Cash-strapped Sri Lanka To Restructure Domestic Debt
Protesters display placards during an anti-government demonstration near the president's office in Colombo on April 20, 2022 demanding President Gotabaya Rajapaksa’s resignation over the crippling economic crisis. (Photo: AFP)
Cash-strapped Sri Lanka is set to restructure its domestic debt, amounting to over $51 billion, following a five-day closure of financial markets starting from Thursday. The restructuring aligns with an International Monetary Fund (IMF) bailout agreed upon in March, after Sri Lanka defaulted on its foreign debt in April of the previous year and declared bankruptcy.
A parliamentary official stated that lawmakers are expected to convene on Tuesday to discuss the possibility of holding a special session later in the week to approve the debt restructuring plans.
Nandalal Weerasinghe, the Central Bank Governor, announced that Friday would be declared a holiday in addition to the existing religious holidays on Thursday and Monday, as well as the weekend. He explained that it would be detrimental for the markets to remain open while the debt restructuring was being deliberated in parliament.
Weerasinghe, in an interview with Hiru TV, emphasized that markets should not operate during discussions regarding sensitive debt restructuring. He expressed hopes of completing the restructuring process within the designated five-day period. Weerasinghe assured individuals that their deposits would not be affected, while the government's plan is to restructure treasury bills and bonds held by commercial banks and pension funds.
Negotiations with foreign creditors are still ongoing to restructure external debt, which is a crucial requirement to continue with the four-year, $2.9 billion IMF rescue package. The government had anticipated foreign debt restructuring by August of the previous year, but the process was delayed as China, the country's main bilateral creditor, initially hesitated to accept a reduction and instead proposed additional loans to repay old debts. Out of the total foreign credit, over $14 billion consists of bilateral debt owed to foreign governments, with 52 percent of it owed to China.
As part of IMF conditions, the government must reduce both domestic and foreign debt servicing by over half in order to achieve fiscal balance and recover from the severe economic crisis the island nation is facing. Sri Lanka experienced a shortage of foreign exchange, leading to unprecedented scarcities of essential imports such as food, fuel, and medicines last year. Widespread protests against economic mismanagement eventually resulted in the ousting of former President Gotabaya Rajapaksa in July. His successor, six-time Prime Minister Ranil Wickremesinghe, has implemented measures including cracking down on protests, raising prices, eliminating subsidies, and doubling taxes in an effort to stabilize the economy.
The IMF recently stated that Sri Lanka's economy has shown "tentative signs of improvement," but the road to recovery remains challenging, and Colombo must undertake painful reforms.
(Disclaimer: The article has been sourced from Rastriya Samchar Samiti (RSS).)
