To Restructure Domestic Debt, Sri Lanka Shuts Down Banks For 5 Days
Sri Lanka's Central Bank has declared a special bank holiday tomorrow (Friday) to ensure a continuous five-day cool-off period beginning today after the government's announcement on the domestic debt restructuring process as part of the efforts to revive the cash-strapped economy.
Sri Lanka has begun the five-day bank holiday to allow the crisis-hit nation to restructure $42 billion in domestic debt. This comes as it secured $700 million in support from multinational lender World Bank.
Local media also quoted analysts as saying that the holiday was announced to provide a suitable buffer for any potential market reactions to significant financial announcements. Debt restructuring can involve the extension of the period over which a loan is repaid, reports BBC.
The move to restructure domestic debt comes as the country is struggling to come out of its worst economic crisis since it won independence from the British in 1948. There are fears that the government's restructuring plan could lead to volatility in financial markets.
However, Sri Lanka President Ranil Wickremesinghe has reassured the public that that the restructuring would "not lead to a collapse of the banking system." His Cabinet had approved a restructuring proposal by the country's central bank. The plan will be submitted to parliament for approval over the weekend, his office said.
"The government expects the entire process to conclude while the markets are closed during these five days," Sri Lanka central bank chief Nandalal Weerasinghe said. "Local depositors are assured of the safety of their deposits and interests will not be affected," he added.
Last year, Sri Lanka defaulted on its debt with international lenders for the first time in its post-independence history. However, there have been several important lifelines extended to the country in recent months.
Funding from the World Bank follows a $3-billion bailout package from International Monetary Fund (IMF). The World Bank said in a statement on Thursday that it would provide support in a "phased approach".
The organisation added that it has allocated $500 million to budgetary support, while the remaining $200 million would be used to "provide better-targeted income and livelihood opportunities to the poor and vulnerable."
The IMF's bailout in March, which was nearly a year in the making, was viewed as a massive lifeline for Sri Lanka. However, the bailout came with conditions, such as requiring the country to make "swift progress" on restructuring its debts.
In March, the IMF said Sri Lanka had secured financing assurances from all its major creditors, including China and India, which paved the way for the bailout. The IMF has so far released around $330 million in funds to Sri Lanka, with the rest due in disbursements over four years.
Story first published: Thursday, June 29, 2023, 12:12 [IST]