Sri Lankan authorities have declared a five-day financial market shutdown starting Thursday ahead of a controversial move to restructure the government’s domestic debt of more than $51 billion.
The restructuring will affect sovereign debt in line with an IMF bailout agreed in March after Sri Lanka defaulted on its external debt and declared bankruptcy last April.
Lawmakers will meet on Tuesday to discuss holding a special session to approve the debt restructuring plan later this week, a congressional source said.
Central Bank Governor Nandalal Weerasinghe said authorities had instructed Friday to be a holiday in addition to existing religious holidays on Thursday, Monday and the weekend.
He told local television that it would be unsound for the market to remain open while the debt restructuring was debated in Congress.
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“The market should not function when sensitive debt restructurings are being discussed,” Weerasinghe told Hiru TV Network. “We hope to complete the restructuring process within the next five days.”
Weerasinghe said personal deposits would not be affected, but the government’s plan was to restructure treasury bills and bonds held by commercial banks and pension funds.
The government is still in talks with foreign creditors to restructure its external debt, a key condition for continuing the $2.9 billion IMF bailout over four years.
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The government had planned to restructure its external debt by August last year, but China, a major bilateral creditor, was initially reluctant to cut haircuts, instead offering additional loans to pay off old debt. Therefore, the restructuring was postponed.
More than $14 billion of total external debt is bilateral debt to foreign governments, 52% of which is owed to China.
Under IMF terms, the government must cut its domestic and foreign debt servicing by more than half in order to balance the balance and pull itself out of the island’s worst economic crisis.
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The country ran out of foreign currency to finance even its most important imports early last year, creating unprecedented shortages of food, fuel and medicine.
Months of protests over mismanagement of the economy overthrew then-President Gotabaya Rajapaksa in July.
Rajapaksa’s successor, six-time prime minister Ranil Wickremesinghe, has cracked down on protests, raised prices, abolished subsidies and doubled taxes in an effort to stabilize the economy.
Earlier this month, the IMF said Sri Lanka’s economy was showing “provisional signs of improvement” but recovery remained difficult and Colombo would need to pursue painful reforms.
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