Sri Lanka's Cabinet approves a domestic debt restructuring plan in effort to solve economic crisis

COLOMBO, Sri Lanka — Sri Lanka’s Cabinet on Wednesday approved a program to restructure the country's staggering domestic debt as the island nation struggles to emerge from an economic crisis that has engulfed it since last year.

The domestic debt restructuring is required as part of a bailout package obtained from the International Monterey Fund, under which nearly $3 billion in government budgetary support will be disbursed in stages. Sri Lanka’s total debt exceeds $83 billion, of which $41.5 billion is foreign and $42.1 billion is domestic.

The restructuring program was approved at a special Cabinet meeting on Wednesday, the president’s office said in a statement. It did not provide details of the program, which is to be submitted to Parliament for approval at a special session on Saturday.

Sri Lankan President Ranil Wickremesinghe said on Tuesday that restructuring of both foreign and domestic debt is necessary for the country to come out of the crisis. He said the program would not affect the stability of state-owned and commercial banks or the deposits in about 50 million accounts.

Sri Lanka announced last year that it was suspending repayment of foreign loans because of a severe foreign currency crisis triggered by the COVID-19 pandemic, excessive borrowing by the government and efforts by the central bank to stabilize the Sri Lankan rupee with scarce foreign reserves.

Sri Lanka sought the support of the IMF, which approved a bailout package in March.

The government previously said it is seeking to reduce the country’s foreign debt by $17 billion through restructuring. It has already begun talks with foreign creditors including groups such as Paris Club and countries including India and China to restructure the debt.

Debt restructuring can take various forms, including bailouts, renegotiating terms of loans and writing off or reducing the amount owed for some loans.

Sri Lanka’s economic crisis, the worst in its history, caused severe shortages of food, medicine, fuel, cooking gas and electricity last year. That led to massive street protests that forced then-President Gotabaya Rajapaksa to flee the country and resign.

The economy has shown signs of improvement since Wickremesinghe took over as president last July. Shortages have been alleviated, power cuts have ended and the rupee has begun to strengthen.