Sri Lanka's major country creditors have approved a major debt restructuring deal valued at a combined US$10 billion that should allow letter of credit (L/C) flows that dried up two years ago on the island state to resume.

Negotiations between Sri Lanka, its Official Creditor Committee (OCC) and China Exim Bank concluded last week with an agreement that marks pivotal strides towards stabilising the country's financial footing amid recent economic challenges.

Importance of L/Cs

President Ranil Wickremesinghe made clear how damaging the L/C shortage has been to the country and how important the resumption of L/Cs will be in special address he made after the restructuring package was concluded with Sri Lanka's main creditors in Paris.

Simultaneously, a final agreement was also reached with China Exim Bank in Beijing, along with related formal procedures.

Reopening for business

"In April 2022, Sri Lanka officially declared its inability to meet its debt obligations. Following this declaration, international business transactions with Sri Lanka came to a halt. No country is willing to engage in financial relations with a nation that is bankrupt and unable to pay its debts. Consequently, we were unable to secure loans or even obtain L/Cs," the president explained.

"Against this backdrop, all projects in our country funded by foreign loans were halted. The countries involved closed their project offices and withdrew. Consequently, development work came to a complete standstill. However, now that we have achieved a crucial milestone in debt restructuring, there are legal opportunities for these countries to resume all projects funded by foreign loans," he added.

Confidence restored

"International confidence in our country is reaffirmed as bilateral creditors have reached an agreement with us, serving as a kind of international endorsement," according to Wickremesinghe.

"The global community, which previously refused to accept our L/Cs, is now prepared to grant us a certificate of confidence," he concluded.

The full version of President Ranil Wickremesinghe special address, Sri Lanka's successful restructuring of its foreign debt is a good news for all who care about the country, can be found here.

This article represents the views of the author and not necessarily those of the ICC or Coastline Solutions.