Sri Lanka to restructure only foreign debt – CBSL

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Sri Lanka intends to restructure only the foreign debt within the debt restructuring process, a spokesman for the Central Bank of Sri Lanka (CBSL) said.

“We have to take the overall monetary debt of Sri Lanka to a sustainable level and work it out based on the Sustainable Credit Criteria provided by the International Monetary Fund (IMF). They will investigate the situation in Sri Lanka and provide us with the relevant criteria. The Government will then have to act on this criteria,” he said.

There is hesitancy in including local debt in the process. It is said if local debt restructuring is carried out in any way, it could have a severe impact on the asset bases of local pension funds, banks, and insurance companies.

Sri Lanka intends to restructure all syndicated loans, sovereign bonds, and other multilateral loans obtained prior to 12 April.

It has been decided to reissue the Sri Lanka Development Bonds (SLDBs) obtained within the period or to make the maturity settlements in local currency.

However, it has been decided to reach a final agreement with the Government in consultation with financial and legal advisers.

A spokesman for the CBSL said Sri Lanka does not have a complete stock of debt from other countries in the world. Therefore, the entire debt restructuring process in Sri Lanka is relatively easy for those countries.

Agreements on restructuring sovereign bonds should be made with the Paris Club, with the London Club on syndicated loans, and with the G20 Group on bilateral loans from India, China and Japan.

In its Article IV Consultation report, the IMF said Sri Lanka faces ‘solvency’ issues. Its ‘debt overhang,’ the report said will impede growth and threaten its macroeconomic stability.

Sri Lanka will also need macro fiscal adjustments and divestments, to mobilise sufficient financing from official sources, including the IMF, Ms. Chua of Citibank said.

Citi’s estimate of a 10% principal haircut, up to 20-year maturity extension and 42-28% coupon cut may now be ‘too conservative’ as the public debt ratio has worsened and the local currency has depreciated more than expected, she said.

According to the IMF Debt Sustainability Analysts (DSA), debt dynamics of Sri Lanka are in a very critical stage. Therefore, it cannot seek IMF support without introducing a viable Debt Restructuring mechanism.

Based on the recently concluded Article IV Consultation team of DSA, Sri Lanka has a high risk of debt distress, with debt burden indicators well above the relevant thresholds in the baseline and all the stress scenarios. Accordingly, international tenders should be called from internationally recognised consultants/managers to implement this Debt Restructuring programme.

Thereafter, the Debt Restructuring programme would take the course of implementation with the technical assistance of the IMF, usually a timeline of about six months before its actual implementation based on a binding agreement with the IMF for the BoP assistance programme. Thus, the Government would have to focus on ‘bridging finance options’ to meet the dollar demand during this transit period.

By Ishara Gamage