How do countries like Zambia and Sri Lanka plan to recover from their debt defaults
Introduction
Zambia and Sri Lanka are taking similar approaches to recover from their debt defaults, primarily through debt restructuring agreements and economic reforms supported by international financial institutions. Here’s an overview of their recovery plans:
Zambia’s Recovery Plan
Debt Restructuring
Zambia has reached an agreement with over 90% of holders of its $3 billion in outstanding international bonds.
The restructuring plan involves a 28% nominal reduction on the bonds’ principal.
This agreement paves the way for Zambia to emerge from its nearly four-year default on sovereign debt.
IMF Support
Zambia secured a $1.3 billion loan from the International Monetary Fund (IMF) in 2022.
The country is working under the IMF’s Extended Credit Facility, which requires debt restructuring with other creditors.
Fiscal Discipline
The government has adopted a prudent approach to spending, aiming to reduce the fiscal deficit from 5.8% of GDP in 2023 to 4.8% in 2024.
There are efforts to limit domestic borrowing to 2.5% of GDP.
Revenue Enhancement
The government is focusing on enhancing revenue collection through better tax administration and growing the tax base.
Sri Lanka’s Recovery Plan
Debt Restructuring
Sri Lanka has reached agreements with both bilateral lenders and commercial creditors.
The deal with bondholders includes a 28% nominal reduction on the bonds’ principal, though this could be reduced to 15% if certain economic conditions are met.
IMF Support
Sri Lanka is under a 48-month Extended Fund Facility (EFF) Arrangement with the IMF.
The program aims to restore macroeconomic stability, debt sustainability, and protect the poor and vulnerable.
Economic Reforms
The country is implementing reforms to improve economic governance, enhance growth and competitiveness, and protect the poor and vulnerable.
Key reforms include enacting a new Public Debt Management Act, implementing tax administration reforms, and addressing financial sector risks.
Social Protection
There’s a focus on revitalizing the social protection system to help the poor and vulnerable cope with the economic crisis and price adjustments.
Enhancing Competitiveness
Measures are being taken to enhance export competitiveness by phasing out para-tariffs and lowering customs duties.
Conclusion
Both countries are working closely with international financial institutions like the IMF and World Bank to implement these recovery plans. The success of these plans depends on the countries’ ability to maintain fiscal discipline, implement structural reforms, and adhere to the terms of their debt restructuring agreements. It’s important to note that the path to full recovery and debt sustainability remains challenging for both nations, requiring sustained effort and commitment to reforms.
