Sri Lanka has officially concluded its debt restructuring agreements with several key bilateral creditors following the completion of the first debt restructuring agreement with China.
In March, Sri Lanka signed a deal with Japan to restructure $ 2.5 billion in loans. This was followed by the conclusion of bilateral debt restructuring of approximately $ 1.4 billion with India in April. More recently, Sri Lanka officially concluded its bilateral debt restructuring process with France. These three countries are the co-chairs of the Official Creditor Committee (OCC) of official bilateral lenders.
In addition, Sri Lanka also recently signed Bilateral Amendatory Loan Agreements totalling SAR 517 million with the Saudi Fund for Development (SFD).
Addressing the recent developments in the process, economists note that while progress has been made, expediting the process is essential for widespread growth.
Sri Lanka successfully completed its International Sovereign Bond (ISB) restructuring in December 2024. However, according to Verité Research, the country took 983 days to complete its ISB debt restructuring process, making it the third longest duration among 17 restructuring episodes in the past decade.
Commenting on the conclusion of the process with France, the Ministry of Finance announced that the Government of Sri Lanka would now be able to resume temporarily suspended loan financing and secure financing for new projects from all lender agencies of the Government of France, leading to the successful completion of development projects.
Debt restructuring negotiations and transparency concerns
Verité Research Lead Economist Raj Prabu Rajakulendran noted a stark difference in the degree of transparency when comparing the two debt restructuring processes related to financial market (ISBs) and bilateral debt restructuring negotiations.
He stated that whenever a meeting concluded or an agreement was reached with the financial market, multiple versions of the agreement were published, clarifying the terms of agreement, including details regarding debt relief and the repayment schedule.
However, he pointed out that regarding bilateral agreements, none of the agreements had been published, even after signatures. Therefore, he stated that assessing the extent of progress or debt relief obtained so far was difficult.
“Sri Lanka’s current credit rating is no longer sufficient to be sustainable; we need to target at least a ‘B’ rating or above, and start building up the country’s reserves while taking debt sustainability seriously,” he said.
Rajakulendran further explained that, even after restructuring, one of the main concerning indicators was the interest-to-revenue ratio, which indicated the proportion of revenue allocated to interest payments. He stressed that Sri Lanka’s interest-to-revenue ratio was currently the highest in the world.
This ratio was around 80% in the worst-case scenario, and the best-case scenario expected by the International Monetary Fund (IMF) is to reach around 40% by 2030. However, he highlighted that 40% would still be the highest globally. While stating that a decline from 80% to 40% was claimed to be ambitious, he added that 40% was still not an ideal position.
“Therefore, it is not that we have recovered greatly, and the risks still persist. These concerns should be the next steps that Sri Lanka focuses on,” he asserted.
ISB debt restructuring
According to the most recently published Verité Research debt update on ISB debt restructuring, there was an overall 33% reduction in Net Present Value (NPV) (dated 31 March 2024) in Sri Lanka’s debt restructuring when calculated based on the actual post-restructure market discount rates (yields) as stabilised in June 2025.
Moreover, 35% of the debt service can has been ‘kicked down the road,’ pushed out to be paid beyond 2030, which is past the point where the pre-restructure debt was due to be fully repaid. This was in NPV terms. If assessed in nominal value terms, 72% of the payments were pushed out beyond 2030.
Rajakulendran explained that with 35% of the repayments (in NPV terms) due until 2030 being pushed to after 2030, it essentially granted Sri Lanka some breathing space until 2030 despite also being a form of “kicking the can down the road”.
“On the interest to revenue, it still remains a concern as the expectation is to bring it from 80% (2023) to 40% (2030), but 40% is still the highest in the world based on IMF forecasts for 2030 for other countries,” he said.
Progress and the need for expediting
Sri Lanka’s external debt restructuring process involves several creditor groups, including the OCC (co-chaired by France, India, and Japan): $ 5.8 billion, Export-Import (Exim) Bank of China: $ 4.2 billion, other official creditors (Kuwait, Saudi Arabia, Iran, and Pakistan): $ 0.3 billion, sovereign bonds: $ 14.2 billion (including past due interest), which includes ISBs (Ad Hoc Group) and domestic sovereign bondholders (Local Consortium of Sri Lanka), China Development Bank: $ 3.3 billion, and other commercial creditors: under $ 0.2 billion, as of the start of 2025.
Speaking to The Sunday Morning, University of Peradeniya (UOP) Department of Economics and Statistics Professor Wasantha Athukorala highlighted the need for prompt finalisation, as this would drive the improvement of overall economic indicators.
He noted that Sri Lanka had completed commercial debt restructuring and was at present in the process of restructuring bilateral debt. Regarding this, he stated that the key countries in the Paris Club in terms of the country’s debt were Japan, France, Korea, and the Netherlands, with unpaid principles for many of these countries.
Non-members of the Paris Club include China, India, Kuwait, Iran, and Pakistan. Prof. Athukorala noted that out of these countries, China and India were key. He explained that as Sri Lanka had already negotiated with many of these countries, the Government was now attending to the Paris Club members.
“The IMF has informed Sri Lanka to expedite the process and complete the debt restructuring process. Hence, the Government must finalise the process promptly. While the country has finalised most of the process, prompt finalisation of the rest of the foreign process is extremely important. Once the Government finishes, there will be economic stability, in addition to the economic outlook by other countries turning positive,” he noted.
According to Prof. Athukorala, credit rating agencies such as Moody’s or Fitch Ratings would likely upgrade the country once the entire process was complete. He also explained that this would improve the country’s overall economic stability, especially in areas such as investments, particularly Foreign Direct Investments (FDIs), tourism, banking sector stability, and imports and exports. For instance, a strong and stable banking sector means that local banks can easily deal with foreign banks. Hence, he emphasised the need to complete this as soon as possible.
As per the IMF, Sri Lanka is expected to increase its Gross Domestic Product (GDP) by more than 7% and reduce the debt-to-GDP ratio by more than six percentage points over 10 years. In light of these targets, achieving debt sustainability is key for Sri Lanka.
Prof. Athukorala also noted that the Government had taken the necessary steps to complete the process.
“The current Government is attempting to maintain economic stability while simultaneously attempting to achieve higher economic growth. Sri Lanka must initiate the repayment of debt at least to a certain extent, which would require at least $ 4-5 billion by the time we start repayment. It seems that the Government will be able to complete the process without issues with the current pace of progress,” he said.
He also added that the challenging part of the process – ISB debt restructuring – was complete. Sri Lanka mainly has only bilateral debt with other countries to settle at this point. Hence, according to him, there will be no issues with achieving the targets set out to complete the processes and start repayment.
Debt restructuring overview
Sri Lanka’s external creditors have forgiven $ 3 billion in debt and restructured another $ 25 billion, extending repayment over two decades at lower interest rates.
As of now, the overview of Sri Lanka’s ISB debt exchange stands as follows: outstanding face value of debt renegotiated is $ 12.5 billion, interest accrued during the negotiation period is $ 1.9 billion, amount of outstanding debt not restructured is $ 273 million (2.1% of outstanding), and the amount of outstanding debt restructured is $ 14.1 billion. The face value of Sri Lanka’s ISBs was reduced by 12.3%, from $ 14,128 million to $ 12,390 million.
Speaking to The Sunday Morning, Frontier Research Senior Research Analyst Navinda Meepe noted that, broadly, Sri Lanka was nearing completion of its debt restructuring, with only about $ 1 billion left to finalise based on IMF numbers. According to the IMF’s Fourth Review, these negotiations could conclude by the end of 2025.
Moreover, Meepe explained that agreements or agreements in principle had been reached with most OCC members, but discussions continued with other creditors, such as Iran and Pakistan.
“What is outside this is a Government-guaranteed SriLankan Airlines bond which is worth about $ 175 million that is yet to be restructured. The Government has announced that it has appointed financial and legal advisers to handle its restructuring. Additionally, a legal issue involving $ 250 million in bonds with Hamilton Reserve Bank (HRB) is ongoing,” he said.
According to Meepe, the risk of this for the restructuring process is the bond since it is a small amount compared to the outstanding debt stocks and the clauses attached to the bonds that exclude payments for final, non-appealable judgments. Moreover, the court recently granted Sri Lanka’s motion for additional discovery in the HRB case.
According to the Debt Sustainability Analysis (DSA), in order to restore debt sustainability, Sri Lanka’s public debt to GDP should decrease from 128% of GDP in 2022 to less than 95% of GDP by 2032 and the Gross Financing Needs (GFN) as a percentage of GDP should decrease from 34.6% in 2022 to less than 13% on average during the 2027-2032 period. Additionally, foreign currency debt service as a percentage of GDP should decrease from 9.4% of GDP in 2022 to no higher than 4.5% of GDP per annum during the same period.
Addressing debt sustainability, Meepe highlighted the credit rating upgrades. He explained that since Fitch and Moody’s had upgraded Sri Lanka from default after the ISB restructuring was finalised last year, any finalisation of what remained could provide space for S&P to upgrade its rating as well.
“While the timing of this remains uncertain, in an environment like this with strong fiscal and external performance, a rating upgrade could attract at least some level of foreign capital in the medium term,” he noted.
Commenting on broader economic recovery, Meepe noted that the progress so far pointed to a certain level of optimism for Sri Lanka’s broad recovery.
“Given the global uncertainties, I think sectors that are more geared towards local customers, with supply chains largely based domestically, could benefit from this broader recovery. That said, global risks still remain and could limit the extent of these gains.”
The Sunday Morning’s attempts to contact the Ministry of Finance and Cabinet Spokesperson Minister Dr. Nalinda Jayatissa regarding the progress were unsuccessful.