by Dimuthu Attanayake in SCMP, June 27, 2023
As cash-strapped Sri Lanka begins its long-awaited domestic-debt restructuring process this week, local experts have voiced optimism that the plan will enhance a reform road map agreed upon with the International Monetary Fund earlier this year.
Nandalal Weerasinghe, the country’s central bank chief, announced on Sunday that the process would get under way over the coming five-day bank holiday weekend – extended with a special additional holiday on Friday recently announced in the government gazette.
The process spans the announcement of the strategy to its implementation following approvals by the cabinet and the parliament.
“[The] government expects the entire process to conclude while the markets are closed during these five days,” Weerasinghe said.
The head office of Sri Lanka’s National Savings Bank in Colombo. All the country’s banks will be closed for five days from Thursday while a domestic debt-restructuring process gets under way. Photo: Reuters
The long bank closure is designed to help absorb any shocks to the market after the restructuring process, analysts say.
“The long holiday would allow any day one losses – as the cash flows are adjusted in the banks – to be pushed to the next quarter,” said Udeeshan Jonas, chief strategist for Sri Lankan investment bank CAL.
Following a debilitating economic crisis last year caused by unsustainable levels of debt – and Sri Lanka’s historic default – the country obtained US$2.9 billion worth of financing from the IMF in March.
Aimed at making the beleaguered nation’s overall debt load sustainable, one of the objectives of the 48-month programme is to reduce Sri Lanka’s total public debt – which at the end of last year stood at a staggering US$83.6 billion, or 128.1 per cent of gross domestic product – to below 95 per cent of GDP by 2032.
This includes the need to “reconcile” Sri Lanka’s US$42 billion of domestic debt that is held as treasury bills, treasury bonds, loans, and advances.
Experts say the success of the IMF programme will depend on the outcome of the domestic-debt restructuring process, which should provide liquidity relief for the government as it boosts debt sustainability and the nation’s overall economic stability.
External debt holders, for instance, could be provided with assurances that even if they agree to a “haircut” – or a lower-than-market value for their assets – their balance would still be repaid in full. But this only becomes possible when all the country’s debt is sustainable, said Murtaza Jafferjee, chair of Advocata Institute, a Sri Lankan think tank.
“When we do the restructuring, the cut has to be deep enough so that [Sri Lanka] does not go [into] default again,” he told This Week in Asia.
Earlier this month, central bank chief Weerasinghe said internal analysis indicated that any shocks from the planned restructuring of treasury bills held by the central bank would be “manageable”.
‘Voluntary optimisation’
The details of how other domestically-held financial instruments will be restructured remain unclear, but Finance Minister Ranjith Siyambalapitya said in parliament last week that there will be no “cut-off” during the process.
Of the remaining domestic debt, a “select pool” including treasury bonds – which made up 30 per cent of total domestic debt at the end of last year – is to be “reprofiled”, hinting at maturity extensions and reduction in coupon payments.
Extending the maturity period of bonds remains necessary to lower the country’s gross financing needs to the level prescribed by the IMF, CAL’s Jonas said.
“We believe … somewhere between 1.5 to 2 trillion Sri Lankan rupees [US$4.9 billion to US$6.5 billion] worth of bonds needs to be pushed towards the long end to achieve this target,” he added.
Early plans by the government said this “optimisation” would be “voluntary” and not “coercive”, with the lenders given some leeway to decide how to minimise losses.
But there may be some level of coercion as the government progresses with the restructuring, Jafferjee said. “For example, if you hold an old bond, that interest may have a higher tax.”
Avoiding ‘undue burdens’
With the final strategy still unclear, many remain concerned about the potential impact on financial markets and who will truly bear the brunt of the restructuring.
To mitigate potential day one loss, regulatory forbearance – the postponement of loan payments – could come into force, Jafferjee said.
But employee benefit programmes such as the Employee Provident Fund and Employees Trust Fund will “suffer heavily” during the restructuring, said W. A. Wijewardena, a former deputy governor of Sri Lanka’s central bank.
“[These funds] do not have a capital base – therefore it is the members who should bear the loss completely,” he said.
However, individual members would not be affected so long as inflows exceeded outflows, Jafferjee said. This means managing the number of individuals who are eligible to withdraw from the funds, of which the main group are retirees.
“With inflation, salaries have gone up, so now the [percentage] contribution is higher. So this could be managed by pushing up the retirement age,” he said.
The key is to widen the net as much as possible, without allowing too many exemptions during the restructuring, Jafferjee said. “So that the people who are being restructured are not called upon to bear an undue burden.”
https://www.scmp.com/week-asia/economics/article/3225461/sri-lanka-takes-5-day-holiday-manage-economic-shocks-domestic-debt-restructuring-looms?module=lead_hero_story&pgtype=homepage
