Reuters – Sri Lanka on Thursday unveiled plans to restructure its massive domestic debt in a bid to meet goals set by the International Monetary Fund (IMF) and rebuild a crisis-hit economy.
The island nation is seeking a 30% haircut for foreign investors in its international bonds as it seeks to restructure its massive debt, and is asking other dollar-denominated bond holders to make similar concessions, the central bank governor said. said Thursday.
The island nation of 22 million last year suffered its worst financial crisis since independence from Britain in 1948 as a severe dollar shortage led to its first external debt default in May 2022.
What happened so far?
Sri Lanka pledged to put its huge debt burden on a sustainable trajectory and in March decided on a $2.9 billion bailout from the IMF. Domestic debt restructuring is necessary for the country to meet the IMF programme’s goal of reducing total debt to 95% of GDP by 2032.
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The country’s central bank on Thursday announced a restructuring plan that would include exchanging treasury bills for long-term bonds.
What does a domestic debt restructuring involve?
Central bank governor Nandalal Weerasinghe said the domestic debt review would give holders of locally issued dollar-denominated bonds, such as the Sri Lanka Development Bond (SLDB), three options.
The first would be treated like investors in the country’s international sovereign bonds: a 30% principal haircut, a six-year maturity, and a 4% interest rate.
“We are asking foreign bond holders to get a 30% haircut, but it is still under discussion,” Weerasinghe said.
Sri Lanka currently holds $12.5 billion in international government bonds.
Domestic bondholders have two other options.
– Treatment similar to that proposed for bilateral dollar creditors: no principal haircut, 15-year maturity and 9-year grace period at 1.5% interest rate.
– Exchange your shareholdings for local currency instruments: SLFR (Sri Lanka Standing Financing Facility Rate) + 1% interest rate with maturity of 10 years and no principal haircut.
Other Points on Domestic Debt Reform
• Local currency bonds held by the Superannuation Fund will be exchanged for longer maturity bonds (2027-2038) with a tiered coupon structure of 12% (up to 2025E) and 9% until maturity is proposed.
• Treasury bills held by the Central Bank of Sri Lanka (CBSL) will be converted into step-down coupon bonds maturing between 2029 and 2038. This will be implemented in the second phase of the domestic debt restructuring.
• Considering that the banking sector is currently under great stress due to an increase in non-performing loans, the impact of external debt restructuring, and high tax rates, treasury bills and Treasury bonds held by the banking sector have Excluded from coverage.
Why is domestic debt review important?
Treasury Secretary Mahinda Siriwardana said on Thursday that the restructuring would cover some of the $42 billion domestic debt.
Domestic restructuring is likely to create momentum to renegotiate $36 billion of external debt, including $24 billion held by corporate bondholders and bilateral creditors such as China, Japan and India. .
Sri Lanka has set a goal of finalizing its debt restructuring talks by September, coinciding with the first review of the IMF programme.
The domestic restructuring framework will now be submitted to parliament on Saturday for approval. CBSL hopes to complete the bond swap of the aged funds by the end of July.
How are potential fallouts prevented?
Aiming to curb potential market volatility, Sri Lanka has declared a five-day holiday from 29 June to 3 July.
Losses on bond sales will be recognized in the third quarter due to bank holidays, analysts said.
(Reporting by Udita Jayasimha; Editing by Shilpa Jamkandikar; Editing by Kim Kogil)
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