Sri Lanka: The Central Bank of Sri Lanka (CBSL) has revealed a comprehensive plan to restructure the country’s domestic debt, aiming to restore stability in the crisis-ridden nation. This move comes as the government strives to fulfil the conditions of a $2.9 billion bailout package from the International Monetary Fund (IMF), which was agreed upon in March 2023 and is seen as crucial for Sri Lanka’s economic recovery. Debt restructuring is necessary to help the country achieve the IMF program’s target of reducing overall debt to 95 percent of the gross domestic product (GDP) by 2032.

Last year, Sri Lanka faced a foreign exchange crisis that left the government unable to pay for essential imports, such as fuel, food, and medicine. This led to protests and the removal of the then-President Mr. Gotabaya Rajapaksa. Under the proposed domestic debt revamp, holders of locally issued dollar-denominated bonds, such as Sri Lanka Development Bonds (SLDBs), will have three options to choose from. The first option involves a 30 percent reduction in the principal amount with a six-year maturity and a 4 percent interest rate, similar to investors in international sovereign bonds. The second option offers a 15-year maturity period with no reduction in principal, a nine-year grace period, and a 1.5 percent interest rate, similar to what is proposed for bilateral dollar creditors. The third option allows bondholders to exchange their holdings for local currency-denominated instruments with no principal reduction, a 10-year maturity period, and an interest rate based on Sri Lanka’s standing lending facility rate (SLFR) plus 1 percent.

Currently, Sri Lanka holds $12.5 billion in international sovereign bonds and has $11.3 billion in bilateral loans. The debt restructuring plan also includes exchanging local currency bonds held by superannuation funds, including pension funds, for longer maturity bonds with a 9 percent interest rate until maturity. The CBSL’s holdings of treasury bills will be converted to bonds maturing between 2029 and 2038. However, treasury bills and treasury bond holdings of the banking sector are excluded from the restructuring due to the significant stress on the sector caused by increasing non-performing loans, the impact of external debt restructuring, and high taxation.

The debt restructuring is expected to set the stage for negotiations on the country’s $36 billion external debt, including $24 billion held by bondholders and bilateral creditors such as China, Japan, and India. Sri Lanka aims to finalize the debt restructuring talks by September to align with the first review of the IMF program. The domestic restructuring framework will be presented to Parliament for approval, and the CBSL aims to complete the bond exchange for superannuation funds by the end of July 2023.

To prevent potential market volatility, Sri Lanka has declared a five-day holiday from June 29th to July 3rd of 2023. This allows any losses from bond sales to be recognized in the third quarter of the year.

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