Sri Lanka Debt Restructuring Makes Slow Progress Even With 1.6% Growth Rate In Q3 Of 2023

The restructuring of Sri Lanka’s external debt is to take much longer than expected, going by President Ranil Wickremesinghe’s policy speech on Tuesday even though he signalled a positive shift in the cash-strapped economy with a surplus by the end 2023, first since 1977.

Delivering the ‘Statement of Government Policy’ on the first day of the Fifth Session of the Ninth Parliament, Wickremesinghe said the finalisation of debt restructuring could be completed by the first half of the year, which is going beyond the earlier anticipation for it to be completed within the first quarter.

“The domestic debt restructuring plan has been successfully executed as the first step, and a policy agreement for restructuring has been reached with foreign creditors as the second step. Negotiations with private creditors are presently in progress," Wickremesinghe, who is also the finance minister, said.

“By September 2023 our total debt burden was $91 billion. It will take a considerable period of time to settle this debt. In order to meet our debt, we need to source the funds locally. It is imperative that we generate this income; otherwise, we risk falling into the debt trap once again,” he said.

He said even under the current negotiations for restructuring, Sri Lanka still has to pay around $3 billion per year.

Referring to his unpopular economic reforms, Wickremesinghe said he was aiming to lessen the tax burden as the economy stabilises. There is also room for a potential revision of the VAT percentage.

“Indeed, VAT poses a burden for many, and we are not oblivious to this fact. We are systematically addressing this issue. In 2022, there were 4,37,547 registered taxpayers, a number that surged to 10,00,029 by the end of 2023 — an impressive 130% increase. As the tax network expands, the burden on individuals and organisations will diminish.”

He said the projections from the IMF, World Bank, and Asian Development Bank have suggested a potential 2% to 3% economic growth for 2024.

On the domestic front, he said, “Despite a 7.8% GDP contraction and six consecutive quarters of negative growth in 2022, the nation rebounded with a 1.6% growth rate in the Q3 of 2023.”

The island nation has achieved a surplus by the end of 2023, marking the first such occurrence since 1977, the Ada Derana website said, quoting the President as he delivered his speech streamed live.

In April 2022, after Sri Lanka declared its first-ever sovereign default since 1948 with more than $83 billion in debt, the then President Gotabaya Rajapaksa was thrown out through a public agitation and the incumbent President, Wickremesinghe, took over.

He put in place unpopular economic reforms to supplement a bailout from the International Monetary Fund that approved a four-year bailout program last March to help the South Asian country.

The government has defended the measures taken, saying they were necessary to meet the IMF targets, assure the country's debt was sustainable, and win over the trust of the international community again.