Experts advise Sri Lanka to avoid a prolonged debt restructuring process

• Say SL should fully commit to transparency and equal treatment of creditors

By Nishel Fernando
Sri Lanka needs to fully commit to transparency and equal treatment of its creditors, in order to avert an unnecessarily prolonged debt restructuring process with its external creditors, experts advised.

Participation at a recent webinar on ‘Options for debt restructuring in Sri Lanka’, jointly organised by the Daily FT and ICC Sri Lanka, last Saturday, sovereign debt restructuring experts, Prof. Lee Buchheit and University of London Prof. Ulrich Volz, highlighted that China’s reluctance to engage in the debt restructuring process in a transparent manner could create suspicion among other creditors, which could potentially lead to a long-drawn negotiation process.

According to Prof. Buchheit, there are four major creditor groups that are going to be involved in Sri Lanka’s debt restructuring process. They are the private creditors, led by bondholders, traditional government creditors, so-called bilateral creditors, who are divided into Paris Club creditor and non-Paris Club creditor groups and multilateral agencies.

Japan remains Sri Lanka’s largest Paris Club creditor while China has emerged as Sri Lanka’s largest bilateral creditor outside of Paris Club, followed by India.

Further, a portion of China’s credit also comes under private credit, as those were extended by China’s state-owned enterprises. Prof. Volz stressed that Sri Lanka would be required to be transparent in terms of revealing its debt owed to everyone with no exceptions, with terms and conditions.  

Prof. Buchheit noted that the country should share details of all debt restructuring agreements reached with the creditors in the process.

The debt restructuring negotiation process is set to commence once the IMF completes its debt sustainability analysis on the country, which would act as a baseline to determine how much of Sri Lanka’s sovereign debt would come under restructuring and the extent of debt relief.   “Everyone will be looking to the IMF for that basic assessment. Once they give it, then the debt restructurers can begin their work to implement a programme that will achieve those objectives on the debt relief side,” Prof. Buchheit added.

Prof. Volz urged that the IMF should also take into account the country’s climate finance requirements and the required expenditures in education and health in its assessment. As many other countries are expected to follow Sri Lanka’s path in restructuring their external debt, he opined that it’s critical to get Sri Lanka’s debt restructuring process on the correct path.

“It’s more important to get it right, not only for Sri Lanka but also for other countries. This will be in the playbook,” he said.

Further, he suggested that Sri Lanka could also negotiate a Brady-bond-style debt restructuring programme that links debt relief to economic policy reforms, with its creditors to achieve a win-win situation for the citizens of the country and its creditors.

With the country fast moving towards a humanitarian crisis, he emphasised the urgency of concluding the debt restructuring process for the country to return to some level of normalcy.  “Every month that we are not moving forward will be a lost month for Sri Lanka. A long-drawn process is costly for both the country and investors,” he said.