Bankrupt Sri Lanka received a fresh boost on Wednesday after reaching an agreement in Paris to restructure $5.8 billion of debt with bilateral creditors including Japan, India, others, as the government tries to steer the country out of its worst economic crisis.

Sri Lanka's creditor committee includes Japan, South Korea, Australia, the U.S. and France. India also is working with the group as a nonmember creditor.

Export-Import Bank of China also signs $4.2billion agreement. Sri Lankan President Ranil Wickremesinghe announced the freedom from bankruptcy status on Wednesday26.

This was consequent to after the declaration of a preemptive default by previous regime in April 12 2022 suspending external debt repayment as it had US$ 20 million as gross official reserves

He hailed the debt restructuring plan as a "significant milestone exiting from bankruptcy re-opening doors for donor countries to restart stalled development projects in the island.

The island nation is nearing the restoration of debt sustainability following the agreements with bilateral creditors including China on Wednesday 26 IMF sources confirmed expressing belief that the state authorities will strike a deal with private creditors soon.

An agreement has now been reached with China and other donor countries to restructure around US$10 billion in bilateral debt while it still needs to convince bondholders to restructure about $12.5 billion in international sovereign bonds.

The reaching an agreement with bilateral creditors would help the government authorities to the conclude the restructuring process started in September 2022 after the country’s foreign reserves down to record lows of $ 20 million and forced it to default on foreign debt for the first time in April 2022. .

"We hope that there will be swift progress on reaching agreements with external private creditors in the near future,” Peter Breuer, IMF’s senior mission chief for Sri Lanka, said in a statement.

Sri Lanka’s total external debt is $37 billion, and it also has to negotiate with China Development Bank to restructure debt of $2.2 billion, finance ministry data shows.

According to restructuring plan agreed by the two sides, Sri Lanka has gained moratorium on repayment for bilateral creditors till 2028. The government and creditors would be able arrange new loans up to 2043.

Once the restructuring is completed, Sri Lanka aims to reduce its debt by $16.9 billion, a senior finance ministry official said.

To prevent the risk of another debt crisis, the medium-term debt management framework needs to be strengthened promptly he pointed out.

Establishing the Public Debt Management Office (PDMO) by end-2024 and making it fully functional by end-2025 are important initial steps agreed upon under the IMF supported program.

The authorities should move expeditiously towards a holistic debt management strategy, with forward-looking plans tied to annual and quarterly issuance, along with stronger communication to increase transparency and predictability, IMF sources said.

The final restructuring agreement with the OCC reflected in the OCC Memorandum of Understanding signed on 26 January 2024 will be translated into individual bilateral agreements with each member of the OCC. Similarly, domestic regulatory formalities will be concluded by Sri Lanka and Exim Bank of China to give effect to the Amendment Agreements.

This will enable the official restructuring to be implemented. The successful implementation of the restructuring agreements with official creditors will provide an impetus to the negotiations with commercial creditors.

Sri Lanka continues to engage with its bondholders and their advisers which is expected to yield a restructuring agreement that meets the debt sustainability DSA targets and is comparable to the agreements reached with the OCC and Exim Bank of China.

As of now, the domestic debt restructuring has been completed, the official restructuring agreements have been concluded, leaving only the external commercial debt restructuring to be concluded for the overall debt restructuring process to be finalised.

: The successful conclusion of the official debt restructuring will enable the resumption of bilateral lending between Sri Lanka and its major international partners in the OCC and with the Exim Bank of China.

This has important implications for supporting economic growth as foreign-funded capital expenditure can resume.

This would have material implications for the construction sector in particular, along with the positive spill-over effects for the rest of the economy. In the medium term, this has important implications for infrastructure development in the country.

restructuring of debt provides significant fiscal relief to the government. One example of this is whilst in 2022, Sri Lanka’s foreign currency debtservice cost was 9.2% of GDP, post-restructuring, this would reduce to less than 4.5% of GDP on average by 2027-2032.

The government’s overall annual gross financing needs will be reduced from 34.6% of GDP in 2022 to under 13% of GDP between 2027-2032. The cashflow savings can be used for priority expenditure on essential public services. The restructuring of official debt makes a major contribution to both these targets.

The availability of external budgetary financing will also support fiscal cash-flow management with positive implications for domestic interest rates

The conclusion of the official debt restructuring is another important step towards restoring the country’s credit ratings. Once commercial debt restructuring, including International Sovereign Bond (ISB) debt and syndicated loans held by China Development Bank (CDB) is also concluded, this would mark the completion of the overall debt restructuring process which would be a key milestone in enabling Sri Lanka’s credit ratings to be re-rated.

The timing of such a re-rating is not certain, however, the conclusion of the restructuring process is a key enabling condition, along with continued adherence to the macroeconomic reform process.