MP Gammanpila: IMF doesn’t demand DDR, but foreign debt holders do

Fact Check

In his statement, the MP makes two claims; 1) that the agreement signed with the IMF does not impose a condition on the Government of Sri Lanka (GoSL) to restructure domestic debt, 2) that it is instead the foreign bondholders that have imposed a condition saying that domestic debt should also be restructured similar to foreign debt.

To check these claims, FactCheck.lk assessed the Letter of Intent (LOI) of the Board Level Agreement with the IMF and the Public Debt Sustainability Analysis (DSA) featured in the IMF Staff Report dated 06 March 2023, and Cabinet Memorandum No. MF/TO/006/CM/2023/154 dated 28 June 2023.

Claim 1: There is no definitive commitment made by the government or IMF conditionality requiring GoSL to carry out Domestic Debt Restructuring (DDR) in the LOI with the IMF.

The only mention of DDR in the LOI is that the government intends to “explore options for a domestic debt operation” and to announce details about it before end-April 2023.

The DSA also includes illustrative scenarios, some of which involve DDR. However, these scenarios suggest that DDR is presented as an option, rather than a condition in setting out an economic recovery plan. See Additional Note 1 for further insight on this.

Claim 2: The MP’s second claim is supported by the Cabinet Memorandum dated 28 June 2023. It states that DDR “is also a stated precondition for the restructuring of FLFC [Foreign Law Foreign Currency] debt owed to members of the ad-hoc committee of holders of Sri Lanka’s International Sovereign Bonds.”

Despite concerns about the credibility of representation made in the cabinet memorandum (Additional note 2), because the claims made by the MP are based on declarations of the government in that memorandum and the government’s LOI to the IMF, we classify his statement as TRUE.

Additional Note 1: While the IMF programme does not entail a commitment to DDR, it can become necessary to achieve other benchmarks of debt sustainability set out in the programme: such as maintaining Gross Financing Needs (GFN) at an average of 13% of GDP from 2027 to 2032. This is provided as a reason for DDR, among other reasons, in the MoF Investor Presentation on 7 July 2023.

Additional Note 2: Country negotiations on debt restructuring with international bondholders is a process of arriving at a reasonable method of achieving the benchmarks on an agreed DSA for the country. In such a negotiation, it is FactCheck.lk’s understanding that neither party is in a position to unilaterally impose conditions on the other. The claim made in the cabinet memorandum about an imposed pre-condition violates this understanding of how negotiations are conducted.

*FactCheck.lk’s verdict is based on the most recent information that is publicly accessible. As with every fact check, if new information becomes available, FactCheck.lk will revisit the assessment.