By:Staff WriterColombo (LNW):Sri Lanka is eying options to re-structure domestic debt, or local law local currency debt (LLLC), without harming the banking sector and announcing them, the International Monetary Fund said in a report.
Local Law Local Currency Debt is held by the banks, pension funds, individuals and the central bank. Sri Lanka has to restructure debt to meet a ceiling on debt-rollovers and new deficits called the gross financing need from 2027, which has been set at 13 percent of GDP (from 30-pct in 2022).
Foreign debt service has to be 4.5 percent of GDP or below.“The authorities and their financial advisors are weighing different options and their associated legal procedures to optimize the design of an LLLC debt treatment while preserving financial stability,” the IMF said in a statement.
Sri Lanka’s plan for a voluntary restructuring of its domestic debt is finding few takers from local banks worried about a hit to their capital, raising the risk of a delay in the country’s financial rescue.
Some of the nation’s biggest lenders including Commercial Bank of Ceylon Plc. and Hatton National Bank Plc warn that a local debt restructuring will lead to capital impairment as banks are forced to set aside more money to cover losses.
“Already the banking sector is taking a toll on haircuts on dollar bonds,” said Sanath Manatunge, chief executive officer at Commercial Bank of Ceylon. “For liquidity and statutory reasons, we have to have some bills and bonds. If that is also going to be subject to a haircut, then the industry might lose its resilience.”
The country’s biggest challenge after securing a $3 billion bailout from the International Monetary Fund in March is to reach a restructuring deal with creditors that would make its debt sustainable in the eyes of the Washington-based lender.
Banks’ reluctance to participate in a domestic-debt restructuring could complicate the process, which authorities hope to conclude before the first IMF review slated for September.
Authorities agreed to include local-currency bonds in the restructuring program as they sought to appease overseas investors who are demanding that domestic debt holders should also share billions of dollars of losses.
Sri Lanka’s external borrowings totaled $41 billion, while its local currency debt stood at around $38 billion in 2022, according to the IMF.
Sri Lankan lenders’ capital buffers are already depleted and if they are further affected by debt restructuring, that would make raising fresh funds harder, Aruni Goonetilleke, chairperson of Hatton National Bank, said at an Asian Development Bank event earlier this month.
Only Treasury bills held by the central bank, which owns about two-thirds of the nation’s around $11.4 billion in securities are currently included in the debt treatment, officials have said.
Sri Lanka also has $24 billion worth of T-bonds, most of which are held by domestic banks and local retirement funds and are subject to voluntary restructuring.
One way to push through the debt overhaul would be to restructure bonds held by the nation’s Superannuation funds, provided their cash flow can be serviced, said Suhini Fernando, chief executive of Reliance Capital (Pvt) Ltd., a Colombo-based investment consultancy.