Improved transparency could lead to higher haircut: Dr. Weerasinghe

If the island nation improves transparency as suggested by commercial creditors and successfully reduces corruption while boosting government revenue, there is a chance the proposed 28 percent haircut could be increased to around 35 percent, according to Central Bank Governor Dr. Nandalal Weerasinghe.

The governor noted that what is crucial is  the reduction in relief being on par with what bilateral parties receive, even if it’s not a haircut. 

“If bilateral creditors do not offer a haircut, they may provide a similar form of relief. According to the IMF, if the economy performs as projected, achieving sustainability with a 28 percent haircut is feasible,” he said.

Dr. Weerasinghe explained that for instance, if the country grows at an average of 3 percent, it can meet this requirement. However, if growth reaches 5 percent, creditors expect the haircut to reduce from 28 percent to 20 percent. 

This scenario implies that as government revenue increases with higher growth rates, a portion of these gains should be allocated to bondholders.

Moreover, if the growth rate falls below 3 percent, there’s a possibility of negotiating a higher haircut, potentially reaching 35 percent or 40 percent instead of the initial 28 percent, he said. 

“This provides a safeguard in case our country’s economic growth slows down unexpectedly,” said Dr. Weerasinghe.