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Saturday September 30th, 2023

Sri Lanka accepts exchange offers for 37 pct of eligible bonds, 84 pct of pension fund bonds

ECONOMYNEXT – Sri Lanka has accepted valid offers for 37 percent of all eligible treasury bonds and 84 percent of bonds held by superannuation funds to be exchanged for new bonds as part of a domestic debt restructuring (DDR) exercise, with Thursday September 14 declared as date of settlement.

According to a statement issued by the Treasury on Tuesday September 12, the government will issue new bonds to eligible holders on Thursday September 14, the settlement date, in accordance with the exchange form submitted by each holder.

The percentage of the “aggregate outstanding principal amount of eligible bonds for which valid offers have been accepted” is 37 percent, the Treasury said in its statement. The same for eligible bonds held by superannuation funds as of end June 2023 is approximately 84 percent.

The percentage of the “aggregate outstanding principal amount of eligible bonds for which valid offers have been accepted by the government from superannuation funds necessary to achieve the participation threshold” is 100 percent, subject to the final determination of the Inland Revenue Department (IRD), the statement said.

The government sent out Invitations to Exchange for specific treasury bonds following a Treasury Bond Exchange Memorandum dated July 04.

In Tuesday’s statement, the Treasury said the success of the Invitation to Exchange will enable the government to reduce gross financing needs (GFN) over the next 10 years, thereby contributing to achieving Sri Lanka’s GFN target in line with the ongoing International Monetary Fund (IMF)-supported programme.

Treasury Bonds with ISINs LKB01123I017 and LKB01023I019 matured on 01 September 2023 and were paid in full by the Republic (the government of Sri Lanka) and have been defined as excluded bonds in the third extension notice announced by the government on August 25, and are therefore are excluded from the above table, the statement said.

On the settlement date, the Treasury said the government will issue new bonds to eligible holders in accordance with the relevant exchange form submitted by each such eligible holder to the extent that the republic (government of Sri Lanka) has accepted the offers set out therein.

The government will also pay to each eligible holder of accepted offers the interest accrued and unpaid up to (but excluding) the settlement date on such eligible holder’s eligible bonds in LKR.

In the exchange invitation on July 04, President Ranil Wickremesinghe in his capacity as Minister of Finance said the invitation formed part of the government’s DDR programme, which it has been referring to as a domestic debt ‘optimisatin’ (DDO).

Wickremesinghe said the DDO will allow Sri Lanka to restore sovereign debt sustainability following the ongoing economic and humanitarian crisis.

“The Invitation to Exchange is an arrangement through which Eligible Holders of Eligible Bonds can submit their holdings of Eligible Bonds governed by Sri Lankan law and denominated in Sri Lankan Rupees for a basket of new Treasury bonds to be issued by the Republic with the same aggregate principal amount but extended average maturity compared with the Eligible Bonds. The interest rate has been calibrated to maintain existing returns in the first years and will step down afterwards as inflation pressure abates. The structure was designed to provide a positive projected real return for beneficiaries of the Superannuation Funds in the medium-term whilst being mindful of the need to reduce the Republic’s gross financing needs
and close the financing gap.

“This transaction is a vital element of the measures which, together with economic reform programme, we are undertaking consistent with the Extended Fund Facility agreed with the International Monetary Fund (IMF) in March 2023. In the 75 years of the Republic’s independence, there has never been a more critical period for our economic well-being and future development. That is why we have introduced a robust reform agenda aimed at achieving sovereign debt sustainability, strengthening governance, widening the social safety nets supporting the most vulnerable and ensuring we can grow an inclusive economy attractive to international business. This is how we will improve the lives of our people and ensure they are first in line to benefit
from improvements in our economic conditions,” he wrote.

“The IMF’s debt sustainability analysis has determined the Republic’s public debt to be unsustainable and the IMF Programme is critical to achieving our vision for our country. Hence, this new era starts with the full implementation of IMF Programme and the resolution of our external debt situation with our external official and commercial creditors.

“However, in addition to the resolution of the Republic’s external public debt situation, a domestic public debt optimisation – of which this Invitation to Exchange is one element – is necessary to, among other things, bring down the Republic’s gross financing needs and restore long-term sovereign debt sustainability.

“The successful completion of this domestic debt optimisation is a critical component of both the debt resolution programme and the IMF Programme; it will contribute to unlocking the support of the Republic’s external creditors and will allow the Republic to reach debt targets agreed with the IMF. We need the full participation of the Superannuation Funds in accordance with the Participation Threshold (as defined in the Exchange Memorandum) in order to achieve these goals and I therefore urge you to give it your full consideration,” he said. (Colombo/Sep13/2023)

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Sri Lanka bank bad loan expansion slows in June quarter

ECONOMYNEXT – Bad loans at Sri Lanka’s banks, measured as ‘Stage 03’ loans to total loans and advances expanded by 0.5 percent to 13.7 percent in the second quarter of 2023, central bank data shows, which is a slower pace than the previous three quarters.

Bad loans went up 1.9 percent in the September 2022 quarter, and 1.0 percent in the December quarter and 1.3 percent in the March quarter, as debt moratoria also ran out.

In Sri Lanka and other countries, large spikes in bad loans are usually ‘hangover’ of macro-economic policy deployed target growth.

Amid a stabilization effort, credit can also contract, making the bad loans bigger.

Sri Lanka’s bad loans usually spike after period of credit growth re-financed by printed money (reverse repo injections made to artificially target a call money rate), and not real deposits, which then trigger balance of payment deficits which require steep spikes in rates to restore monetary stability.

Sri Lanka economic bureaucrats cut rates with the printed money in the belief that there is a growth shortcut by cutting rates to target real GDP, which has led to external crises since a central bank was set up in 1950.

However, policy worsened after 2015 when the International Monetary Fund taught the country to calculate potential out and dangled the number in front of a central bank which had taken the country to the agency multiple times after running down reserves.

In December 2019, inflationists also cut taxes on top of rate cuts, deploying the most extreme Cambridge-Saltwater macro-economic policy ‘barber boom’ style with predictable results.

When rates are hiked to restore monetary stability, bad loans rise and a currency collapse destroys purchasing power of the consumers and sales of firms which had taken loans.

When central banks cut rates with liquidity injections bad loans also go up in floating rate regimes (the housing bubble), but balance of payments are crises are absent. (Colombo/Sept29/2023)

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Sri Lanka expects restructuring decisions from all creditors: Minister

ECONOMYNEXT – Sri Lanka is engaging positively with all foreign creditors State Minister for Finance Shehan Semasinghe said this week as an International Monetary Fund review hangs in the balance on restructuring.

“All creditors are engaging positively with us,” Minister Semasinghe said. “We expect decisions from all our creditors. For us earlier the better.”

Sri Lanka is negotiating with Paris Club creditors and several non-Paris Club creditors like India and Saudi Arabia together and China separately. China is an observer in the Paris Club meeting.

The Paris Club held a meeting on Sri Lanka on September 22 with China as an observer.

Though Paris Club creditors have a well-oiled mechanism to give a quick decision on countries that default, the entry of China which had earlier not been willing to restructure debt, but was willing to give fresh loans to repay instalments, have complicated matters.

“Let me say again that we support Chinese financial institutions in actively working out the debt treatment with Sri Lanka,” China’s Foreign Ministry spokesman Wang Wenbin told reporters on September 26.

“We are ready to work with relevant countries and international financial institutions to jointly play a positive role in helping Sri Lanka navigate the situation, ease its debt burden and achieve sustainable development.”

There are expectations that Sri Lanka may be able to wrap up a preliminary deal with official creditors as early as October 2023 around the time IMF’s annual sessions take place in Morocco.

Sri Lanka President Ranil Wickremesinghe is to make an official visit to China October.

Sri Lanka is expected to finalize a refinery deal in Hambantota among other investments during the visit, according to reports.

Completing Sri Lanka’s external debt restricting is key to completing the first review of the island’s reform and stabilization program with the International Monetary Fund, which is expected in October or November.

Without completing a review Sri Lanka will not have formal IMF economic targets for December, and no disbursement of the second tranche.

World Bank and IMF with the G20 group, which include India and China has formed Global Sovereign Debt Roundtable has been trying to fine tune debt restructuring going beyond the Paris Club.

IMF’s Senior Mission Chief for Sri Lanka Peter Breuer said Sri Lanka’s debt is ‘spread around quite a bit’ to a question whether an IMF review could progress without China, possibly indicating that the lender would prefer to have the country on board.

“This is a process that we have that applies in the case of Sri Lanka to both official creditors, meaning other countries that have lent to Sri Lanka on a bilateral basis as well as commercial creditors, for example, bond holders,” Breuer told reporters in Colombo.

“And as you know, the government is in discussions with all of these groups. In Sri Lanka’s case, the debt is spread around quite a bit externally and domestically.”

READ MORE Sri Lanka’s external debt restructure ‘progress’ decision by IMF exec board

Out of Sri Lanka’s 36.59 billion US dollars of central government debt, multilaterals held 29.8 percent or 10.9 billion US dollars which will not be restructured.

Bilaterals held another 29.9 percent of which Paris Club was 12.1 percent and China 12.7 percent.

Of the commercial debt which was 40.3 percent, China Development Bank held another 6 percent, relating to a monetary instability loan it has given as a bailout without asking for rate hikes to stop output gap targeting.

China without AIIB held 6,850 million US dollars or 18.7 percent of central government external debt. (Colombo/Sept29/2023)

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Sri Lanka can build strong tourism ‘eco-brand’: UN official

ECONOMYNEXT – Sri Lanka can build an ‘eco-brand’ catering especially to younger tourists who feel strongly about the environment, United Nations Resident Representative to Sri Lanka, Azusa Kobota said.

About 70 percent of global travellers prioritise sustainability in their holiday choices, marking a ten percent increase from 2021, while around 30 percent of travellers feel guilty about flying, due to carbon emissions, she said.

“As the world embraces green thinking during this time of economic recovery efforts, the objective of the tourism sector cannot simply be about increasing the number of inbound tourists,” Kobota said at an event marking World Tourism Day in Colombo.

“It has to be about enhancing their experience through green lenses, by implementing a responsible, eco-conscious paradigm for the sector and building a stronger eco-brand around the sustainable agenda for Sri Lanka,”

“This is no longer about reducing the trade offs between growing the industry and protecting the environment.

“We must see nature as our asset and solutions to be obtained for the exponential growth for our future generations.”

The sustainable tourism market is estimated to have earned 195 billion US dollars in 2022, and is expected to reach about 656 billion US dollars in 2032, she said.

“Tourists, particularly the younger generations from gen X,Y,Z are deeply, deeply conscious about the long term choices of their actions, and the adverse impact of tourists on the environment.

“Statistics show that a significant proportion of global travellers, about 30 percent, feel guilty about flying due to the environmental impact and 22 percent say they actively prefer public transport and bicycle rental options, over renting a car.”

Sri Lanka welcomed one million tourists by September 26 and is expecting more that 1.5 million tourists by the end of the year. (Colombo/Sept29/2023)

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