By: Staff Writer
Colombo (LNW): The government authorities are carrying out a domestic debt restructuring process or debt optimization (central bank’s term) under a well designed plan to attract the attention of creditors and if it fails to gain their consent then avoiding doing more harm than good might be very difficult, official sources claimed.
To ensure that it is done right the first time, sovereign domestic debt restructuring should be part of a broader policy package that effectively addresses the fundamental problems and debt vulnerabilities, it added.
The island nation is persuading domestic creditors for a moratorium on debt repayments to manage Sri Lanka’s public debt rollover risks in the future as it has become essential to tackle the debt crisis.
At the recent investor presentation on DDO conducted on July 07, the response of participants was positive but there was no indication for an agreement for the government’s policy actions and a comprehensive debt treatment, informed official sources reveled.
To garner broad creditor participation in the restructuring and reduce the likelihood of costly litigation, the process of restructuring has to be perceived as fair and transparent.
International Monetary Fund (IMF) is likely to suggest some amendments to their Debt Sustainability Analysis (“DSA”) targets by considering the slow progress of achieving economic reform program commitments to ensure that the country restores the sustainability of its public debt
Its first policy review in September, the IMF may direct Sri Lanka towards the second Domestic Debt Optimization (DDO) strategy if the targets of the current plan are not achieved, official sources warned.
According to the central bank governor Nandalal Weerasinghe “if the country deviates from the current path, there could be another domestic debt optimization as well as another default and bankruptcy.
On the other hand the government is facing a daunting tasks of reducing its debt stock to 95 percent in 2032 from 128 percent in 2022, bringing down of GFN target to 13 percent of GDP in 2027-32 from 34.6 percent in 2022 and reduce FX debt service target to 4.5percent of GDP in 2027-32 from 9.4 percent in 2022.
Although it is branded as double edged sword by opposition politicians and some economic experts, the need to manage Sri Lanka’s public debt rollover risks in the future has become essential to tackle the debt crisis, former finance minister Ravi Karunanayake disclosed.
Restructuring domestic debt is a tool for the country facing fiscal and economic stress. And it should not drag into the second round of restructuring, he said adding that IMF is flexible to consider the government’s situation and accommodate its proposals and explanations relating to implantation of economic reforms.
