Sri Lanka has decided to turn down a proposal put forth by international bondholders regarding the restructuring of its substantial debt, which amounts to more than $12 billion. The primary reasons cited by the government for rejecting the deal were certain "baseline" evaluations made in the proposal and the absence of a backup plan in case the economy continues to struggle, as stated in an official statement released by Sri Lanka.
The government expressed its intent to engage in further discussions at the earliest opportunity but highlighted the immediate concern that failure to reach a compromise in the upcoming weeks could lead to potential delays in receiving the next installment of crucial IMF support. While Sri Lanka has already reached an agreement with its primary government creditors, aligning with bondholders on an "agreement in principle" is deemed necessary to secure approval from the IMF Board for the disbursement of $337 million, part of a larger $2.9 billion program.
One of the key sticking points in the negotiations was the lack of alignment between the fundamental parameters outlined in the bondholders' plan and those integrated into Sri Lanka's existing IMF program. Additionally, the bondholders' "steering committee," involved in recent negotiation sessions, was reluctant to extend the "restricted discussions," a confidential segment of debt talks. Despite an initial extension granted, prolonging the restricted phase could be atypical for significant fund managers, potentially limiting their market engagement.
It was revealed that talks could resume promptly, with some parties already in Washington for engagements related to the IMF and World Bank meetings. Nevertheless, sources familiar with the process indicated a challenge related to information symmetry between the parties, including an inadequate understanding among bondholders about the terms agreed upon with entities like the Paris Club and China, complicating the negotiation landscape. Furthermore, Sri Lanka opposed a suggestion to tie future repayments to bondholders to the country's macroeconomic growth, proposing additional safeguards in the event of economic underperformance compared to IMF growth projections.