Sri Lanka’s Sovereign Debt Restructuring: Lessons from Complex Processes

Sri Lanka’s debt restructuring distinguishes itself from others by its complexity due to a particularly diverse creditor landscape and novel instruments issued in the restructuring. Not eligible for the G20 Common Framework for Debt Treatments, Sri Lanka had to navigate the challenges of a diverse creditor landscape, requiring complex coordination across many stakeholders. The majority of official debt was held by non-traditional creditors outside of the Paris Club and domestic borrowing played an important role in Sri Lanka’s overall debt. Commercial creditors were particularly interested in new and complex instruments that would share up- and downsides to the macroeconomic framework and would offer additional debt relief for implementing governance reforms. For the first time, the IMF applied fully the newly developed Sovereign Risk and Debt Sustainability Framework to assess debt sustainability. The restructuring took place against the background of a very deep fiscal and balance of payments crisis that required sweeping policy solutions in the context of a complex IMF-supported reform program. This paper reviews the root causes of Sri Lanka’s debt problem, the deliberation of its solution, and the designs, negotiations, and outcomes of the restructuring processes. Important lessons from Sri Lanka’s experience regarding restructuring strategies and design, as well as the IMF’s role in facilitating debt-creditor engagement, can inform future restructurings.