SL DDR: Still honeymooning phase
After some clarity on Sri Lanka’s domestic debt restructuring (DDR) that local banks will not be entitled to a haircut, some stakeholders were relieved but others are awaiting more pain as the process progresses.
State Finance Minister Dr. Ranjith Siyambalapitiya told Parliament on Tuesday that domestic debt will not be written off. No injustice will be done to any bank depositors, Superannuation Funds’ beneficiaries and pensioners due to domestic debt restructuring, he said.
He also said that domestic debt restructuring does not mean writing off debt. “However, it might include freezing loans or writing off interest,” he said.
Central Bank Governor Dr. Nandalal Weerasinghe in early May said that public bank deposits and the stability of the banking system will be safeguarded in any reorganisation of domestic debt.
More clarity on this is to be expected after President Ranil Wickremesinghe returns from overseas after discussing with the Paris Club members who are the ISB holders is what Shehan Semasinghe, State Minister Finance has told recently.
Samagi Jana Balawegaya MP Kabir Hashim told the Business Times that the lack of transparency in statements made by government ministers has kept the country guessing which is not good for the debt restructuring process.
The country has a domestic debt of Rs. 15 trillion (US $ 47 billion), with foreign debt totalling Rs.12.5 trillion. The major domestic lenders to the government are private and public banks (Rs.8.5 trillion) with the remainder from non-banking sources.
The Employee Provident Fund (EPF) has invested around 95 per cent of its Rs. 3.5 trillion in government securities. An economist said that this is a crucial honeymoon period for the country where it has defaulted on its international debt and awaiting debt restructuring.
Meanwhile, sources told the Business Times that about two months ago, the Central Bank (CB) had requested private bankers to send their financials to check on the status quo in the event of a DDR. They said that the CB had found out that most private banks can manage with a haircut.
Ravi Abeysuriya, Advocacy Chair / Director, CFA Society Sri Lanka told the Business Times that despite a ‘no-no’ on DDR, a maturity extension and or a coupon rate cut of bonds would be required.
“The government has said that there will not be a principal haircut on sovereign bonds which is good news for all those who have invested in government bonds. But the country has a debt sustainability requirement which can only be achieved by bringing the Gross Financing Needs (GFN) and Debt to GDP ratio to manageable levels. For this, a maturity extension and or a coupon rate cut of bonds would be required.”
A senior banker said that the only way out is to soften the cushion of the cash outlays. He also pointed out that the taxes, as expected by the government, aren’t coming through. “Some MPs are also discouraging the privatisation of Sri Lanka Telecom, Lanka Hospitals etc. They are promoting restructuring the loss-making state owned enterprises. This will most likely entail a voluntary retirement scheme for the employees of these entities, and the banks will need to restructure the payment terms of loans that the entities have taken. These units will also need to sell unnecessary and underutilised assets. Somebody will have to pay along the line,” he added.
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