Sri Lanka’s ongoing debt restructuring talks with sovereign bond holders are currently stalled, awaiting clarity from the International Monetary Fund (IMF) regarding the assessment of securities linked to economic performance under its debt sustainability analysis (DSA). Sources familiar with the discussions revealed that the IMF found a March proposal by private investors, involving macro-linked bonds, to be inconsistent with its debt sustainable framework. Consequently, a new proposal submitted in April is pending IMF evaluation to determine its compliance with the DSA framework.
The proposed macro-linked bond entails a variable haircut, initially higher and subject to reduction if the economy outperforms IMF expectations. However, there is limited precedent for applying a revised DSA methodology to such bonds, particularly those of Middle Income Countries like Sri Lanka. Efforts are underway to gain a clearer understanding of how the framework applies to these unique proposals. Despite these challenges, representatives from both parties engaged in encouraging discussions later in April following the initial round of talks.
Typically, the IMF does not directly participate in formal negotiations with bondholders, interacting primarily with the government, which can disadvantage bondholders. Clearer guidelines from the IMF on applying the DSA framework to macro-linked bonds could facilitate swifter negotiations, potentially leading to revised proposals and a faster resolution. Additionally, bondholders have proposed governance-linked bonds, a concept endorsed by Sri Lanka’s opposition, suggesting potential avenues for progress in the debt restructuring talks.