Minister Semasinghe says no domestic debt restructuring, but markets not convinced

• Says govt. hasn’t taken any decision to restructure domestic debt as talks with foreign creditors ongoing
• Stresses govt. has no intention to impose any treatment on domestic debt which will have adverse impact on domestic banking sector, insurance sector and superannuation funds
• However, markets have grasped reprofiling of domestic debt as a certainty
• They remain skeptical of debt restructuring, which could include haircuts

State Finance Minister Shehan Semasinghe yesterday said the government up to now has not taken any decision to restructure the domestic debt, though speculation is rife that ultimately Sri Lanka will be compelled to restructure domestic debt.

“Government has not made any decision to restructure domestic debt as negotiations of treatments on external debt still been discussed with external bilateral and commercial creditors,” Minister Semansinghe tweeted.

“GOSL has no intention to impose any treatment on domestic debt which will have an adverse impact on the domestic banking sector, insurance sector and superannuation funds. 
“There is no basis for the recent speculation announced on restructuring domestic debt,” his twitter message further said. 

However, markets have digested the fact that reprofiling of the domestic debt as a certainty going forward, though they remain skeptical of a debt restructuring, which could include haircuts.
Debt reprofiling in simplest terms means extending the repayment maturity while interest rates on borrowed money are not cut. According to former Central Bank Deputy Governor Dr. W.A. Wijewardena, a potential domestic debt restructuring exercise, involving a capital haircut, could potentially bankrupt the country’s largest pension fund, the Employees’ Provident Fund (EPF), while wiping out Central Bank’s capital base and heighten risks on financial sector stability.

The government in a statement released following talks with the country’s official foreign creditors recently said certain domestic creditors are to be ringfenced for financial stability or social reasons.

“We are still assessing precisely, with the assistance of our debt advisors and the IMF team, the impact certain reforms the domestic financial sector may have on our fiscal accounts and growth estimates,” the statement said.

“Yet, we want to reassure our external partners that this topic is being looked at with an open mind, and by reference to the principle of fair and equitable treatment of all creditors.  
“This does not mean however that strict comparability of treatment will necessarily apply between external and domestic creditors (given that certain domestic creditors are to be ringfenced for financial stability or social reasons),” it added.