COLOMBO, Sri Lanka (AP) — Sri Lankan President Ranil Wickremesinghe announced a debt restructuring deal with countries including India, France, Japan and China in a televised address Wednesday. The agreement marks an important step in the country’s economic recovery after the country defaulted on its debt repayments in 2022.
Sri Lanka is under an International Monetary Fund bailout program and the debt settlement deal is expected to reopen the doors to bilateral transactions and stall the resumption of foreign projects as the island defaulted.
“This morning in Paris, Sri Lanka reached a final agreement with our official bilateral creditors. Similarly, today in Beijing we signed another agreement with China’s Exim Bank. … Sri Lanka won,” Wickremesinghe said.
Sri Lanka declared bankruptcy in April 2022 and suspended repayments of some $83 billion in domestic and foreign loans amid a severe currency crisis that led to severe shortages of essentials such as food, medicine, fuel and cooking gas, and hours-long power outages.
Sri Lanka’s crisis was largely the result of staggering economic mismanagement combined with the fallout from the COVID-19 pandemic, which along with the 2019 terrorist attacks devastated its important tourism industry. The coronavirus crisis also disrupted the flow of remittances from Sri Lankans working abroad.
Moreover, the then government cut taxes in 2019, emptying the coffers, just as the virus hit. Foreign exchange reserves fell, leaving Sri Lanka unable to pay for imports or defend its beleaguered currency, the rupee.
Wickremesinghe said these agreements will allow Sri Lanka to defer all bilateral loan repayments until 2028. In addition, Sri Lanka will be able to repay all loans on concessional terms, with an extended period until 2043.
According to an earlier statement from the President’s Office, the agreements would cover $10 billion, but further details on the method of restructuring were not immediately disclosed.
By 2022, Sri Lanka had to repay about US$6 billion in foreign debt every year, equivalent to about 9.2% of gross domestic product. The deal would allow Sri Lanka to keep debt payments below 4.5% of GDP between 2027 and 2032.
As Wickremesinghe addressed the nation, his supporters watched the speech on a giant screen in the capital Colombo and celebrated the announcement by setting off fireworks and consuming traditional milk rice.
The economic turmoil led to a political crisis that forced then-President Gotabaya Rajapaksa to resign in 2022. Parliament then elected Wickremesinghe as president.
Sri Lanka has suspended debt repayments due to the country’s shortage of foreign currency needed to pay for imports of fuel and other essentials. Shortages led to street protests that changed the country’s leadership. The IMF approved a four-year bailout program last March.
The economic situation has improved under Wickremesinghe and severe shortages of food, fuel and medicine have largely abated. But public dissatisfaction has grown over the government’s efforts to boost revenues by raising electricity bills and imposing heavy new income taxes on professionals and businesses, as part of the government’s efforts to meet IMF conditionality .
After Sri Lanka declared bankruptcy, all projects financed with foreign loans were also halted.
On Wednesday, Wickremesinghe said the new agreements would pave the way for the resumption of foreign-funded projects such as highway, light rail and airport development, as well as the initiation of new projects.
