The key points of Sri Lanka’s domestic debt restructuring plan

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By Webdesk

Crisis-hit country’s central bank outlines measures to restructure local debt as part of efforts to meet terms of IMF bailouts.

The Central Bank of Sri Lanka (CBSL) has unveiled a major domestic debt restructuring plan aimed at restoring stability to the crisis-hit country.

The move on Thursday comes as the government tries to meet the terms of a $2.9 billion International Monetary Fund (IMF) bailout agreed in March. time last year.

The much-anticipated restructuring is needed to help Sri Lanka meet the IMF’s target of reducing total debt to 95 percent of gross domestic product (GDP) by 2032.

Last year, a currency crisis left the government unable to pay for imports of fuel, food, medicines and other supplies, sparking protests that led to the ousting of then-President Gotabaya Rajapaksa.

The plan “is not a choice, but an unavoidable action by the government given Sri Lanka’s fragile fiscal situation,” WA Wijewardena, former deputy governor of the country’s central bank, told Al Jazeera.

What does the plan entail?

  • Holders of locally issued dollar-denominated bonds, such as Sri Lanka Development Bonds (SLDBs), will be given three options, according to CBSL Governor Nandalal Weerasinghe, according to CBSL Governor Nandalal Weerasinghe.
  • The first would be a treatment similar to investors in the country’s international government bonds – a 30 percent redemption rate on the principal with a six-year term at an interest rate of 4 percent.
  • The second will be a similar treatment to that offered to dollar-denominated bilateral creditors: no principal haircut, with a 15-year term and a nine-year grace period at an interest rate of 1.5 percent.
  • The third will be to exchange their holdings for local currency denominated instruments: no haircut on the principal with a 10-year term at the SLFR (Sri Lanka Standing lending facility rate) + 1 percent interest.
  • Sri Lanka currently holds $12.5 billion in international government bonds. It also has $11.3 billion in bilateral loans.

Local currency bonds

  • Under the plan, local currency bonds held by pension funds, including pension funds, will be exchanged for longer-term bonds (2027 to 2038), which will bear 9 percent interest until maturity.
  • CBSL holdings of Treasury bills to be converted into bonds maturing between 2029 and 2038, with a step-down coupon structure. This will be implemented in the second stage of domestic debt restructuring.
  • Treasury bills and government bonds of the banking sector are excluded from domestic debt restructuring, given the significant pressure on the banking sector currently due to rising non-performing loans, the impact of external debt restructuring and high taxes.

Why is reworking domestic debt important?

  • Finance Minister Mahinda Siriwardana said on Thursday the restructuring would cover part of the country’s $42 billion domestic debt.
  • The move is likely to create momentum around foreign debt renegotiations on $36 billion in foreign debt, including $24 billion held by bondholders and bilateral creditors such as China, Japan and India.
  • Sri Lanka has set itself the target of completing debt restructuring negotiations by September, in line with the first review of its IMF programme.

What’s next?

  • The domestic restructuring framework will now be submitted to parliament for approval on Saturday. CBSL hopes to complete the bond exchange of aged funds by July.
  • Sri Lanka has declared a five-day holiday from June 29 to July 3 to contain potential market volatility. Due to the holiday season, any losses on bond sales could also be accounted for in the third quarter of the year, analysts said.

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