Sri Lanka suspends normal debt servicing; announces interim policy on servicing external debt

Sri Lanka's government has suspended the normal debt servicing of all affected debts, for an interim period pending an orderly and consensual restructuring of those obligations in a manner consistent with an economic adjustment program supported by the IMF.

Announcing an interim policy regarding the servicing of Sri Lanka's external public debt, the Ministry of Finance said the policy of the government shall apply to amounts of affected debts outstanding on April 12, 2022.

However, new credit facilities and any amounts disbursed under existing credit facilities, after that date are not subject to this policy and shall be serviced normally.
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This policy shall apply to the following categories of external public debts of Sri Lanka (Republic) and its public sector borrowers:

(i) All outstanding series of bonds issued in the international capital markets;

(ii) All bilateral (government-to-government) credits, excluding swap lines between the Central Bank of Sri Lanka and a foreign central bank;

(iii) All foreign currency-denominated loan agreements or credit facilities with commercial banks or institutional lenders (including such institutions owned/controlled by foreign governments) for which the Republic or a public sector entity is the obligor or guarantor; and

(iv) All amounts payable by the Republic or a public sector entity following a call during the interim period upon a guarantee (or equivalent financial undertaking) issued in respect of the debt of a third party.

The holders of all affected debts are being requested to capitalize any amounts of principal or interest falling due during this interim period, at an interest rate not higher than the normal contractual rate applicable to that credit, until a restructuring proposal can be presented to the creditors for their consideration.

The holder of an affected debt that wishes to receive the Sri Lankan Rupee equivalent of an amount falling due during the interim period in lieu of the capitalization of that amount as described above should contact the Ministry as soon as practicable, but no later than one month from the day on which such amount fell due.

The government intends these emergency measures as temporary expedients designed to preserve the financial status quo until, with the assistance of the IMF and Sri Lanka's other official sector partners, a full economic recovery program can be prepared. To this end, the government expects and intends:

(i) to advance its discussions with the IMF on an economic adjustment program as expeditiously as possible,

(ii) to post on the Ministry's website all Debt Sustainability Analyses and similar assessments prepared by the staff of the IMF or by Sri Lanka's own financial advisors in connection with the economic adjustment program,

(iii) to engage in good faith discussions with representatives of both bilateral and commercial creditors regarding the features of a comprehensive external debt restructuring program consistent with the parameters of the IMF-endorsed economic adjustment program and to invite the views of those parties on the elements of such an external debt restructuring program, and

(iv) to be guided in the design and implementation of that external debt restructuring program by the principles of inter-creditor equity (both as between different creditor groups and among individual members of each creditor group) and full transparency.

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