall debt restructuring process to be finalised.