ECONOMYNEXT – Sri Lanka’s domestic debt has already been re-structured de facto due to high inflation and rupee depreciation, Sharmini Cooray, a former International Monetary Fund official who is an advisor to President Ranil Wickremesinghe said.
“The high inflation and rupee depreciation has delivered has reduced the real value of domestic debt,” Cooray told an economic policy forum organized by the Ceylon Chamber of Commerce.
“It has delivered a de facto restructuring up front to domestic debt holders. So I am hoping that the external creditors will recognize that.”
Sri Lanka’s rupee collapsed from 200 to 360 to the US dollar in 2022 as an attempt to float the currency failed due to a surrender requirement as well as too low interest rates.
Domestic creditors – some of whom are legally tied – are the only source of real financing available to the government with multilaterals whose debt area also serviced as senior creditors not giving any new financing.
The value of rupee debt has fallen by around 20 billion US dollars and dollar denominated debt has now overtaken rupee debt by June despite additional financing during the year.
Rupee tax revenues are also rising faster in inflation and tax hikes though the economy is contracting in real terms.
However, interest rates in the country are elevated due to fears of domestic debt re-structuring.
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Almost the entirety of Sri Lanka’s central government debt to GDP ratio jump from 101.3 percent in December 2021 to 127.2 percent in June 2022 after the currency collapse came from 44 to 68 percent of GDP jump in foreign debt, according to an analysis of official released government data and nominal GDP projections.
Due to a flaw in the IMFs current debt resolution framework, there is no upfront clarity on the treatment of domestic debt which holders are willing to roll-over unlike foreign creditors.
The IMF has tried to solve serial defaults of Latin America countries, which have among the worst sterilizing central banks in the world without much success, as the fundamental problem of activist intermediate regime central banks (flexible exchange rates) with high inflation targets above 2 to 3 percent is not solved, according to critics.
Structural reforms are a remnant of the so-called ‘Baker Plan’ while hair cuts stem mostly from the ‘
Brady Plan’.
Latin America defaults came in quick succession from the early 1980s – usually when the Fed tightened – after depreciation as a prescription for poorer countries became a fashionable among Washington based economists.
“Domestic deb t restructuring is a matter of negotiation,” Cooray said. “But I t think we have a strong argument that it has reduced significantly in dollar terms and in real terms.”
The key problem with a domestic debt restructuring is its impact on banking system. It has been said that some rupee bond holders could be ‘ring fenced’
Sri Lanka has to meet some targets on gross financing need (the roll-over volume) and debt to GDP ratios.
Cooray said there was no ‘trade off’ between banking system stability and IMF targets. (Colombo/Dec08/2022)
I don’t think anyone believes this,
The country has made zero actions to reform its sick economical structure. Tell hungry man about the percentages and figures .He will remain hungry…