Sri Lanka Banks Concerned Over Local Debt Restructuring, Seek Transparency From Government

Sri Lanka’s banking sector has sought more clarity and transparency from the government on the recently proposed domestic debt restructuring plans without causing a further escalation of the economic crisis in the country.

Having obtained a $3 billion facility from the International Monetary Fund, cash-strapped Sri Lanka is currently negotiating debt restructuring with bilateral and multilateral creditors and is expected to make an announcement on the restructuring of both domestic and external debt.

In a statement, the Sri Lanka Banks’ Association (SLBA), representing all the licensed banks in the country and underpins all sectors of the economy, called out the government's lack of transparency in the debt structuring process.

“The management of this process, including priorities of the GoSL (Government of Sri Lanka) through their agents, the International Monetary Fund (IMF) expectations and all public debt holders is admittedly difficult given the diversity of interests,” the statement said on Monday.

“However, the lack of transparency in the negotiations with the SLBA member bank consortium is unhelpful,” it added, according to the Economy Next news outlet.

“It must be borne in mind always that the banking sector will have to play an active role in Sri Lanka’s economic revival process,” the statement said.

All stakeholders involved in structuring the restoration of the Balance of Payments to a sustainable equilibrium must take a careful look at the resulting outcomes - impact on the banking sector capital and liquidity in a potential Domestic Debt Restructuring (DDR) and minimise the risk to the sector, the statement said.

"A further escalation of the situation we are in must be avoided," it added.

The banks seek clarity on Sri Lanka’s Central Bank and Treasury officials' statements that there will be voluntary debt ‘optimisation’ for domestic debt holders and questioned whether there is a non-voluntary element which applied to state banks and pension funds, according to the report.

“The banks reiterate that maintaining the stability of the banking system is paramount at this time when extremely difficult decisions are being made,” the statement said.

Last week, Sri Lanka's Parliament approved the $3 billion IMF bailout package to revive the island’s economy, hit hard by a catastrophic economic and humanitarian crisis sparked by years of mismanagement and the raging pandemic.

The Washington-based global lender said the island nation's debt restructuring proposal should cover official bilateral and commercial creditors and expects the debt restructuring to be done through an extension of the grace period and maturity interest rate reduction, nominal hair cut or a combination of these.

According to official figures, Sri Lanka’s total debt is $83.6 billion, of which foreign debt amounts to $42.6 billion externally and domestic debt amounts to $42 billion.

In April 2022, Sri Lanka declared its first-ever debt default, the worst economic crisis since its independence from Britain in 1948, triggered by forex shortages that sparked public protests.

Months-long street protests led to the ouster of the then-president Gotabaya Rajapaksa in mid-July. Rajapaksa had started the IMF negotiations after refusing to tap the global lender for support.

In March this year, the IMF approved a $3 billion bailout programme to help Sri Lanka overcome its economic crisis and catalyse financial support from other development partners, a move welcomed by Colombo as a "historic milestone" in the critical period.

Wickremesinghe, in a recent address to Parliament, said that having obtained the $3 billion facility from the IMF, Sri Lanka is currently negotiating debt restructuring with bilateral and multilateral creditors.

Sri Lanka has introduced painful economic measures such as tax hikes and utility rate hikes to unlock the programme. Trade unions and opposition groups have organised protests against such actions.

The programme will allow Sri Lanka to access financing of up to $7 billion from the IMF, International Financial Institutions (IFIs), and multilateral organisations.