Colombo – Sri Lanka has formalized a $2.5 billion debt restructuring agreement with Japan, marking its first deal with official creditors who pledged relief last year to support the nation’s economic recovery.
Under the agreement, Japan has granted concessions on a ¥369.45 billion ($2.5 billion) loan as part of a broader debt treatment plan, which the International Monetary Fund (IMF) deems crucial for stabilizing Sri Lanka’s economy.
“The development of Sri Lanka, strategically located in the Indian Ocean, is vital for the stability and prosperity of the Indo-Pacific region,” the Japanese Foreign Ministry stated, reaffirming Tokyo’s commitment to the island nation’s sustainable development.
Sri Lanka’s Finance Ministry acknowledged Japan’s “pivotal role” in facilitating the debt restructuring process, highlighting Tokyo’s leadership and constructive engagement in helping the country navigate its financial crisis.
In June 2023, Sri Lanka reached an understanding with bilateral creditors to defer repayments until 2028. However, formal agreements faced delays due to prolonged negotiations, making Friday’s deal with Japan the first official restructuring agreement.
China remains Sri Lanka’s largest bilateral creditor, holding $4.66 billion of the $10.58 billion borrowed from foreign nations. Japan follows as the second-largest lender, with loans exceeding $2.5 billion. Last year, Sri Lanka secured debt agreements with the Export-Import Bank of China and the China Development Bank.
Japan is the first nation in Sri Lanka’s 17-member Official Creditor Committee (OCC) to finalize a restructuring deal, while China, a key lender, is not part of the OCC.
The government, led by leftist President Anura Kumara Dissanayake, had aimed to finalize debt restructuring agreements by the end of last year.
Sri Lanka defaulted on its $46 billion external debt in April 2022 after exhausting its foreign reserves, leaving the country unable to finance critical imports such as food and fuel. However, the economy has since shown signs of recovery following an IMF bailout package and stringent austerity measures designed to repair the country’s finances.
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In November, President Dissanayake announced that Sri Lanka would uphold an agreement reached by his predecessor to restructure $12.55 billion in international sovereign bonds- an essential step to secure the $2.9 billion, four-year IMF bailout.
Additionally, a majority of Sri Lanka’s private creditors agreed in September to a 27% reduction in their loans, further easing the country’s financial burden.
The IMF bailout, secured in 2023, came after Sri Lanka implemented drastic fiscal reforms, including tax hikes, the removal of energy subsidies, and increased prices on essential goods to boost government revenue.