• 1: Bondholder deal and IMF primary surplus target expected to reduce debt
• 2: Positive impact on President’s political prospects; investor sentiment up

Sri Lanka’s debt stock is expected to fall from 113% of GDP at the end of 2023 to 82% by 2032, based on the bondholder deal’s parameters if the country sticks to the International Monetary Fund’s (IMF) primary surplus target, Bloomberg Economics said.

A special report by Bloomberg Economics said that Sri Lanka’s debt stock is expected to fall to 82% of GDP by 2032, well below the IMF target of 95%, if the country sticks to the 2.3% primary surplus target.

Moreover, it said that due to over performance on debt targets set by the IMF, President Anura Kumara Dissanayake’s electoral promises to provide relief to people are in reach which should strengthen his party’s prospects in parliamentary elections in November.

The IMF and the official creditors’ committee - led by Japan, France and India - have signed off on an agreement on 19 September between private dollar bondholders and Sri Lanka to exchange $ 12.6 billion of bonds for new instruments worth $ 9.2 billion.

“The new president’s approval of the deal suggests that he is not as radical as the market thinks. This should ease investors’ worries about the future of the IMF bailout programme,” Bloomberg Economics said.

It also said that most of the new instruments offered under the deal are macro-linked bonds (MLBs), for which future pay-outs depend on how the country’s growth pans out.

The deal provides for a 27% haircut if the country grows in line with the IMF’s forecasts. If GDP grows faster than the IMF’s projections, part of the haircut will be reversed and coupon rates will be raised from 2028.

If growth stays lower, an additional haircut will be applied in 2028. The effective haircut will be just around 15.5%, based on Bloomberg Economics’ growth projections which are more optimistic than the IMF’s.

“This should strengthen Dissanayake’s position in negotiations with the IMF to reduce the primary surplus target,” it added.

Further, Bloomberg Economics estimates suggest that the country could still meet the debt target with the primary surplus of just 0.8% of GDP, giving it additional fiscal space of as much as 1.5% of GDP. This will be in addition to 0.7% available from better-than-expected tax collections and improved tax compliance.