Government resorts to domestic debt restructuring surgery
Sri Lanka Government is now resorting to restructure domestic debt to overcome fiscal and economic stress
Restructuring domestic debt is like surgery:“You only do it if you must, and you avoid it if it might do more harm than good” , the International Monetary Fund clarified in a recent report.
On the one hand, domestic debt restructuring may be easier to accomplish. Authorities can, for example, simply elect to alter the terms of debt contracts through changing domestic law.
On the other hand, domestic debt is often held predominantly by domestic creditors who will suffer losses.
Through this channel, sovereign debt distress can easily spread to domestic banks, pension funds, households and other parts of the domestic economy. This can add to the economic malaise that made the debt restructuring necessary in the first place.
So the government is now ina catch 22 situation caught up between options of Domestic Debt Restructuring or not. , he said adding the President is determined to take the risk.
Sri Lanka should not pave the way to create a banking crisis in attempting to reduce government debt by imposing haircuts on rupee debt in a bid to reach debt sustainability, Former Finance State Minister Eran Wickremeratne has said
Of the total debt, domestic debt increased by 22.4 percent to Rs. 11,097.2 billion at the end of 2021 from Rs. 9,065.1 billion at the end of 2020. The share of domestic debt in the total debt stock increased to 63.1 percent at the end of 2021 from 60.0 percent recorded at the end of 2020.
Rupee debt holders have already suffered a steep real hair cut with the rupee falling from 182 to 360 to the US dollar over the past two years and inflation hitting 60 percent.
When banks lose their capital the government will anyway have to bail them out adding to the debt, he claimed.
Pension funds such as EPF and ETF, financial sector which includes banks and insurance firms, as well as corporates holding a majority of the Treasury bonds will be greatly affected by domestic debt restructuring former Minister of Mega Polis Patalee Champika Ranawake said.
Around 8 million account holders in the EPF and ETF will face difficulties in recovering their gratuity as most of these funds invested in Treasury bonds, he said, adding that 57 percent of assets of the Bank of Ceylon and the Peoples Bank had been given to the government.
This is a serious and critical situation, he said, pointing out that President Ranil Wickremasinghe should hand over the surgery of debt restructuring and the ailing economy to a specialist surgeon and eminent economic consultant to save the patient.
The following finance ministry statistics show the gravity of the domestic debt ailment of the country he said.
Finance Ministry data
The total debt, domestic debt, increased by 22.4 percent to Rs. 11,097.2 billion at the end of 2021 from Rs. 9,065.1 billion at the end of 2020.
The share of domestic debt in the total debt stock increased to 63.1 percent at the end of 2021 from 60.0 percent recorded at the end of 2020.
The share of short-term debt in total domestic debt stock increased to 28.3 percent by the end of 2021 from 24.2 percent reported at the end of 2020 mainly due to the increase in the Treasury Bills by 40.1 percent, to Rs. 2,270.5 billion at the end of 2021, compared to Rs. 1,620.7 billion recorded at the end of 2020.
Furthermore, the share of Treasury Bills in total domestic debt stock increased to 20.5 percent at the end of 2021 from 17.9 percent at the end of 2020.
The medium and long term domestic debt stock increased by 15.9 percent to Rs. 7,957.4 billion by the end of 2021 from Rs. 6,867.5 billion recorded at the end of 2020.
The banking sector debt increased by 15.5 percent to Rs. 5,467.1 billion at the end of 2021 from Rs. 4,731.7 billion in 2020 due to the increased debt to commercial banks and the Central Bank