By:Staff WriterColombo (LNW): While external debt restructuring remains a top priority for the Sri Lankan government, domestic debt rework finalization gets underway but the Government securities and Sri Lanka Development Bonds will not be restructured, Central Bank and Finance Ministry officials confirmed dispelling fears of local banks and creditors.
Only T-Bills held by the Central Bank amounting to US$11.4 billion will be considered for treatment to create some fiscal space, two high officials of the monetary and fiscal authorities said.
A voluntary domestic debt optimization operation without compulsion is envisaged by Sri Lankan government and its advisors will initiate consultations with major T-Bonds holders of $ 24 billion, they reiterated.
The International sovereign bonds amounting $12.1 billion would be treated as and when necessary they stated adding that the country would not restructure Treasury bills outside of central bank holdings and would engage with major T-bond holders for voluntary ‘optimization.
According to CB high official, holders of Sri Lanka’s Treasury bonds who agree to participate in the voluntary Domestic Debt Optimization (DDO) will undergo a debt exchange process, where their old bonds will be replaced by new bonds.
Sri Lankan authorities will offer the option of debt exchange to T-bond holders who are willing to participate in the voluntary debt optimization. New bonds will be issued in exchange for old bonds, but this will be performed while ensuring the stability of the banking system.
The Central Bank has already reduced the stock of Sri Lanka Development Bonds (SLDBs) which are held largely by the banks by converting them to rupee bonds.
The Central Bank has announced the domestic debt optimization strategy pledging to protect the banking sector and without affecting the superannuation funds.
The banking sector has to bear tax burden as high as 50 percent making a significant contribution to government revenue and financial consolidation.
The Banks obtained a profit of 33 percent from the investment in government securities, while in the current situation, it has earned a profit of 17 percent.
Therefore the government has decided to absorb any additional impact on banks and ready to make financial infusion if necessary if there is any impact from the DDO, finance ministry sources disclosed.
Treasury bonds of superannuation pension funds are to be exchanged for longer maturity treasury bonds from 2027 to 2038, with a step-down coupon structure of 12percent until 2025 and 9 percent until maturity.
In order to encourage participation of superannuation funds, those that do not take part would be subject to an income tax rate of 30 percent versus the current 14 percent, according to the DDO strategy.
EPF and ETF are subject to a 14 percent tax rate, lower than the tax rate imposed on banks.it has been decided to optimize all existing Treasury Bonds from these funds and issue new bonds in return.
These bonds will get 12 percent interest until 2025 and 9 percent interest. The government assures that if there is any deficit, the treasury will cover it.
The stock of SLDBs was brought down to Rs. 282.5 billion by the end of March 2023 from Rs. 603.1 billion in April last year, he added.
Sri Lanka has launched the foreign commercial borrowing by the issuance of International Sovereign Bonds raising funds amounting $ 17.2 billion in 2001 an again $17.6 billion from 2007, central bank data shows.
However Sri Lanka’s bond holders have been demanding for domestic debt restructuring in the recent past. They claim that the government’s domestic debt – defined as debt governed by local law – will be reorganized in a manner that both ensures debt sustainability and safeguards financial stability.