Banking sector seeks more clarity on proposed Domestic Debt Optimisation

• Says transparency and clarity key to arrive at a successful debt restructuring solution to all 
• Asks clarity on what is meant by “voluntary” debt optimisation, is there a non-voluntary element and to whom does this apply
• Urges govt., IMF and creditors to look at consequences of a potential DDR on banking sector

Sri Lanka’s banking sector has sought more clarity and transparency from the government on the recently proposed Domestic Debt Optimisation (DDO), in order to arrive at a successful debt restructuring solution acceptable to all, without causing a further escalation of the crisis.

“The management of this process, including priorities of the GoSL through their agents, the IMF expectations and all public debt holders, is admittedly difficult, given the diversity of interests. However, the lack of transparency in the negotiations with the SLBA member bank consortium is unhelpful,” the Sri Lanka Banks’ Association (SLBA)
said in a statement. 

Although the government has proposed a DDO to be conducted on a voluntary basis, the SLBA noted that the government so far has kept the details of the DDO from the banking sector. Hence, it urged the government to reveal more details of the proposed DDO, particularly with regards to whether there’s a non-voluntarily element with the International Sovereign Bond (ISB)
restructuring terms.

“The banks have asked for clarity on what is meant by “voluntary” debt optimisation, is there a non-voluntary element and to whom does this apply (limited to the larger Treasury bills/Treasury bond holders such as the superannuation and pension funds and state-owned banks), more disclosure on the proposed DDO and ISB restructuring terms, what is the IMF’s view of Sri Lanka’s economic growth prospects over the duration of the IMF Extended Fund Facility and whether the proposed DDO would resemble the experience of some other countries, who have taken this route before us,” the statement said.

Meanwhile, the SLBA stressed that the government along with the IMF and creditors must look at the consequences of a potential domestic debt restructuring (DDR) on the banking sector, which could further escalate the current crisis.

“The banks believe that all stakeholders involved in structuring the restoration of Sri Lanka’s balance of payments to a sustainable equilibrium must necessarily take a careful look at the resulting outcomes – impact to the banking sector capital and liquidity in a potential DDR and minimise the risk to the sector. A further escalation of the situation we are in, must be avoided.

It must be borne in mind always that the banking sector will have to play an active role in Sri Lanka’s economic revival process. The sector Capital Adequacy Ratios (CAR) and Liquidity Coverage Ratios (LCR) are presently within the regulatory requirements. This position must not be depleted through any action, including a debt restructuring that threatens the stability of the banks and erodes public confidence,” it elaborated.