Key points of Sri Lanka's domestic debt restructuring plan
Sri Lanka's central bank has unveiled a far-reaching domestic debt restructuring plan aimed at restoring stability to the country
Sri Lanka's central bank has unveiled a far-reaching domestic debt restructuring plan aimed at restoring stability to the crisis-hit country.
The move announced by Sri Lanka's central bank on the 29th comes as the government tries to meet the conditions of its $2.9 billion bailout package agreed with the International Monetary Fund in March — a bailout that is crucial to the economic recovery of the island nation that defaulted on its first foreign debt last year.
Sri Lanka needs a long-awaited debt restructuring to help the country meet the IMF's target of reducing its overall debt to 95 percent of gross domestic product by 2032.
Last year, a foreign exchange crisis left the Sri Lankan government unable to pay for imports of fuel, food, medicine and other essential goods, sparking widespread protests and leading to the ouster of then-President Gotabaya Rajapaksa.
W A Wijewardena, former deputy governor of Sri Lanka's central bank, told Al Jazeera that the plan "is not an option, but an inevitable action taken by the government in light of Sri Lanka's fragile budget situation."
What does this plan include?
Sri Lanka's central bank governor Vila Sinkha said holders of locally issued dollar-denominated bonds such as Sri Lanka Development Bonds (SLDBs) would have three options under the domestic debt reform program.
The first option is similar to the treatment of investors in the country's international sovereign bonds – a 30 percent reduction in principal with a six-year maturity and a 4 percent interest rate.
The second option is similar to the treatment proposed to bilateral dollar creditors: no principal reduction, a 15-year term, a nine-year grace period, and an interest rate of 1.5 per cent.
The third option is to convert their holdings into instruments denominated in local currency: 10-year, Sri Lanka Standing Loan Facility Rate (SLFR) + 1% interest rate, no principal discount.
Sri Lanka currently has $12.5 billion in international sovereign bonds. It also has $11.3 billion in bilateral loans.
Sri Lanka to receive first bailout worth $2.9 billion in two days, IMF (Reuters)
Local currency bonds
Under the scheme, local currency bonds held by pension funds, including pension funds, will be converted into longer-term bonds (2027 to 2038) at a pre-maturity interest rate of 9%.
Treasury bills held by the Central Bank of Sri Lanka will be converted into bonds maturing between 2029 and 2038 with a diminishing coupon structure. The move will be implemented in the second phase of domestic debt restructuring.
Given that the banking sector is currently under greater pressure due to factors such as increased non-performing loans, external debt restructuring and high taxes, the bank's holdings of notes and government bonds are excluded from the scope of domestic debt restructuring.
Why is domestic debt restructuring important?
Sri Lankan Finance Minister Sirivadana said on the 29th that the restructuring will cover part of the country's $42 billion domestic debt.
The move could boost momentum to renegotiate around the country's $36 billion in foreign debt, including $24 billion held by bondholders and bilateral creditors such as China, Japan and India.
Sri Lanka has set a target of completing debt restructuring negotiations by September this year to coincide with the IMF's first review of its program.
What's next?
The framework for restructuring the domestic debt will be submitted to Sri Lanka's parliament for approval this Saturday. Sri Lanka's central bank hopes to complete bond swaps in pension funds by July this year.
Sri Lanka announced a five-day holiday from June 29 to July 3 to curb any potential market volatility. Analysts said the bank's special holiday would also allow any losses in bond sales to be recognized in the third quarter of the year.
IMF bailout agreement for Sri Lanka
