Prez reignites domestic debt restructuring fears

• Says ISB holders may push govt. to restructure domestic debt as they alone may not be keen to take a haircut 
• Points out it is pension funds and banks that have invested mostly in Lankan ISBs and not multi-billionaires 
• Says Sri Lanka needs to have one approach towards debt restructuring, may it be ISB or bilateral debt
• Remains optimistic of fresh foreign inflows once SL enters a staff-level agreement with IMF 

Reigniting fears over a potential local debt restructuring, President Ranil Wickremesinghe this week warned that Sri Lanka’s International Sovereign Bond (ISB) holders may push the government to restructure the domestic debt, as they alone may not be keen to accept a steep haircut under a debt sustainability plan, which is a prerequisite to secure an International Monetary Fund (IMF) bailout. 

“The more difficult issue is how do you deal with private creditors? The money that is invested is not all by multi-billionaires. Lots of money is from pension funds and from other earnings, from banks and a haircut means that those pensioners have to take a dock. We know the situation where we are in, where the EPF today is worth half of what it was three years ago. So, will they take that cut? That is what we have to decide,” Wickremesinghe told the Organisation of Professional Associations (OPA) annual conference and awards ceremony held in Colombo this week.

Following the pre-emptive debt default on foreign debt on April 12, Sri Lanka is required to secure the consent of its foreign creditors, including bilateral creditors and majority of ISB bondholders, to initiate restructuring of its debt to secure an IMF bailout package. 

Finance professionals and economists have warned that a full-scale restructuring of the rupee-denominated domestic debt could bring severe implications on the country’s banking sector, endangering the stability of the financial system.

Lazard, Sri Lanka’s financial advisor in debt restructuring, is currently preparing the debt sustainability plan for the country and the government has already initiated debt restructuring talking with India. However, Wickremesinghe noted that China remains as the first hurdle in 
this process. 

“Now there are two groups – the West, which thinks of a haircut and the Chinese would like to give additional loans to pay off these loans. So, there has to be one approach and we are talking with Japan about how this could be achieved and we’ll talk with China,” he noted. 

After agreeing on the debt sustainability plan, Wickremesinghe said the government would be forced to increases taxes, which would result in bankruptcies, in particular impacting the small and medium enterprises and further adding strain on the banking sector’s asset quality.

 However, he assured that the government would come up with measures to contain the impact without divulging further details. “That we have to face and the government is preparing measures for that. But let’s ensure that this is only for a short term and not even for the medium term. To do so, we must at the same time look at our stabilisation,” he said.

Following the enactment of the proposed 22nd Amendment to the Constitution, Wickremesinghe revealed that the government is considering the appointment of a Parliament oversight committee on banks and financial services. Although the economy is not out of the woods yet, Wickremesinghe said the country is moving towards gradual stabilisation. Once the country secures a staff-level agreement for the IMF bailout, he was optimistic that the country would see an increase in foreign exchange inflows. “... the staff-level agreement will come in and that will give us confidence. Money will come in from some other donors, some other multilateral organisations; some investors wouldn’t mind taking the risk,” he said.