Debt restructuring and our local debt - EDITORIAL

In April last year, our country’s rulers finally admitted that sections of the public already knew for some time - that we had reached a point of no return. Our expenditure had far exceeded our income and we did not have the capacity to repay our creditors both local and international.

In short, it meant we had lost our creditworthiness leading to the sharp depletion of foreign exchange and severe shortages of consumer goods, energy sources including fuel and electricity and inputs for various industries.

The situation compelled the Government to introduce essential policy measures, to curtail inflationary pressure and prioritization of essential imports to minimize foreign exchange outflows and prevent worsening the crisis. It was also forced to apply for a rescue facility from the International Monetary Fund (IMF) to help redeem our creditworthiness in international financial circles. 

Following the debt default in April, last year, debt restructuring has now taken the front seat. Debt restructuring is the process undertaken to re-establish debt sustainability and the decision to restructure is undertaken when no other option to re-gain debt sustainability is considered politically or socially acceptable.
Debt restructuring aims at manageable levels of Gross Financing Needs (GFNs), manageable levels of debt services denominated in domestic and foreign currency and a declining debt to Gross Domestic Product (GDP) ratio to manageable levels in the medium-to-long run.

The IMF providing rescue facility, helped restore a modicum of creditworthiness in negotiations with both multi-lateral lenders and private financial institutions e.g., hedge-fund creditors in restructuring debts, including ‘Face Value Reduction’ where the nominal value of outstanding debt is reduced, giving the highest degree of relief to the debtor.
Initially, the government negotiators emphasized there would be no restructuring of the ‘domestic debt’, however more recently this has changed - today we are informed restructuring the domestic debt will happen. How did this suddenly change? Are our foreign creditors demanding this as a condition for restructuring the foreign debt? 

The present brouhaha raised in parliament demands the domestic debt not be restructured. Opposition politicians point out restructuring the domestic debt could lead to a collapse of the banking sector and in a domino effect - the economy of the country.
Also endangered are EPF and ETF funds which like some banks have invested heavily in government bonds and treasury bills. The EPF and ETF are the life-savings of the ordinary workers of the country.   

International creditors have never publicly vocalized a demand that their willingness to restructure the debt owed to them is dependent on local creditors doing the same. However, the government implies this is the case. The fact of the matter is that the ongoing uncertainty is not breeding confidence.
The IMF describes a country’s domestic debt is considered sustainable if the government is able to meet all its current and future payment obligations without exceptional financial assistance or going into default.

Questions are being raised as to why if Zambia, which was also in a similar position to ours avoided restructuring its domestic debt, why we accepted this condition. 
According to sources close to the government who wish to remain anonymous, the first stage of domestic debt restructuring may see the interest rates on deposits brought down, as well as delayed payments on capital invested. At this stage there is no thought of Face Value Reduction.
Making the debt sustainable will also necessitate the sale of loss-making state- owned enterprises. Public Finance.lk reveals that during the first four months of 2022, the cumulative loss of State-Owned Enterprises (SOEs) amounted to LKR 860 billion. 

The top three contributors to the increase of the loss were; (1) Ceylon Petroleum Corporation (CPC) (2) Srilankan Airlines and (3) Ceylon Electricity Board (CEB). However, trade unions and some political parties are totally opposed to the selling of SOEs. 
We also know the restructuring efforts will bring pain to the more vulnerable sections of the community. It is time our warring politicians and political parties put country before petty party-political aspirations and seek a manner we as a people drag this country out of debt, while at the same time easing the burdens on the more vulnerable sections 
of society.