Sri Lanka’s debt negotiations stall over GDP growth projections and repayment terms – Nishan de Mel



Dr. de Mel

In a recent televised interview, Nishan de Mel, the Executive Director of Verité Research, stated that holders of Sri Lanka’s International Sovereign Bonds (ISBs) have expressed concerns about specific aspects of the debt sustainability analysis conducted by the country alongside the IMF. This disagreement is one of the key hurdles in reaching an accord with them, he said.

Dr. de Mel said holders of Sri Lanka’s ISBs disagree with the IMF’s and Sri Lanka’s GDP growth projections. They believe that the potential economic growth of the country has been underestimated, he added.

He said that bondholders believed Sri Lanka had underestimated its economic growth potential, and therefore, its capacity to repay debt. “If the GDP growth potential is higher, then we can pay more. The bondholders argue that if Sri Lanka’s economy grows more than the IMF’s projections, then we should agree to pay them more,” he said. He further noted that Sri Lanka has acknowledged this possibility and has provided the bondholders with estimates of higher repayments contingent on achieving greater than projected GDP growth.

According to Dr. de Mel, while Sri Lanka has agreed to higher repayments if GDP exceeds forecasts, it has sought the flexibility to pay less if growth falls short of IMF estimates. There is currently a disagreement regarding the discrepancy between the higher payments Sri Lanka is willing to make and the amount the bondholders expect, centered around this variance in growth projections, Dr. de Mel said..

“This is natural, and we don’t need to panic,” he said.

He also said there are many challenges of forecasting, noting that the results of GDP growth projections rely heavily on the underlying theories and hypotheses used. He mentioned that the IMF had developed its GDP

projections for Sri Lanka by examining other countries that have undergone debt restructuring processes.

“However, neither Sri Lanka nor the IMF has revealed how they came up with these figures. Also, there is no one way of calculating this. If we underestimate the GDP growth, it’s good for Sri Lanka. If GDP growth is overestimated, this benefits the bond holders,” he said.

It was unlikely that IMF would delay the next tranche of the three-billion-dollar financial package due to the delay in coming to an agreement with ISB holders, he said. The main reason why there would be a delay in issuing the third tranche was that Sri Lanka had not kept many promises it has made to the IMF, he said.

The Executive Director of Verité Research said his institution had come up with novel way of debt restructuring, called Governance-Linked Bond. “We will present this to the world during a conference in Paris next month. The basic design of a Governance-Linked Bond is to have a coupon (interest rate) reduction, which is triggered when specific governance actions are achieved by a certain date.

This structure makes the bond “index eligible” (an important feature for bond-holders), as opposed to the Value Recovery Instrument, which has also been mooted in current negotiations. The same structure was recently proposed by bond-holders in a GDP-Linked rather than a Governance-Linked Bond. A good set of criteria for the Governance-Linked Bond will be that they (a) improve the probability of sustainable recovery, (b) are easily observable and verifiable, (c) have a high level of public support.”