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Sri Lanka asks foreign lenders for 30% debt 'haircut'

June 29, 2023

The government of Sri Lanka has mandated a five-day bank holiday to prevent people rushing to banks to withdraw money as officials implement a debt restructuring plan.

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A vendor holds Sri Lankan bank notes while working at a market in Colombo
The country is facing an inflation as it seeks to rein in its debt crisisImage: Ishara S. Kodikara/AFP

The Central Bank of Sri Lanka announced a far-reaching debt restructuring plan on Thursday, as the country is struggling to come out of the worst economic crisis in its history. 

Sri Lanka has a total debt of more than $83 billion (€76 billion), of which $41.5 billion is foreign and $42.1 billion is domestic. The island nation is now seeking to reduce half of its local debt through a restructuring program.

Addressing a press conference on Thursday, Central Bank Governor Nandalal Weerasinghe said the government will exchange short-term treasury bills into longer-term bonds. 

He also said that the government will spare banks from being part of its local debt restructuring plan as it might impact deposits.

Sri Lanka's five-day bank holiday to restructure debt

Following the cabinet approval for the plan, the county began a five-day bank holiday from Thursday to restructure its domestic debt. 

This is to ensure that financial markets remain closed and also to prevent any bank runs that could be triggered by the changes. 

A man walks inside Colombo Stock Exchange
Sri Lanka has a total debt of more than $83 billionImage: Ishara S. Kodikara/AFP

While details remain scarce, the country's pitch to foreign lenders will include a plea for a sizable debt reduction.

"We are asking foreign debt holders for a 30% haircut but that is still under discussion," Weerasinghe said.

The government's plan comes as Colombo tries to meet International Monetary Fund (IMF) conditions, which are crucial for the country's recovery. 

Sri Lanka had secured $2.9 billion from the IMF in March, after earning financial assurances from it's biggest lenders, China and India.

IMF and World Bank earmark funds for Sri Lanka

Sri Lanka, the island nation in the Indian Ocean with a population of nearly 22 million, defaulted on its debt with international lenders last year. 

The COVID pandemic, populist tax cuts and inflation led the country to face the worst economic crisis since gaining independence in 1948.

Economic crisis fuels poverty

Shortages of food and fuel paired with a record-high inflation triggered nationwide protests and forced former President Gotabaya Rajapaksa to flee the country.

Finally, a couple of months ago, Sri Lanka managed to secure help from the IMF. 

Meanwhile, the World Bank on Thursday approved $700 million in financing for Sri Lanka's projects on economic stability and support for the poor and vulnerable. 

ara/dj (AFP, Reuters)