Holders of defaulted SriLankan Airlines debt are set to vote on March 18 regarding an exchange for government bonds, a move that could finalize the process and enhance the nation’s credit profile. Treasury Secretary Harshana Suriyapperuma expressed optimism at a forum organized by the American Chamber of Commerce, stating, “We are expecting within a short period of time, within weeks perhaps, we will be able to reach a good outcome with those creditors as well.” He emphasized the genuine and constructive approach taken with partners during these discussions.
SriLankan Airlines has initiated a consent solicitation to encourage investors to exchange $175 million in defaulted bonds and interest, offering $850 for each $1,000 in new sovereign bonds—equivalent to 85% of the total claim. The actual nominal value of the bonds issued will be higher, considering the amortization and 4.0% coupons of the series so far.
On March 18, bondholders will decide and vote on a resolution to exchange the defaulted bonds. If approved, there will be a mandatory exchange, with non-consenting holders receiving 75% of the claim.
This debt restructuring for SriLankan Airlines is the last major one following the sovereign default in 2022, which was triggered by aggressive macroeconomic policies such as rate and tax cuts aimed at potential output. Despite fiscal corrections in years like 2018, Sri Lanka’s credit rating steadily declined due to currency crises triggered by call money rate targeting in previous years.
Warnings intensified in 2019 that Sri Lanka would face downgrades if rates were cut during the next recovery period, and money was printed to target call money rates. The country faces the risk of credit downgrades and possible sovereign default on dollar debt unless the discretionary ‘flexible exchange rate’ is restrained and monetary discipline is implemented.
“Next year will be a critical year as budget deficits are set to expand, and the credit system will also go through a cyclical recovery, leading to an expansion in private credit,” an economic columnist from FC noted in late 2019, prior to aggressive rate cuts and inflationary open market operations. Sri Lanka once maintained monetary stability even during the worst years of conflict, but each new episode of monetary indiscipline has cost the country one notch in the rating scale. The nation will soon exhaust its rating space to access capital markets if flexible exchange rate/call money rate targeting persists in the next recovery phase.
Rating agencies are particularly sensitive to depreciating exchange rates, stemming from flawed central bank operating frameworks. “Investor confidence has been undermined, as evident from large outflows from the local bond market and a depreciating exchange rate,” Fitch Ratings stated in a 2018 downgrade when taxes were increased to reduce budget deficits and fuel prices were determined by the market.
(Colombo/Feb26/2026)
