carrying fixed interest rates that will step down in 2025 and 2027.

A much smaller portion of the outstanding credits have been converted to short-term Treasury bills. S&P Global Ratings says its sovereign ratings do not reflect the government’s capacity and willingness to service financial obligations to public sector enterprises or similar official creditors.

Nevertheless, the credit rating agency views the completion of this restructuring exercise, in addition to the restructuring to superannuation funds, as supportive of Sri Lanka’s near-term creditworthiness on its local currency obligations because it will further reduce refinancing needs as well as the government’s interest bill.

In its view, the successful completion of the domestic debt exchange with superannuation funds suggests that the government will continue to service its unaffected outstanding local currency bonds in the near term. However, Sri Lanka remains dependent upon favorable economic developments to continue to meet its financial commitments, the statement read further.

As of May 2023, local currency-denominated Treasury bills and bonds outstanding were approximately LKR 14.1 trillion, or about 60% of GDP. Sri Lanka’s restructuring exercises on some of these obligations will not affect the size of the outstanding debt stock because there is no haircut on the value of the notes. Banks, which were not included in the domestic debt exchange program on local currency bonds, are estimated to hold approximately 27% of Treasury bills and 43% of Treasury bonds.

Although Sri Lanka’s ongoing restructuring efforts will help to stabilize the government’s fiscal dynamics, net general government indebtedness will remain at a very high level of more than 100% of GDP through at least 2026, in S&P Global Ratings’ assessment. Likewise, the credit rating agency estimate that the government’s interest burden will be more than 70% of revenues for 2023, and will remain above 50% in 2026. It says these outcomes will be highly dependent on the pace of nominal GDP growth, fiscal consolidation and revenue growth, prevailing interest rates in the economy, and future restructuring outcomes, among other variables.

— S&P Global Ratings