• The key point is that Sri Lanka's long-term debt sustainability will not be compromised by any upside payouts triggered by economic over-performance under the economic growth and governance-linked bond deal with bondholders. The negotiated framework ensures a balanced sharing of upside and downside between creditors and Sri Lanka, with mechanisms in place to mitigate risks and ensure payments align with the country's capacity to pay.

Sri Lanka’s long-term debt sustainability would not be impacted if any upside payout is triggered in the case of economic over-performance through the economic growth and governance-linked bond deal with the bondholders, according to the Finance Ministry. The Ministry stated that the negotiated Joint Working Framework with the Ad Hoc Bondholder group enables a fair sharing of upside or downside between creditors and Sri Lanka in case of an economic over-performance or under-performance by Sri Lanka. “Any upside payouts would only occur in a manner that does not compromise Sri Lanka’s longer-term debt sustainability,” it said. The Ministry also noted that the risk of higher payouts being triggered while capacity to pay is weak is mitigated by the inclusion of a control variable. “Therefore, any increased payments would to a great extent be balanced by enhanced capacity to pay,” it added.

The Finance Ministry further explained that the upside thresholds and payouts were adjusted to ensure a more balanced share of upside between creditor and debtor, while the upside/downside trigger is calculated based on average US dollar GDP during the years 2025-2027. In 2023, US dollar nominal GDP was $84.4 billion. Taking Sri Lanka’s nominal US dollar GDP average annual growth in the last 10 years, it was 1.5% per year. Taking the last 5 years pre-pandemic (i.e., 2015-2019), it was 2.4% per year (in 2015 GDP was $79.4 billion and in 2019 it was $89 billion). “Hypothetically, if US dollar GDP were to grow by 4% each year during the period 2024-2027, the resulting upside trigger, average USD GDP during 2025-2027, would be $95 billion,” authorities said. The baseline scenario results in a Net Present Value (NPV) effort of 40% at a discount rate of 11%, while the scenario with the highest payments by Sri Lanka (resulting from the most significant economic over-performance) would result in an NPV effort of 27% at a discount rate of 11%. The Finance Ministry concluded by stating that the position of the bondholders remains that Sri Lanka will outperform the IMF framework, primarily through a less depreciated foreign exchange rate trajectory, and such outperformance will create additional debt service payment capacity, which should be shared between the creditor(s) and debtor.

Debt sustainability unaffected by potential high payouts | The Morning