Sri Lanka to restructure domestic debt amid challenges 

Sri Lanka will shut down its banks and financial sector for five days, ahead of an extraordinary weekend debate in Parliament on the government’s plan to restructure its domestic debt.

Sri Lanka will shut down its banks and financial sector for five days beginning Thursday, ahead of an extraordinary weekend debate in Parliament on the government’s plan to restructure its domestic debt.

The move comes a year after Sri Lanka decided to suspend servicing its foreign debt, to combat a devastating economic meltdown — the country’s worst since Independence. The government subsequently entered an agreement with the International Monetary Fund and secured a nearly $3 billion-dollar package from it, while agreeing to restructure both its foreign and domestic debt that the Fund estimated at about $41 billion and $42 billon respectively, as of March 2023.

In May, the IMF pointed to “tentative signs of improvement” in Sri Lanka, while underscoring the need for timely restructuring agreements with the island’s creditors ahead of the Fund’s first review scheduled in September.

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Spelling out the government’s plan to state-owned French media during his recent visit to Paris, President Ranil Wickremesinghe said Sri Lanka’s debt restructuring programme will be presented to the Cabinet on Wednesday. “It will go to Parliament on Friday, before the public finance committee, and Saturday and Sunday it will be debated in Parliament and will be approved by Parliament. Thereafter, we can start the rest of the negotiations with our creditors,” he said in the interview broadcast on Monday.  

Sri Lanka was looking at obtaining a longer timeframe to repay its loans, as well as “some form of reduction”, Mr. Wickremesinghe said, hinting at a haircut.

Sri Lanka’s negotiations with bilateral creditors are ongoing.  On May 9, 2023, a total of 17 countries joined an “official creditor committee”, co-chaired by India, Japan, and France, to discuss Sri Lanka’s request for debt treatment. The committee includes Paris Club creditors as well as other official bilateral creditors. China attended the meeting as an observer and is yet to formally join the committee.