ECONOMYNEXT – Sri Lanka extended sovereign bond maturities through restructure, sharply reducing the near-term roll-over or repayments as part of efforts to emerge from the country’s first external sovereign default triggered by aggressive macro-economic policy.
Sri Lanka has reduced sovereign bond maturities in 2025 from 2,150 million dollars to 330 million dollars according to data released by the Finance Ministry.
In 2026, maturities have been reduced from 1,000 million to 330 million. In 2027, maturities of 1,500 million have been reduced to 330 million dollars.
In 2028 maturities of 1,250 million have been reduced to 544 million, in 2028 1,400 million have been reduced to 634 million and 1,500 million in 2030 have been reduced to 634 million.
In a country that has market access it is not necessary to repay maturing bonds, as they can be rolled over at reasonable rates.
Confidence in rupee, confidence in a nation
But if there is no market access, which is an outcome of a loss of confidence, the bonds have to be repaid on a net basis by squeezing the current account at a required interest rate to reduce domestic credit (and import generating investments) as well as consumption.
When rates are cut with open market operations or other tools under flexible inflation targeting, the resulting currency crises usually triggers a downgrade and loss of confidence.
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“Sri Lanka is a country that had mostly kept monetary stability in the worst years of the war with the help of the ideology then prevailing,” EN’s economic columnist warned in 2019 in column originally published before the presidential elections as signs emerged that aggressive call money rate targeting was resuming.
“But now each new episode of monetary indiscipline is costing the country one notch in the rating scale.
“Sri Lanka will soon run out of rating space to tap capital markets if the flexible exchange rate/call money rate targeting continues in the next recovery space.”
“The central bank and others are talking about the need to get down interest rates. That is not re-asssuring.
“If rates are cut further and money is printed, the recovery in 2020 will be short-lived or not at all, and another currency crisis will be generated and downgrades will follow.”
Repayment Schedule
Though there are claims that ‘Sri Lanka does not have to repay debt till 2028’ the past due interest bonds of 330 million each have to be repaid in 2025 and 2026 and 2027, as well as repayments to multilaterals and coupons to everyone.
Some of the new bonds Sri Lanka has issued are also amortizing, which means they have to be repaid in small installments.
To generate foreign exchange to repay the bonds Sri Lanka has to keep domestic interest rates sufficiently high regardless of what the past 12 months inflation was.
If steep rate cuts are made, based on statistical formulae, rejecting classical economic principles (primarily the price specie mechanism described by David Hume), as in recent years, Sri Lanka may not be able to generate sufficient foreign exchange to settle debt, analysts have warned.
If rate cuts are enforced with open market operations – to maintain a single policy rate for example – actual forex shortages will also emerge, leading to exchange rate pressure and run downs of reserves as in the past and social unrest when the rupee depreciates.
Countries with reserve collecting central banks that default without war, due to deliberate macro-economic policy that violates economics, tend to repeat the policy errors as seen in Latin American nations with non-credible pegs.
In Argentina the failure to roll-over Leliqs (a sterilization security of the BCRA) at a market rate leads to repeated currency crises and defaults regardless of what the fiscal metrics are.
Sri Lanka also has exchange controls, which by definition means the central bank’s operating framework is fundamentally flawed with inherent anchor conflicts, and has been so for many decades.
Though Sri Lanka could not have restructured debt without International Monetary Fund help, the peacetime currency crises also came in the wake of IMF technical support to calculate potential output (printing money to push up growth) and discretionary monetary policy in general (flexible) to generate high levels of inflation incompatible with maintaining external stability.
The latest technical advice has been on the controversial single policy rate, an operating framework that emerged in reserve currency floating central banks after the housing bubble involving excess liquidity (abundant or ample reserves as a temporary expedient to push up asset prices back up but has since become ‘normalized’) leading to uncontrolled inflation and budget troubles.
During the last currency crisis which ended in default the central bank imposed a classic ‘single policy rate’ involving a true floor rate by mandating ceiling rates on short term gilts.
(Colombo/June26/2025 – Update IV)