Sri Lanka to restructure domestic debt amid challenges 

The cash-strapped country declared special bank holiday on June 30 to set in local debt restructuring

June 26, 2023 08:29 pm | Updated 08:29 pm IST - COLOMBO

Sri Lanka was looking at obtaining a longer timeframe to repay its loans, as well as “some form of reduction”, President Ranil Wickremesinghe said, hinting at a haircut. File

Sri Lanka was looking at obtaining a longer timeframe to repay its loans, as well as “some form of reduction”, President Ranil Wickremesinghe said, hinting at a haircut. File | Photo Credit: Reuters

Sri Lanka will shut down its banks and financial sector for five days beginning Thursday, ahead of an extraordinary weekend debate in Parliament on the government’s plan to restructure its domestic debt.

The move comes a year after Sri Lanka decided to suspend servicing its foreign debt, to combat a devastating economic meltdown — the country’s worst since Independence. The government subsequently entered an agreement with the International Monetary Fund and secured a nearly $3 billion-dollar package from it, while agreeing to restructure both its foreign and domestic debt that the Fund estimated at about $41 billion and $42 billon respectively, as of March 2023.

In May, the IMF pointed to “tentative signs of improvement” in Sri Lanka, while underscoring the need for timely restructuring agreements with the island’s creditors ahead of the Fund’s first review scheduled in September.

Ground Zero: In Sri Lanka, a long and rocky road to economic recovery

Spelling out the government’s plan to state-owned French media during his recent visit to Paris, President Ranil Wickremesinghe said Sri Lanka’s debt restructuring programme will be presented to the Cabinet on Wednesday. “It will go to Parliament on Friday, before the public finance committee, and Saturday and Sunday it will be debated in Parliament and will be approved by Parliament. Thereafter, we can start the rest of the negotiations with our creditors,” he said in the interview broadcast on Monday.  

Sri Lanka was looking at obtaining a longer timeframe to repay its loans, as well as “some form of reduction”, Mr. Wickremesinghe said, hinting at a haircut.

China’s role

Sri Lanka’s negotiations with bilateral creditors are ongoing.  On May 9, 2023, a total of 17 countries joined an “official creditor committee”, co-chaired by India, Japan, and France, to discuss Sri Lanka’s request for debt treatment. The committee includes Paris Club creditors as well as other official bilateral creditors. China attended the meeting as an observer and is yet to formally join the committee.

India has repeatedly emphasised creditor parity among bilateral lenders — Japan and the Paris Club have echoed the sentiment — while China has demanded that multilateral creditors be brought into the same process. Meanwhile, it remains to be seen how private creditors, who hold the largest chunk of Sri Lanka’s foreign debt by way of International Sovereign Bonds, will participate.

With bilateral creditors waiting for China to come on board, and China’s insistence that multilateral creditors be subject to the same treatment, Sri Lanka’s foreign debt restructure process appears effectively deadlocked for the moment.

However, Mr. Wickremesinghe in his interview said, “We are confident of China coming along with the others”, referring to Chinese Premier Li Qiang’s “positive message” at the Paris financial summit.

“China is ready to be engaged in debt relief efforts in an effective, realistic and comprehensive manner in keeping with the principle of fair burden sharing,” Mr. Li was quoted as saying at the forum.

China’s role in Sri Lanka is closely watched, especially after China’s recent nod to participate in Zambia’s debt restructure plan. Sri Lanka’s Foreign Minister Ali Sabry is currently in China on a week-long visit and so far, there is no official word on China’s position on Sri Lanka’s debt relief request.

Domestic debt

Meanwhile, the government’s move on restructuring its domestic debt has set off concern among many, who raise its potential impact on people’s savings and retirement benefits. “We don’t know the specifics of the government’s plan yet, but, in principle, we have been opposed to restructuring domestic debt,” said Eran Wickramaratne, a legislator from the Opposition Samagi Jana Balawegaya (SJB) and former State Minister of Finance.  

“Restructuring domestic debt could mean there is an extension of tenure or maturity, an interest rate or coupon adjustment or a haircut.  Although the [rate of] inflation has reduced now, prices are still largely the same.  The value of people’s savings has gone down tremendously,” explained Mr. Wickramaratne, who is also a former banker. Domestic lenders taking a haircut could adversely affect the elderly, by impacting benefits such as Employees’ Provident Fund, Trust Fund and pensions, government critics contend.

Meanwhile, all creditors should help Sri Lanka with its debt restructuring plan, Mr. Wickramaratne noted.  “The bond investors [private creditors] who enter this high-risk scene intentionally, got higher returns in the past ten years. If they were ready for the upside, they should take the downside, too,” he said.  

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