Sri Lanka aims to halve debt servicing costs, central bank chief says

COLOMBO: Sri Lanka is committed to achieving debt sustainability at the earliest and aims to halve the servicing costs once it completes the debt restructuring process, its central bank chief said on Tuesday.

Cash-strapped Sri Lanka rejected international bondholders’ proposal in April to restructure more than $12 billion in debt, putting at risk critical International Monetary Fund support and delaying its efforts to resolve a two-year-long debt crisis.

Sri Lanka has already struck a deal with its main government creditors, but an “agreement in principle” with bondholders is also needed to secure IMF Board approval for the next $337 million instalment of its $2.9 billion programme.

“The next round of negotiations with bondholders will happen soon,” Central Bank of Sri Lanka Governor P. Nandalal Weerasinghe told reporters.

“Talks with all creditors are progressing well and Sri Lanka is committed to reaching debt sustainability as soon as possible.”

Sri Lanka is expected to grow by 3% in 2024 after its economy went into free-fall in 2022 due to record low foreign exchange reserves, pushing it into its worst financial crisis since independence from Britain in 1948.

The South Asian island nation defaulted on its foreign debt in May, 2022.

The economy has gradually stabilised after a $2.9 billion bailout from the IMF but still shrank by 2.3% last year.

The central bank has lowered interest rates by 700 basis points since last year to support its recovery after keeping a tight hold on policy rates amid the crisis to calm markets.

It expects to keep inflation around its target of 5% in 2024.

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But the economy’s positive growth trajectory in the near to medium term hinges on Sri Lanka’s continuation of the IMF programme, timely completion of debt restructuring, and structural reforms, including higher taxes and lower budget deficits.

“After the debt restructuring is completed Sri Lanka is hoping to halve its debt to GDP ratio to 4.5% from the current 9%. This is the crucial target for us,” Weerasinghe said.

“Once this is achieved it will be verified by the IMF and critical for Sri Lanka to regain a credit rating.”