Sri Lanka is seeking to restructure about $19.8 billion of local bills and bonds, equivalent to half of its domestic debt load, as the government seeks to ease its payment burden. The nation’s dollar bonds surged.

The domestic debt optimization involves about 3.5 trillion rupees ($11.4 billion) of bonds held by retirement funds and 2.6 trillion rupees are bills owned by the central bank, Deputy Treasury Secretary A.K. Seneviratne told reporters in Colombo on Thursday. The rest are dollar-denominated bonds mainly held by domestic banks.

Sri Lanka is seeking to restore debt sustainability in line with a $3 billion International Monetary Fund bailout program it secured in March. The South Asian nation’s domestic debt stood at around $38 billion in 2022, while its external borrowings totaled $41 billion, according to the IMF.

“The proposal strikes a balance by satisfying the need for burden sharing without creating too much risk to financial stability,” said Patrick Curran, a senior economist at Tellimer based in Portland, Maine. “It also provides a preliminary look at what might be expected of external creditors, which we think points to recovery values of around 40 to 50 cents on the dollar.”

Sri Lanka’s dollar bonds due 2030 rallied 4.6 cents to about 47 cents on the dollar on Friday. Local markets are shut for a holiday and will reopen on Tuesday.

The debt plan represents a major step in Sri Lanka’s efforts to set its economy back on track after it defaulted in 2022. Securing an agreement from creditors is crucial for the nation to keep unlocking funding under the IMF bailout.

--With assistance from Ronojoy Mazumdar.

(Updates with analyst comment in the fourth paragraph, bond move in the fifth)

Author: Asantha Sirimanne and Karl Lester M. Yap