DDR: Need proper assessment to beat financial tsunami
Cherry picking should not be done in the domestic debt restructuring (DDR) process and if done properly, the
Sri Lankan population can live with it, economists say.
“It should be done for all debt securities and adjusted equally. The fear of debt restructuring is far greater than the actual pain. If you spread it out as much as possible, with the interest rates coming down it should be fine,” Murtaza Jafferjee, Chairman Advocata Institute told The Business Times. He said the impact on DDR for the deposit holders is a distant risk whereas the near-term risk is for the shareholders and bondholders of banks. “Risk to capital erosion is already built into the banks.”
A webinar on DDR by the Institute of Certified Management Accountants of Sri Lanka on Thursday saw Prof. Udara Peiris say that in the event of a DDR, it is unlikely that Treasury Bills will be restructured, simply because by the time the restructuring of debt is completed, the bonds will have matured. The focus will be on the treasury bonds, he added.
He also said that there would be less need for “money printing” which should reduce negative pressure on the exchange rate.
He added that implementing DDR would cause interest rates to decrease after it, so there would be a positive valuation effect in the share market. “Debt sustainability would then further increase values,” he added.
Dr. W. A. Wijewardena, former Central Bank (CB) Deputy Governor, said that nobody is safe in this financial tsunami.
He said the government finances are in bad shape and the economy must cut down on expenditure. “There is absolutely no alternative than to go for a debt restructure.”
He pointed out that the terms of the IMF bailout package says structure State Owned Enterprises (SOEs) that is part of the wider public debt and the public will need to know when and how these will be restructured. “The monopoly power of the SOEs has to be broken. These are the long-term structural adjustments the government will have to do.”
The government does not seem to be aware of the precarious position it is in, he said noting that the CB has US$ 6 billion credit to the rest of the world. It must pay interest to these countries and does not earn any foreign exchange, he added.
He noted that the Employees Provident Fund interest rate is less than 12 per cent and the average earnings are less than 10 per cent of the portfolio. “The domestic debt of the public sector is wider. The Sri Lanka Government is trying to optimise only a part of the domestic debt. The IMF has put a cap on the CB to print more cash. The IMF has imposed austerity measures to both the government as well as the CB.”
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