The Sri Lankan government has issued an Expression of Interest (EOI) for the divestiture of its national carrier, SriLankan Airlines, calling for a capital injection of at least US$500 million. The divestiture is expected to reshape the airline’s future by overhauling its operations, including catering service, ground handling, and international destinations.

The investment teaser highlights several key strengths of SriLankan Airlines, including its diversified international network and its dominant position in international traffic to and from Sri Lanka. SriLankan Airlines currently operates a fleet of 23 Airbus aircraft, serving a network of 39 global destinations.

The teaser also promotes the potential of Sri Lanka as a hub for connecting India with South East Asia and Australia, suggesting the establishment of a hub at Colombo airport.

The government offers up to 49 per cent of shares in SriLankan Airlines while retaining a 51 per cent stake, or even considers an outright sale based on the offers received.

Sri Lanka’s Divestiture Plan

The sale of SriLankan Airlines is an offshoot of the Sri Lankan government’s divestiture plan which encompasses several other state-owned entities. Recent reports indicate that the divestiture is divided into two tranches, with the national carrier, alongside Sri Lanka Telecom and Lanka Hospital Corporation, included in the second group.

SriLankan Airlines is an SOE with a significant debt burden and a history of losses. Therefore, it has been identified as a prime candidate for divestiture. Sri Lanka’s decision to put its national carrier up for sale is an effort to restructure the country’s debt and stabilise its economy.

The US$500 million figure that the government seeks to raise from the sale of SriLankan Airlines falls short of covering the airline’s mounting debts.

The airline has been making significant losses for several years and its debt ballooned to over US$1.3 billion as reported in March 2023. A recent default on a Treasury Bond of Rs 175 billion has compounded the airline’s financial troubles.

The airline’s catering service and ground handling operations generate an annual profit of Rs 15 billion. They are being offered as part of the restructuring to attract potential investors who can inject fresh capital and expertise into these segments. Investors in these sectors will also gain access to the airline’s list of international destinations.

In a recent parliamentary address, Aviation Minister Nimal Siripala de Silva revealed that the government would need to shoulder the remaining debt burden.

The government ownership meant political interference, mismanagement, and a lack of accountability for the airline. The privatisation is expected to relieve the Sri Lankan government of this financial burden and allow it to focus on other priorities, such as infrastructure development and social welfare programmes.

A private sector owner is expected to bring in professional management expertise, instil a stronger performance culture, and make strategic decisions to improve the airline’s competitiveness.

Hope and Challenges in Debt Resolution

The sale of a stake in SriLankan Airlines could potentially generate additional capital, offering some hope for paying down part or all of the remaining debt associated with the airline. However, the gap between the sale proceeds and the debt’s size is substantial, creating financial challenges for the Sri Lankan government.

However, the sale of SriLankan Airlines is not without its challenges. The airline operates in a highly competitive global aviation industry. Finding a buyer willing to take on its debt and invest in its turnaround will not be easy. The government will also need to ensure that the sale is conducted in a transparent and fair manner and that it protects the interests of the airline’s employees and stakeholders.

If the privatisation process is mishandled, it could damage the airline’s reputation and make it more difficult to attract a buyer. On the other hand, if the airline fails to turn around under private ownership, it could become a burden on the new owner, potentially leading to job losses and economic instability.

Sri Lanka finds itself at a critical juncture as the IMF presses for a comprehensive debt restructuring plan as a prerequisite for providing much-needed financial assistance to the nation. Sri Lanka’s increasingly unsustainable debt burden threatens to push the country toward a default and is contributing to an economic crisis.

Sri Lanka’s high external debt poses significant challenges for the country to meet its debt servicing obligations. The mounting debt burden triggered a severe economic crisis. The country’s currency depreciated significantly, inflation skyrocketed, and the economy contracted, leaving it grappling with numerous economic challenges.

Sri Lanka’s current financial predicament rules that it cannot service its debts without further assistance.

The principal objective of debt restructuring is to make Sri Lanka’s debt load sustainable. This entails reducing the debt burden to a level that the country can reasonably manage without destabilising its economy.

Debt restructuring is, therefore, anticipated to play a key role in Sri Lanka’s economic recovery, reestablishing financial stability. The country will be better positioned in its creditworthiness and potentially attract new investment, which is crucial for long-term economic health.

IMF’s Role in Debt Restructuring

The IMF has taken on a central role in Sri Lanka’s debt restructuring process. The organisation has offered technical assistance to the Sri Lankan government and has been instrumental in negotiating with the country’s creditors. Furthermore, the IMF’s financial support is contingent upon Sri Lanka’s commitment to implementing a successful debt restructuring plan.

However, debt restructuring is a multifaceted and demanding process. It entails negotiations with many creditors, and there is no guarantee that a satisfactory agreement will be reached. Additionally, debt restructuring often involves painful consequences for a country’s economy, as it can necessitate cuts to government spending and increases in taxes, which can be met with resistance from the public.