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Sri Lanka compels to clear another hurdle of domestic debt restructuring

Sri Lanka is to clear another hurdle of massive domestic debt restructuring as external creditors want more details of government debts before formal negotiations, informed sources said.

These external bondholders expressed concern that managing Sri Lanka’s local debt pile will prove costly, which could reduce payments earmarked for foreign bondholders or even trigger another restructuring effort down the road, Bloomberg reported.

Bloomberg quotes the people, who asked not to be identified because the discussions are private, as saying that recommending Sri Lanka follows in Ghana’s footsteps to help its stalled restructuring efforts.

The African country has offered a debt swap plan for local securities in addition to its Eurobond negotiations .The Asian island nation seeks to restructure its Eurobonds while repaying its local-currency obligations in full, the new agency added.

According to available official data total Rupee debt is Rs 12.34 trillion of which are bills of 3.78 trillion and bonds of 8.56 trillion.

These Government’s debts are equal to the size of the national economy that the Central Bank is unable to tackle very high inflation purely through monetary policy tightening.

The high cost of rolling over the government’s domestic debt will aggravate the problem. The fiscal solvency and inflation makes monetary policy less effective, even with high interest rates that have a negative impact on investment and growth, economic experts claimed.

Domestic debt restructuring will provide a groundwork for resetting these negative dynamics and achieving conditions conducive to economic growth, with reduced interest rates and reduced inflation, they pointed out.

The present path of quietly restructuring domestic debt through high inflation disproportionately hurts Sri Lanka’s wage-dependent working population and increases poverty.

Reducing the burden of domestic debt through restructuring allows the costs to be targeted progressively to those sectors of the economy that are most equipped to bear the burden of debt reduction.

It is not unusual for countries that enter into insolvency and debt restructuring to fall back repeatedly into the same set of problems.

Currently Sri Lanka faces high risks in poor governance, over-optimistic fiscal targets, and triviality of the debt restructure.

Intrest rates remain at current levels and the government’s highly ambitious targets for increasing revenue are not fully met, the country faces the prospect of a relapse into another debt sustainability crisis in the medium-term.

An early domestic debt restructure can mitigate that risk – even though it cannot compensate for the continuing risks of poor governance, they said.

Sri Lanka’s domestic debt has already been re-structured de facto due to high inflation and rupee depreciation, Sharmini Cooray, a former International Monetary Fund official who is an advisor to President Ranil Wickremesinghe said.

“The high inflation and rupee depreciation has reduced the real value of domestic debt,” Cooray told an economic policy forum organized by the Ceylon Chamber of Commerce some time back. .

Central bank governor Nandalal Weerasinghe said last week that the country will hold detailed talks on domestic debt treatment only after the IMF loan has been approved.

In the meantime, the monetary authority is talking to local lenders on the debt recast and conducting an asset quality review to gauge any stress in the banking industry, he disclosed.

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