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Friday February 23rd, 2024

Sri Lanka currency board option analyzed by think tank, but repeats false Argentina claim

TEQUILA EFFECT: An outflow-sterilizing Latin America style central bank can trigger a debt crisis despite exceptional budgets. Unless CBs are fixed debt and currency problems will return.

ECONOMYNEXT – Sri Lanka’s Institute of Policy Studies, has analysed the advantages of a currency board (an unbreakable fixed exchange rate) and its supposed disadvantages, but also repeated a false claim that Argentina at one time had a currency board.

Mercantilists usually oppose currency boards because they cannot depreciate the currency and tilt the playing field towards producers and exporters at the expense of the real wages of workers, pensions of old people and savings of a society.

An IPS researcher in an analysis said a currency board can have short term benefits.

“A currency board will be helpful to stabilise inflation in the short run but in the long run, Sri Lanka will be better off with a more flexible exchange rate regime,” the analysis claimed.

There are a number of stock criticisms about currency boards made by Western interventionists who lack knowledge of the institutional arrangement of a currency board as well as the process of monetary anchoring to keep inflation down.

What is a currency board?

It is helpful to know what a currency board is.

A currency board is a consistent, neutral policy monetary regime with a single anchor, which for all practical purposes behaves exactly like dollarization, which is the use of a strong foreign currency within a country.

If people wish there can be one or more currency board moneys circulated in a country. The Federal Reserve is about to legalize Tether style cryptocurrencies which are supposed to behave like a currency board, though balance sheet data is not available to confirm whether they are in fact hard pegs.

An American Express Travelers’ cheque operates exactly like a currency board.

Both floating exchange rates and currency boards are consistent regimes which have a single non-conflicting anchor.

A floating exchange rate has has no foreign reserves and the monetary base (the currency notes in use within the country) is determined by an inflation index (a domestic anchor).

A fixed exchange rate or currency board has floating rate interest rates and the monetary base is determined by the balance of payments (an external anchor).

In the gold standard days and the Bretton Woods periods, currencies did not depreciate against each other much because they all had the same anchor – gold. The rupee for was a silver currency until the Reserve Bank of India went to gold.

Regimes with anchor conflicts

Intermediate regimes or flexible exchange rates, are systems that collect forex reserves (targets the exchange rate), but also print money to target an inflation index (domestic anchor).

When inflationary policy is followed (money is printed when domestic credit expands) the flexible exchange rate collapses.

Sri Lanka abolished its currency board regime and an intermediate regime was externally imposed in 1950 amid US attempts to break the Sterling Area, according to critics.

The peg made the island a top customer of the International Monetary Fund and there were steep economic downturns whenever the US tightened policy and the currency fell.

Up to the collapse of the Bretton Woods, soft-pegs including in Latin America did not break as much as they did after 1980s, as the current Mercantilist competitive exchange rates mantra was not so prevalent in Western interventionist circles, analysts say say.

The Bretton Woods was set up in part to prevent competitive devaluation.

Discrimination against the voiceless

In the early 1980s Washington based Mercantilists such as John Williamson started to advocate a so-called basket, band, crawl (BBC) policy of depreciating currencies, but apparently lacked knowledge about anchoring money.

Read Interview by the Centre for Financial Stability Washington-consensus-John_Williamson_Interview

Competitive exchange rates destroy the basis of society by giving zero-sum profits to producers of goods against the well-being of workers, pensioners and savers generally.

Competitive exchange rates undermine a classical liberal concept known as sound money which does not discriminate between various individuals and economic sectors at the expense of weaker sections of society who have no voice.

Though such ideologies were developed in Washington to solve Latin America collapses, developing countries also became victims to the social unrest and out migration that comes with depreciation.

The anchor conflicting, flexible exchange rate has now brought Sri Lanka near to default.

Using the flexible exchange rates, interventionists used monetary policy for stimulus, which cannot be done in a reserve collecting regime without creating a balance of payments trouble (Why Singapore chose a Currency Board). Taxes were also cut, increasing pressure on interest rates.

Significant public opposition is now building up against the 1980s type Mercantilism following the repeated of failure of the intermediate regime and real pain people suffer from deprecation as opposed to the supposed pains of ‘internal devaluation’ as claimed by Western armchair Mercantilists who do not earn or save in depreciating currencies but are protected by single anchor floating rates.

The price of monetary policy independence

Whether Sri Lanka has used its supposed ‘monetary independence’ from a post-Colonial central bank to counter US tightening successfully, as claimed by interventionists, without creating economic mayhem is something that people can easily decide for themselves by a cursory examination of history.

When the US tightens, Sri Lanka suffers forex shortages if central bank prints money to cut rates.

One of the biggest costs of such ‘flexible exchange rates’ or intermediate regimes in addition to inflation, is the stifling of free trade.

Exchange and trade controls follow whether or not the currency is depreciated as forex shortages emerge from the anchor conflicts, fattening the pockets of import substitution oligarchs who claim that forex shortages can be eliminated by picking the pockets of consumers under tax protection.

“In sum it was a story of tightening partial relaxing, and again tightening the trade regime and associated areas to over a perceived foreign exchange crisis,” writes Saman Kelegama, one of Sri Lanka’s most humane economists who wanted free trade for the poor, in ‘Development in Independent Sri Lanka What Went Wrong’.

“In the early 1960s strategy for dealing with the foreign exchange crisis was the gradual isolation of the economy from external market forces.

“It was the beginning of a standard import-substitution industrial regime with all the controls and restrictions associated with such a regime.”

In a hard or consistent peg, there is free trade. Monetary policy tightens automatically as US tightens. Policy then loosens and excess liquidity builds up as domestic credit falls, and there are no forex shortages.

Sri Lanka’s recent currency crises occurred in 2015/2016 (following Yellen quantity tightening in 2014) and 2018 (Yellen quantity tightening and rate hikes), which led to political instability as the currency fell and output shocks as reserves were re-built.

From 2015 to 2019 the currency collapsed from 131 to 182 in two cycles.

To get out of the resulting crises after ‘monetary policy independence’, a flexible exchange rate country not only has to slow the economy sharply to restore stability but also has to re-build reserves under an IMF program creating a prolonged slowdown.

In a currency board or dollarization, if socialist policies lead to default, the fallout is contained in sovereign debt. In a flexible exchange rate with depreciation, the fallout spreads to banks and private firms and also people whose savings evaporate.

Fast Recovery

In a dollar currency board, there is no requirement to re-build reserves at the cost of an 18 month downturn as they are not depleted in the first place but the economy initially slows as the US tightens.

Due to the lack of floor policy rate, recovery would be quicker in a currency board area than if reserves had to be re-built after being lost in a soft-peg.

In fact the danger could be a too-fast recovery and a property bubble as the IPS analysis acknowledges and not a prolonged downturn under an IMF program as in a flexible exchange rate with anchor conflicts.

In a dollar currency board regime, banking systems do not usually collapse even if US banks collapse (in part due to the inability to over-trade without open market operations) helping the economy recover faster.

Sri Lanka now has to severely squeeze the economy to prevent a system wide meltdown following the stimulus (independent monetary policy) allowed to economists under a flexible exchange rate, even as the US begins its tightening cycle.

Flexible exchange rate regimes that try to engage in independent monetary policy, in a country addicted to foreign commercial debt, also end up in sovereign default.

In the 2018 cycle, Sri Lanka cut rates and the currency collapsed and earning lower ratings, while Argentina collapsed and defaulted.

In the 2020/2021/2022 ‘independent monetary policy’ cycle, Sri Lanka is heading for default and severe tightening is required due to exercising monetary policy independence.

In March 2022 the rupee collapsed steeply in a flexible exchange rate and a float has not yet been established and forex shortages persist.

In 1994, Mexico which was running a budget surplus, collapsed due to the flexible exchange rate and defaulted. Mexico was made to run an even bigger budget surplus under the IMF program on top of a steeply depreciated currency.

Argentina False Claim

Meanwhile the IPS analysis repeated a false claim made by Western media that Argentina had a ‘currency board’ up to 2000.

A key feature in a currency board is that foreign exchange interventions are unsterilized and foreign reserves match the monetary base at all times.

Reserves cannot fall below 100 percent of reserve money since interventions cannot be sterilized to keep overnight rates down.

In a currency board, foreign reserves and the monetary base moves lock-step (reserve pass through to the domestic monetary base is one to one).

Under a currency board, foreign reserves usually exceed the monetary base by only 10 percent (from profits of note issue) and any excess reserves are transferred to the government by the governing law.

Currency boards are similar to dollarization (using a foreign currency) except that there are no profits from note issue.

Such profits, annually transferred, can be externally invested to build a bank bailout fund or sovereign wealth fund to spend in a downturn.

Banco Central de la República Argentina law allowed foreign reserves to fall far below 100 percent of the monetary base and the peg collapsed amid sterilized interventions.

Read A MONETARY CONSTITUTION FOR ARGENTINA – A-monetary-constitution-for-Argentina

The BCRA was also allowed to hold domestic government dollar denominated bonds similar to Sri Lanka Development Bonds.

Prior to the fall of the ‘convertible peso’, the so-called ‘currency board’ had collected reserves over 190 percent of the monetary base on one time and fell to 80 percent, which is impossible under an orthodox or credible currency board which cannot sterilize interventions.

Whether or not a regime is a currency board or not can only determined by analyzing its balance sheet as soft-pegs can be stable for long periods as long as deflationary policy is followed (inflows are mopped up and no money is printed) like China from 1993 to 2005.

Flexible Exchange Rate, Flexible Inflation Targeting Peso also collapses

In 2018, Argentina which had operated a ‘flexible exchange rate’ and ‘flexible inflation targeting’ at an unfunny 17 percent, again collapsed and defaulted similar to the so-called ‘currency board’ period.

The IPS also claimed that “flexibility of labour markets is a key to the sustainability of currency boards.”

However in all pegged East Asian nations real wages have risen along with productivity growth, usually in export sectors. In some fixed exchange regimes (dollarized Panama) it was the financial sector, that drove up real wages.

Other counties including Cambodia and several former Latin America flexible exchange rates, which collapsed steeply are now also dollarized.

The original Ceylon currency board was one-to-one with India rupee. Bhutan still operates its peg one to one with India rupee which has not broken.

The requirement to maintain a peg is not the budget or labour laws, but the lack of aggressive open market operations and the outlawing of sterilized interventions.

A currency board country without crises and depreciation usually grow steadily and generate employment beyond 100 percent and attract foreign labour. Guest workers sometime leave when there is a downturn in the anchor currency nation.

However when a flexible exchange rate collapses under US tightening, resident workers lose jobs and expat workers who had gone to work in consistent pegs areas like GCC nations may also return home.

The IPS analysis is reproduced below:

Currency Board: A Solution to Sri Lanka’s Economic Crisis?

By Asanka Wijesinghe

On 08 March, Sri Lanka devalued the rupee against the US dollar, entering into a floating exchange rate regime. The Central Bank of Sri Lanka had to abandon the pegged exchange rate as defending the rupee with dwindling reserves was impossible. The inter-bank exchange rate shot up once the banks were assured that the exchange rate was floated. The initial shoot-up was followed by further rallying of the US dollar reaching close to Rs. 300 per USD. With the gradually weakening rupee, inflation is also ascending to worrisome levels calling for radical changes, including adopting a currency board. This article discusses the effectiveness and suitability of a currency board for Sri Lanka in the current macroeconomic context.

Weakening Rupee, Rising inflation, and the Currency Board Solution

A currency board is a system that issues domestic banknotes in exchange for specific foreign currency – anchor currency like the USD which is used for trade with partner countries – at a constant rate. A cornerstone of the currency board mechanism is the authority’s ability to meet all demand for foreign currency by the holders of the domestic currency.

In Sri Lanka, even after the rupee was floated, reports suggest that an active kerb market with a significant premium above the inter-bank rate exists. While such market behaviour indicates an acute dollar shortage in the market and the equilibrium rate is further away, no official data exists on the kerb market money exchange. However, cryptocurrency platforms provide some critical insights. The Tether coin (USDT), which is closely pegged to the US dollar on a one-to-one basis, is traded for rupees on peer-to-peer (P2P) platforms as USDT is used as a medium to purchase other cryptocurrencies, including Bitcoin.

Data extracted from the P2P platform medium of Binance – a popular cryptocurrency exchange among Sri Lankans- show some supporting evidence for the continually widening gap between official and informal rates again. Significantly, the premium over the official rate plummeted once the rupee was floated, but it gradually recovered to the pre-floated period (A and B panels of Figure 1). The number of sellers and the USDT volume available for sale also went up but riveted back to the levels of the pre-floated period (C and D panels of Figure 1).

The inflationary pressure also does not show any unwinding signs, further eroding people’s purchasing power. These developments encourage the adoption of a currency board as a currency board is believed to be a solution for rising inflation. By the inner mechanics of the currency boards, the independence of discretionary monetary policy is taken away, substituting a disciplined monetary policy – a gold standard without gold – which eliminates the inflationary bias. Indeed, empirical evidence exists in favour of the anti-inflationary effect of currency boards. The inflation rate is lower under currency boards than in pegged or floating rate regimes. Moreover, economies under currency boards grew faster than the average of countries with pegged regimes. However, empirically disentangling multiple influences to pinpoint the low inflation on the currency board is an excruciating task.

Another selling point of the currency board is the fiscal discipline, as currency board regulations prohibit direct monetary financing of government expenditures. A high budget deficit in Sri Lanka and excessive government borrowings from the Central Bank make the fiscal-discipline effect of currency boards much more appealing. Empirical evidence points to low fiscal deficits or larger surpluses under currency board regimes.

Figure 1: Behaviour of USDT Market in P2P Binance Trading Platform

Source: Author’s illustration using Binance data

Challenges in Adopting a Currency Board

A significant drawback of a currency board is the need to surrender the monetary policy independence required for managing asymmetric shocks. Such loss is costly when the anchor currency country responds to cyclical conditions, which are different from the prevailing conditions in the country operating the currency board.

For example, Hong Kong’s currency board imported low-interest rates from the US in the early 1990s. Such monetary easing was appropriate for the US, but Hong Kong faced an asset price boom that called for monetary tightening. A counterargument against the negative impact of losing monetary policy is the availability of fiscal policy at the operating country’s disposal. However, the maneuverability of fiscal policy is determined by the fiscal and debt positions.

In Sri Lanka’s context, the high debt to GDP ratio and fiscal deficits might restrict the use of fiscal policy for pump-priming-stimulating the economy in a recessionary period- due to the fear of losing investor confidence in debt sustainability. Thus, international evidence shows that countries with hard pegged exchange rate regimes generally tighten their fiscal policy in a recession. The Argentinian attempts to bring down the deficit in a recession in 2000 proved to be disastrous.

Sri Lanka’s high indebtedness will also challenge installing a currency board. Once a threat of a possible default looms, the interest rates soar, and refinancing debt will be increasingly difficult. In addition, the operating country needs reserves to back the monetary base in a currency board. In a currency board, the board must continually convert domestic currency for the anchor currency at a constant rate.

It should be noted that the reserve level of Sri Lanka has dwindled over time in the recent past. Another drawback of currency boards is the requirement of real sector changes to compensate for the exchange rate deviations.

For example, if the anchor currency appreciates against Sri Lanka’s main trading partners, wages should fall to compensate for the increase in foreign consumer prices, restoring competitiveness. Such an exercise needs greater flexibility in the labour markets. Thus, the flexibility of labour markets is a key to the sustainability of currency boards. The political feasibility of the institutional attempts to ease labour market regulations is highly doubtful.

Against this backdrop, the decision to install a currency board should be taken after a careful cost-benefit analysis. A currency board will be helpful to stabilise inflation in the short run but in the long run, Sri Lanka will be better off with a more flexible exchange rate regime. In addition, the benefits of a currency board are not exclusive. For example, fiscal discipline should be stronger in flexible exchange rate regimes as fiscal policy effects are reflected immediately and more transparently.

Thus, if Sri Lanka enters into a currency board to stabilise inflation and domestic currency, it needs to contemplate an exit strategy. Generally, it is advisable to leave a currency board when the economy recovers. The requirement to surrender monetary independence and the inability to finance government expenditure under a currency board might reduce the political preference for such a system.

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Sri Lanka’s Grisly Recent History Goes Unpunished

ECONOMYNEXT – They lie buried in numerous mass graves, all evidence of Sri Lanka’s murderous recent past which has been punctuated by multiple civil conflicts.

Whatever remains is evidence of Sri Lanka’s grisly history of the extrajudicial executions of rebels in both Northern and Southern insurrections.

Most of the bodies remain in mass graves that stretch from Chemmani and Duraiappah Stadium in  Jaffna to burial sites in the Colombo and Matale Districts and the Southern and Central Provinces.

The dead could be anyone; captured rebels, those caught in crossfires and others who were deemed to be “inconvenient,” according to a report titled ‘Gotabaya Rajapaksa’s War Time Role’ released by the International Truth and Justice Project (ITJP) on 17 January 2024.

A horrific record

Sri Lanka’s recent blood-soaked history is replete with mass killings and many “disappearances” from the various incidents during the insurgencies of the JVP as well as the Tamil separatist war.

The activist group Journalists for Democracy and affiliated organisations claim that at least 32 mass graves have been identified across the island. A report published in Groundviews in January said these graves “dotted across the country that hold the remains of not just the casualties of the civil war but also those who disappeared during the two JVP uprisings in 1971 and from 1988 to 1989.”

A 1999 United Nations study noted that Sri Lanka has the second-highest number of enforced disappearances in the world with around 12,000 people missing after being detained by government Security Forces. Figures vary with Amnesty International reporting that the number of disappeared persons could be as high as 60,000.

There is no official government figure.

Evidence against GR

Now, fifteen years after the separatist war in Sri Lanka ended, mounting evidence has emerged against former President, Gotabaya Rajapaksa, for his pivotal role in the commission of war crimes and crimes against humanity during the civil war, say Human Rights lawyers in this new report.

Rajapaksa figures in two serious passages of time where suspected cadres of the Janatha Vimukthi Peramuna were killed at Matale in the 1988-89 period and LTTE cadres and civilians on the frontlines of Nandikadal which proved to be the final battle of the Eelam War.

The ITJP report quotes its Executive Director Yasmin Sooka as saying if Sri Lanka “is serious about dealing with its violent past, the litmus test is to hold (former President) Gotabaya Rajapaksa criminally accountable for war crimes and crimes against humanity.”

The report presents detailed evidence connecting the former President when he was Secretary to the Ministry of Defence to numerous massacres of civilians. Although not the army commander, nor Chairman of Joint Chiefs of Staff, Gotabaya had command and effective control of the security forces during the Civil War as the Defence Secretary and the younger brother of then President Mahinda Rajapaksa.

The ITJP report says the then Defence Secretary Rajapaksa had “contemporaneous knowledge of the violations of international humanitarian law and international criminal law being committed, and failed to take any steps to prevent them, or to hold those under his command accountable. He and successive Sri Lankan governments have had countless opportunities since the war ended to initiate credible investigations into allegations of gross human rights violations and to establish prosecutions. Instead of allowing the truth to come to light, Gotabaya and his successors have perpetuated denial of the complicity of the security forces in these violations, rewarding and protecting the alleged perpetrators.”

The 104-page document examines evidence of Rajapaksa’s involvement in and knowledge of attacks on the No Fire Zones set up to protect civilians, his failure to prevent and investigate summary executions, enforced disappearances, torture, rape and sexual violence, arbitrary detention and the denial of humanitarian aid to civilians.

Individual stories that were leaked at the time gave credence to these incidents.

One was the evidence of the killing of LTTE Leader Velupillai Prabhakaran’s younger son Balachandran. The boy, according to some reports, had been escorted to the Sri Lanka Army lines by an LTTE bodyguard at Mullivaikkal. Photos purported to have been taken at that stage show the boy wrapped in a Sri Lanka Army issue sarong eating a biscuit behind the Sri Lanka Army lines. A second photo shows him dead at the same location, his body riddled with bullets.

Another set of pictures was that of the LTTE’s TV icon Issapriya whose image was widely circulated. There were unconfirmed reports that she had been sexually assaulted along with other young women who had been captured as the LTTE unravelled. That is followed by another picture of her corpse shot at close range.

Eventually, the Sri Lankan government during President Maithripala Sirisena’s tenure acknowledged that some 65,000 persons were missing and granted close surviving relatives rights to manage their properties, the ITJP report states.

Matale Mass Grave

Rajapaksa was the military Coordinating Officer for the Matale District in 1989 when the area was rocked by the so-called Deshapremi Janatha Vyaparaya a JVP offshoot. He was a Lt. Colonel at the time.

In December 2012, reports emerged that a mass grave had been found in the grounds of the Matale Hospital.

Accusations were made at the time that the remains unearthed were that of JVP cadres who had been captured and allegedly killed during the insurrection, a claim the party repeatedly made.

No government however pursued an investigation into the discovery because politics got in the way; after all the UNP was in power when the killings were supposedly carried out and the officer responsible, Gotabaya, was the brother of Mahinda Rajapaksa at the time, a prominent leader in the SLFP.

The government of the day meanwhile claimed the bodies were of victims of a landslide in the 1950s.

However, there was no proper investigation to prove which theory was factual.

The ITJP report also contains the names of former Army Commander, Lt Gen Shavendra Silva and others who are seen as Gotabaya loyalists in the Army.  The report also claims that Army top brass, other than Field Marshall Sarath Fonseka, who was Commander of the Army at the time the civil war ended, had close personal connections to Rajapaksa.

These incidents, however, are not the only horrific events of our island nation’s history; abductions and disappearances of young men, allegedly by members of the armed forces, the massacre of a group of Buddhist monks at Aranthalawa, the killing of pilgrims at Anuradhapura, the latter two by the LTTE, random killings of public servants and others by rebel groups, and more recently the Easter Sunday bombings, the list goes on. And the powers that be, govern with impunity.

So, it is unlikely that the relatives of the victims will find closure until justice is served and those whose hands are bloodstained are held accountable for their actions.

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India has given “lot of offers” for Ramayana Trail, Sri Lanka state minister says

ECONOMYNEXT – India has given a lot of offers to establish Ramayana Trails in Sri Lanka, State Tourism Minister Diana Gamage said, as the island nation is focusing more on Indian tourists to boost the hospitality industry.

Historians say, according to Hindu mythology, Sri Lanka was the kingdom of Ravana, the ten-headed demon king who abducted Sita, the wife of Rama, the hero of the Ramayana, a smriti text from ancient India, one of the two important epics of Hinduism known as the Itihasas, the other being the Mahabharata.

The epic narrates the life of Rama, a prince of Ayodhya in the kingdom of Kosala.

With the opening of Ram Mandhir in Ayodhya, Sri Lanka has renewed the establishment of Ramayana Trails, which includes all the places believed to be associated with Ramayana.

The places include Sigiriya, Ashok Vatika, a garden in the city of Nuwara Eliya, which is believed to be the place where Ravana kept Sita captive, Ravana Ella Falls, Koneswaram Temple in Trincomalee and Divurumpola Temple in Bandarawela which is believed to be the place where Sita underwent a trial by fire to prove her purity among many other places.

“I think India is even willing to invest in it. They have given proposals that they are willing to invest in it. They will build hotels even around where they can have accommodation for the people who are visiting these areas,” Diana Gamage told reporters in Colombo.

“They (Indians) have given a lot of offers. If we do this in the right way, we can bring 5 million tourists from India alone.”

Indians topped the list of tourists to Sri Lanka last year with over 300,000 visitors.

“At the moment I am having discussions with some of them, and they are in touch with me,” Gamage said.

“If you look at Seetha Eliya, Seetha Temple is one of the main areas in this Trail. So that area also will be developed, specially.”

“I don’t know if you have seen how many millions visited the Ayodhya temple. There are so many millions from around the world. So, there is an interest in this and we have to grab that opportunity being in the country that it actually has taken place.”

“It is so unfortunate that why it has not been done so far. This should have been done a long long time ago. So now I am thinking that we should do it at least now.” (Colombo/Feb 22/2024)

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Sri Lanka offers fresh debt plan to bondholders amid Hamilton case extension hopes: Sources

ECONOMYNEXT – Sri Lanka offered a revised restructuring proposal to sovereign bond holders sources said, as the country tries to wrap up debt restructuring by the middle of the year and a holdout investor sues to force payment on one series of bonds.

A US court had stayed proceedings of case by holdout investor Hamilton Reserve for six months, which has the required volumes of bond with a ‘single series’ collective action clause to file action following request which was supported by the US, UK and France.

The deadline runs out on February 29.

An extension of at least three months may be sought to help wrap up the debt restructuring, sources said.

Sri Lanka is expecting to sign memoranda of understanding with Paris Club, within weeks, according to official sources.

Courts had earlier granted the stay saying Hamilton had the option of renewing case for summary judgement once it is lifted.

Sri Lanka rejected a proposal by bondholders to exchange a ‘downside’ bond linked to gross domestic product which will have a 20 percent hair cut with additional haircuts if GDP growth is low as forecasted by the International Monetary Fund.

Bondholders believe that the growth projections in an IMF debt sustainable analysis is too pessimistic

However bondholders are very keen on the structure, and it may be tough to convince them to accept a ‘plain vanilla’ type of solution, according to sources familiar with their thinking.

Bondholders also do not want a value recovery instrument detached from the underlying bond which is not ‘index eligible’. Earlier VRI’s used in debt re-structures have been upside instruments.

Bondholders had earlier expressed their unhappiness at what they said was “no progress” in negotiations.

Some bondholders were also of the view that the first ask by Sri Lanka from bondholders was deeper than the in-principle re-structure given by bilateral creditors. (Colombo/Feb22/2024)

A US court had stayed proceedings of case by holdout investor Hamilton Reserve for six months, which has the required volumes of bond with a ‘single series’ collective action clause to file action following a request from the US government among others.

The deadline runs out at the end of the month.

An extension of at least three months may be sought to help wrap up the bond restructuring, sources said. It is not clear whether courts will grant the extension.

Sri Lanka rejected a proposal by bondholders to exchange a ‘downside’ bond linked to gross domestic product which will have a 20 percent hair cut with additional haircuts if GDP growth is low as forecasted by the International Monetary Fund.

Bondholders believe that the growth projections in an IMF debt sustainable analysis is too pessimistic

However bondholders are very keen on the structure, and it may be tough to convince them to accept a ‘plain vanilla’ type of solution, according to sources familiar with their thinking.

Bondholders also do not want a value recovery instrument detached from the underlying bond which is not ‘index eligible’. Earlier VRI’s used in debt re-structures have been upside instruments.

Bondholders had earlier expressed their unhappiness at what they said was “no progress” in negotiations.

Some bondholders were also of the view that the first ask by Sri Lanka from bondholders was deeper than the in-principle re-structure given by bilateral creditors. (Colombo/Feb22/2024)

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