Sri Lanka might restructure all bilateral loans, ISBs and CBSL Bill/Bonds holdings


Sri Lanka may consider restructuring all of its bilateral loans, International Sovereign Bonds (ISBs), and Treasury Bill/Bond holdings of the Central Bank of Sri Lanka in order to reach its International Monetary Fund (IMF) debt sustainability level within the next ten years (2023-2032), global capital market experts, revealed to Finance Today.

They indicated that by 12 April 2022 all outstanding debt obligations in Sri Lanka subject to this classification would indeed be restructured accordingly.

According to already finalised IMF debt sustainability analysts (DSA), the IMF has focused primarily on restructuring only the Treasury Bill/Bonds Holdings of the CBSL on the principle that debt should be restructured on an equality basis with the participation of both foreign and local parties in order to achieve debt sustainability in Sri Lanka.

As of yesterday, the Treasury bill/bonds holding of the CBSL was at 2.3 trillion rupee level. It is said that attention has been focused on transferring all or part of this to a special Bond and carrying out the relevant restructuring activities.

According to sources, Lazard, the financial advisor to Sri Lanka’s debt restructure process, is confident that the required, minimum 75% consent of external commercial debt holders captured by the Committee of Creditors will agree to one of several scenarios involving a mix of ‘haircuts,’ lower rates, and longer duration on the aggregate $51 billion of external debt owed by Sri Lanka that is not being serviced.

Talks with holders of ISBs are however, a more complex exercise with geopolitical implications.

A clarification, sourced from the Government, is required here on the USD 51billion. Total Commercial Debt subject to restructure is put at USD 14.5 billion. It comprises USD 12.5 billion of ISBs issued by Sri Lanka and USD 1.4-2 billion of other debt obtained from commercial lenders such as the Chinese Exim Bank.

Government sources also clarified that the External Public Debt subject to restructuring is put at USD 33.67 billion from which USD 9.38 billion is due to Multilateral Agencies such as World Bank, IMF and ADB.

Such debt, government sources clarified that multilateral loans are not subject to restructuring as they carry mandatory repayment in full and carries no discounts.

It also learnt that all foreign loans taken by Sri Lanka after April 12, as well as all short-term Central Bank swaps and obligations payable to the Asian Clearing Union shall not be restructured under any circumstance.

All local Treasury Bills and Bonds, as well as Sri Lankan Development Bonds (SLDBs), are not subject to restructuring. However, maturing SLDBs are already being settled in local rupees.

Thus, total external debt attributable to the Central Government is USD 24.29 billion to which must be added an amount of USD 1.4 billion being Chinese commercial debt obtained for the plant in Norochcholai thereby increasing it to USD 25.69 billion.

It should be noted that the $25.69 billion excludes commercial debt on the balance sheets of other State-Owned Enterprises.

Of the USD 25.69 billion noted above, 26% amounting to some USD 6.8 billion comprises debt owed to China indicating the size of the grip held by China on Sri Lanka.

Negotiations with creditors for debt restructuring are now under way. According to sources, in order for the IMF Executive Board to approve Sri Lanka’s already announced economic adjustment package, bilateral lenders must support the debt restructuring process 100 per cent.

Sri Lanka has reached a staff-level agreement (formal arrangement) with the IMF, offering access to 2.9 billion dollars over a four-year period. The agreement is a step toward persuading international creditors and investors to return to the country with a sustainable debt level, robust Macroeconomics  and governance environment.

However, political observers stated that the political system is still in chaos, unable to unite on a clear framework that can inspire both internal and external confidence in implementing reform as an essential corollary of debt restructuring in order to receive and sustain IMF help and money.

In April 2022, Sri Lanka became the first South Asian country to default in the pandemic era, struggling with debt that reached unsustainable level of 140% of its GDP.

“Negotiations are required to choose between haircuts and extending the repayment period. And that negotiation will reflect the creditor’s preferences. Some creditors “may prefer to obtain their money sooner,” analysts said. “Others will choose not to have a haircut and instead have the money spread out over a longer period of time,”

Africa and the Middle East have increased their share of government issuance, as have emerging Asia and the Pacific.

However, ISBs may not be the optimum avenue to mobilise resources because overseas borrowing requires debt payment commitments in foreign currency.

The increased reliance of developing countries on ISBs has not only contributed to a debt crisis, but has also made resolution nearly impossible.

By Ishara Gamage