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Sri Lanka’s Debt Restructuring Roadmap: Following the evidence

Published

3 years ago

2023/07/25

By Dr Dushni Weerakoon

Debt restructuring is fundamentally about allocating the associated economic costs to someone. The onus is typically on the debtor country to secure participation from its creditors, applying comparable treatment to all. As with all negotiations, the level and modalities of relief will always be subject to some degree of controversy. Sri Lanka’s recently gazetted domestic debt restructuring (DDR) exercise too has drawn expressions of both support and criticism. Overall though, negotiations have to be framed within certain desired outcomes to minimise costs to the economy. To this end, Sri Lanka’s negotiating stance dovetails neatly with crucial research evidence.

A restructuring process, whether pre-emptive or post-default, imposes significant output costs. For a debtor country to minimise these, some notable findings are:

Output losses are higher in post-default restructuring.

When defaults are accompanied by a banking crisis, the fall in output is particularly large.

Even in a post-default setting, output costs can be reduced the quicker the debtor country is able to reach an agreement with its creditors.

The size of creditor losses (haircuts) is among the best predictors of participation rates on bond restructuring.

To begin with, there was no real appetite to include a DDR in Sri Lanka’s case, especially in view of the substantial real erosion in value to debt holders as inflation spiralled. But, as opening gambits commenced with external creditors, the bondholder group’s request that ‘domestic debt is reorganised in a manner that both ensures debt sustainability and safeguards financial stability’ could not be ignored if only to avoid an impasse. Sri Lanka has limited room to circumvent a DDR altogether. As a middle-income country, the inclusion of domestic debt optimisation is implicitly encouraged in the IMF’s debt sustainability framework (DSF) for market-access countries. It focuses on the total stock of public debt but is avoided by low-income countries where the applicable DSF focuses only on external public debt.

Having opened the door to a DDR, there would have been very real concerns that the combination of skyrocketing inflation and financial fragility would test the banking sector’s resilience to deal with a DDR. Figures on capital adequacy and asset quality (with the non-performing loan ratio on stage 3 loans rising from 5.2% in 2020 to 11.3% in 2022) and exposure to restructuring the country’s international sovereign bonds (ISBs) meant the stakes were high. When times are uncertain, a herd mentality will rule, and this is to be avoided at all costs.

Another element in a DDR is that there are negative externalities that need to be internalised – i.e. there may be direct costs to a country’s financial sector from a DDR, such as recapitalisation and these have to be taken on board. This is particularly so where there is a strong link between the sovereign and its financial system. In setting aside resources to ensure financial system stability, the anticipated fiscal benefits of a DDR can potentially reduce. Thus, on both counts, ringfencing the banking sector to avert a far more damaging economic crisis and deeper output losses has been the first step in Sri Lanka’s approach.

Having left out the banking sector, the economic cost appears to have been disproportionately directed at the savings of workers contributing to pension funds. Private bondholders have been exempted denying ‘comparable treatment’ while the captive nature of the Employers Provident Fund (EPF), managed by the Central Bank of Sri Lanka (CBSL), means there has been no attempt to ‘secure participation’.

Sri Lanka’s DDR treatment in effect is an example of the considerable degree of influence that a sovereign can exert over domestic legal and regulatory frameworks, unlike that of an external debt restructuring (EDR). Under the terms, pension funds are required to opt for a 30% haircut or be liable for higher taxation at 30% instead of the prevailing 14%. For EPF savers, there is the only assurance of receiving a 9% return in the long-term for a fund that has often performed below par even against the simplest alternative instrument that an average saver may look at, such as one-year fixed deposits (Figure 1a). Where there has been a substantial erosion of real savings from a crisis-induced economic environment, this is scant consolation for workers. The premise of a return to single-digit inflation merely means that price increases have slowed from the previous exorbitant high levels, but the erosion of the value of savings remains very real.

The second step of the negotiating process is to bring as many of Sri Lanka’s external creditors on board as quickly as possible. Having complied with the bondholder group’s request on including a DDR, comparable treatment is being offered by way of a 30% haircut on EDR too. As a bilateral creditor, China’s preference globally is for deferral rather than reduction. But merely pushing repayments down the line with maturity extensions (and some coupon adjustments) still leaves Sri Lanka at the risk of being permanently illiquid and, therefore, vulnerable to repeat short-term crises. Clearly, the deeper the haircut, the more sustainable the debt becomes, but negotiations will likely drag on. A complex creditor group and geo-political wrangling add to these risks. Ecuador, a middle-income country, came to an agreement with its bondholders to a haircut of 9% on USD 17.4 billion in 2020, with a high 98% of bondholders agreeing to the deal. China persisted with maturity extensions and coupon adjustments.

Corralling in the bilateral creditors will require more diplomatic persuasion than economic analysis. China’s recently concluded deal with Zambia to restructure USD 4.2 billion of loans under an initiative driven by the G20 Framework for low-income countries pushed back repayments and accommodated interest rate cuts. This follows on from its deal with Ecuador a year earlier that included maturity extensions and interest rate adjustments on debts worth USD 4.4 billion. There are two key arguments put forward by China for not taking losses in debt restructurings: first, that its loans are development-oriented, tied to projects that generate revenues for the recipients, and second, that multilateral banks should also participate, instead of the current preferred status of having their loans repaid in full. In many ways, Sri Lanka will be a test case on these issues.

The expected deceleration in the contraction of Sri Lanka’s economic output in the coming months is only the start to claw back lost output. This too is under threat. As domestic consumption faltered, net exports were the only positive driver of growth in recent quarters, but there are concerning signs of a slowdown (Figure 1b). In the event, it is even more probable that the allocation of costs associated with debt negotiations will be weighed and measured against the need to get an overall deal done as quickly as possible to support Sri Lanka’s slow-burn economic recovery.

Link to blog: https://www.ips.lk/talkingeconomics/2023/07/18/sri-lankas-debt-restructuring-roadmap-following-the-evidence/

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Zydus, Sunshine launch US$20 million pharma plant in Horana to boost local drug manufacturing

Published

5 hours ago

2026/06/29

Thilina Walpola

Leadership teams of Zydus Lifesciences Ltd and Sunshine Holdings PLC at the official foundation stone laying ceremony

A market-driven investment backed by confidence in local pharmaceutical manufacturing

Sri Lanka’s drive to strengthen domestic pharmaceutical manufacturing received a major boost last week with the launch of a US$20 million joint venture between India’s Zydus Lifesciences and Sri Lanka’s Sunshine Healthcare to establish a modern pharmaceutical manufacturing facility at the Board of Investment (BOI) zone in Horana.

The foundation stone for the new plant, to be built on nearly four acres, was laid by the leadership of the two companies in the presence of senior executives and stakeholders. The facility will manufacture pharmaceutical products for the local retail market, helping improve the availability of quality medicines while reducing Sri Lanka’s dependence on imports.

The venture, operating as Zydus Sunshine Lifesciences Pvt. Ltd., combines Zydus’ global pharmaceutical manufacturing expertise with Sunshine Healthcare’s extensive distribution network and strong presence in Sri Lanka’s healthcare sector. The project is expected to facilitate technology transfer, create skilled employment, and strengthen the country’s healthcare supply chain.

Speaking at the ceremony, Dr. Sharvil P. Patel, Managing Director of Zydus Lifesciences, said the investment reflected the company’s long-standing commitment to Sri Lanka, where it has operated for more than three decades.

“We have always believed that strong local capabilities are key to resilient healthcare ecosystems,” he said. “Through Zydus Sunshine Lifesciences, we seek to contribute to the development of a stronger pharmaceutical manufacturing base in Sri Lanka by combining global scientific expertise with deep local execution capabilities.”

Dr. Patel added that the project would go beyond manufacturing by creating high-quality employment opportunities across science, technology, healthcare and operations, helping nurture the next generation of talent in Sri Lanka’s pharmaceutical industry.

Sunshine Holdings Deputy Chairman Vish Govindasamy described the venture as a significant progression in Sri Lanka’s future at a time when countries are seeking to secure stable supply chains.

“The establishment of Zydus Sunshine Lifesciences contributes directly to building greater pharmaceutical security for Sri Lanka,” he said. “Together, we are combining global knowledge with local capability to strengthen pharmaceutical manufacturing, healthcare resilience and our commitment to serving the Sri Lankan people.”

Govindasamy noted that the project represents the largest foreign direct investment into Sri Lanka’s pharmaceutical manufacturing sector to date, with the initial equity capital of US$10 million contributed equally by the two partners. Sunshine Healthcare’s participation has been supported by the International Finance Corporation’s US$11 million equity investment made last year to support the company’s growth strategy.

The new manufacturing facility will operate under the oversight of the BOI, with the Ministry of Health and the National Medicines Regulatory Authority providing regulatory supervision. All products manufactured at the plant will comply with NMRA standards and applicable pricing regulations.

The investment comes as Sri Lanka continues efforts to expand local production of essential medicines following recent economic challenges that exposed vulnerabilities in import-dependent supply chains. By increasing domestic manufacturing capacity, the partners expect the project to improve medicine availability, strengthen supply security and support the country’s broader healthcare resilience while generating high-value employment and industrial growth.

The foundation stone ceremony marked the formal commencement of construction, with both partners expressing confidence that the venture would play a meaningful role in advancing Sri Lanka’s long-term healthcare and manufacturing ambitions.

Unlike many local pharmaceutical manufacturers that operate under government buy-back agreements guaranteeing sales to the public health system, Zydus Sunshine Lifesciences will initially rely entirely on Sri Lanka’s private healthcare market. The partners are betting that locally manufactured, high-quality medicines can successfully replace imported products, making the venture commercially viable without state purchase guarantees. However, Sunshine Holdings Deputy Chairman Vish Govindasamy told The Island Financial Review that the company would welcome opportunities to supply the government sector as well, should the authorities choose to procure its products in the future.

By Sanath Nanayakkare

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Lanka Hospitals celebrates 2025 milestones at Pulse of Excellence Awards

Published

5 hours ago

2026/06/29

Thilina Walpola

Lanka Hospitals Corporation PLC successfully hosts its exclusive "Pulse of Excellence" awards ceremony recently

The Lanka Hospitals Corporation PLC successfully hosted its exclusive “Pulse of Excellence” awards ceremony recently. The event was organized to recognize and celebrate the institution’s remarkable milestone achievements and outstanding overall performance in 2025.

The ceremony was graced by Dr. Nalinda Jayatissa, Minister of Health and Mass Media and Chief Government Whip, who attended as the Chief Guest and delivered a special address. During his address, the Minister highlighted the institution’s profound contribution to the country, stating: “These achievements are now an integral part of the hospital’s enduring legacy and a testament to its vital role within our nation’s healthcare sector. Lanka Hospitals has consistently demonstrated that true medical excellence is achieved when world-class clinical standards are driven by a genuine, compassionate duty of care toward the people.”

Other distinguished dignitaries in attendance included Dr. Hansaka Wijayamuni, Deputy Minister of Health, and Dr. Priyantha Tennakoon, Director of Private Health Sector Development.

The evening highlighted Lanka Hospitals’ continued commitment to shaping the future of healthcare through a comprehensive awards program, with accolades distributed across several key categories. In the area of Financial and Operational Excellence, departments such as Cardiology, Bariatric Surgery, Neurosciences, Out-Patient, and Radiology were recognized for record-breaking performances in 2025. Notably, the Neurosciences department was commended for achieving the highest number of advanced neurosurgical procedures during the year.

Furthermore, National and International Excellence Awards were presented to the Departments of Finance, Quality Assurance, Infection Prevention and Control, and Marketing. A significant highlight in this category was the hospital’s prestigious nomination by the World Health Organization (WHO) as the first private mentor hospital for Antimicrobial Stewardship in Sri Lanka.

The ceremony also celebrated leadership and dedication. A highly anticipated Lifetime Service Excellence Award was presented to Mr. Sunil Gamage, Chief Ward Master, in recognition of his enduring commitment and service. Additionally, special recognition was bestowed upon Lanka Hospitals Diagnostics (Pvt) Ltd. in honor of its outstanding service excellence and exceptional financial performance throughout the year.

A major milestone of the evening was the official launch of the LHD Mobile Laboratory Service, which was ceremonially inaugurated during the event.

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Ceylon Green Life Plantation expands internationally with Malaysia greenhouse venture

Published

5 hours ago

2026/06/29

Thilina Walpola

The initial phase of the project will be carried out on a fifty-acre land allocation

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Implemented with the support of the Malaysian Government, the initial phase of the project will be carried out on a fifty-acre land allocation. The venture will utilise advanced greenhouse technology, modern cultivation methods and high-yield seed varieties to produce vegetables tailored to the demands of the Malaysian market.

CGLP Founder and Chairman Dr. Malan Francis Peter said the initiative represents a major step towards positioning Sri Lankan agricultural knowledge and expertise on the international stage. “This project provides access to advanced agricultural technologies, improved cultivation practices and a ready market for produce. It creates opportunities not only for our organisation but also for Sri Lankan farmers and agricultural professionals who can benefit from international exposure and knowledge transfer,” he said.