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Monday December 4th, 2023

Sri Lanka ‘radio silence’ on domestic debt restructuring after IMF deal: CB Governor

ECONOMYNEXT- Sri Lanka has to maintain ‘radio silence’ on domestic bond re-structuring as part of the process now followed under the International Monetary Fund to reduce the debt to ‘sustainable’ levels, Central Bank Governor Nandalal Weerasinghe said.

Sri Lanka in April 2022 did not include domestic debt when the country defaulted after the biggest currency crisis in the history of the central bank and two years of liquidity injections to suppress interest rates led to a loss of all its foreign reserves and also borrowed reserves.

Last week, Sri Lanka struck a staff-level agreement with the IMF involving macro-economic adjustments that will raise tax revenues, and temporarily reduce monetary instability until the next crisis under an intermediate monetary regime and structural adjustments.

“When we announced the debt standstill we clearly announced that our intention was to restructure external debt because this was a balance of payments crisis,” Governor Weerasinghe told a talk show hosted by Sri Lanka’s Newsfirst television.

“That was the position the government took in April. Going forward, because we have started with the IMF staff-level agreement, and formally started the debt re-structuring process we cannot talk about it.

“It is called radio silence. That means authorities should not talk about debt restructuring parameters whether it will be re-structured or not. Unfortunately, that is market sensitive. I cannot comment on that process.”

It is not clear yet what the IMF debt parameter is. According to information now in the public domain, the People’s Bank of China swap and the Bangladesh swap were included in an IMF debt sustainability analysis parameter.

Sri Lanka was not allowed to bust up the China swap on unsustainable imports and the money still remains in the reserves.

Serious Flaw?

Uncertainty over whether or not the domestic debt will be re-structured forcing a second haircut on top of depreciation and inflation has discouraged investment flows into the domestic bond market, potentially exposing a serious flaw in the current permutation of a debt resolution plan developed more or less by the US Treasury, the IMF, the Fed and Washington-based think tanks, analysts say.

The debt restructuring plans were developed in Washington in response to a series of sovereign defaults in the 1980s in Latin American countries with sterilizing (soft-pegged) central banks which try to run ‘counter-cyclical policy’ with the tightening cycles of the US Fed which are pro-cyclical domestically.

In the process, Argentina-style Latin American central banks with so-called soft-pegs extend the credit cycle and resist rate hikes by printing money to maintain a policy rate followed by sterilizing interventions with new liquidity which then leads to loss of reserves, a collapse of the peg and default.

Several plans have been cooked up in Washington including the ‘Baker Plan’ named after then US Treasury Secretary James Baker, which is partly responsible for the ‘structural benchmarks’ in current IMF programs.

Other Latin American debt resolution experiments include Brady bonds, named after US Treasury Secretary Nicholas Brady where bank loans were swapped for bonds along with early permutations of what is now known as a hair-cut.

The principle was guaranteed by deep discount 30-year US ‘Brady bonds’ bought from bailout funds or remaining reserves.

The plans did not contain any serious attempts to restrain the flexible policies of the intermediate regime central banks which led to forex shortages, sterilized interventions, and default even when countries ran budget surpluses such as in the case of Mexico.

Sri Lanka’s interest rates are now around 30 percent, partly due to the lost credibility of the peg which has not yet been restored – which is usually done through a float as a prior action in an IMF deal, and also due to the lack of early clarity on the treatment of rupee bonds, which has created uncertainty.

Re-structuring of domestic debt leads to an effective default ending the ‘gilt’ status of government bonds.

Sri Lanka’s Stand

Governor Weerasinghe has previously said Sri Lanka can reach debt sustainability without re-structuring rupee bonds.

Fitch Ratings has said there was a high risk of default on local currency debt at its CCC rating.


Sri Lanka domestic debt re-structuring could erode net benefits: Fitch

Large volumes of which were bought by the central bank to trigger the currency crisis and the rest is held by the Employees Provident Funds and commercial banks, insurance funds and private holders.

Sri Lanka authorities have said hair cuts on domestic bonds will lead to problems in banks which will delay recovery and the ability to repay foreign bondholders.

Sri Lanka banks have taken mark-to-market hits on their equity directly and are anyway facing higher rates on deposits. They also have to provide for dollar bonds in their portfolios.

Rupee bond holders anyway take a real ‘haircut’, with the depreciation and domestic inflation which tends to inflate the economy and bring higher nominal tax revenues, while the real value of the debt is ‘hair-cut’ or inflated away.

In the current debt restructuring, various creditors are treated unequally. The debt of IMF, World Bank, ADB and AIIB are not restructured. Bi-lateral debt is re-structured and haircuts are given for private bonds which are sometimes bought at steep discounts in the secondary market.

The current uncertainty came after President Ranil Wickremesinghe remarked that Sri Lanka’s debt advisors were looking at a possible restructuring of domestic debt as part of their scenario analysis of debt sustainability. (Colombo/Sept07/2022)

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Sri Lanka stocks close up as some investor interest returns

ECONOMYNEXT – The Colombo Stock Exchange closed up on Monday, CSE data showed.

The All Share Price Index was up 0.22 percent, or 23.33 points, at 10,743.59.

The S&P SL20 index was up 0.68 percent, or 20.60 points, at 3,067.73.

Turnover was at 708 million. The banks sector contributed 189 million, while the food, beverage and tobacco sector contributed 176 million of this.

Sri Lanka’s stock market has seen some investor interest return after last week’s news that the country had managed an agreement on a debt restructuring deal with an official creditor committee, and foreign funds for some development projects resumed.

Top positive contributors to the ASPI in the day were Sampath Bank Plc (up at 71.50), LOLC Holdings Plc (up at 379.00), and Commercial Bank of Ceylon Plc, (up at 90.90).

There was a net foreign outflow of 52 million.

Citrus Leisure Plc, which announced that its banquet hall and revolving restaurant at the Lotus Tower would launch on or around Dec 9, saw its share price rise to 6.20 rupees. (Colombo/Dec4/2023).

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Sri Lanka rupee closes broadly steady at 328.10/30 to the US dollar

ECONOMYNEXT – Sri Lanka’s rupee closed at 328.10/30 to the US dollar on Monday, from 328.00/10 on Friday, dealers said.

Bond yields were stable.

A bond maturing on 01.06.2025 closed at 13.70/14.00 percent from 13.70/95 percent.

A bond maturing on 01.08.2026 closed at 13.90/14.10 percent from 13.90/14.05 percent.

A bond maturing on 15.01.2027 closed at 14.00/14.10 percent from 14.05/10 percent.

A bond maturing on 01.07.2028 closed at 14.20/35 percent from 14.15/25 percent.

A bond maturing on 15.05.2030 closed at 14.25/45 percent, from 14.20/45 percent.

A bond maturing on 01.07.2032 closed at 14.05/40 percent, from 14.00/45 percent. (Colombo/Dec4/2023)

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Gov minister highlights abortion rights, sex-ed for children, and Sri Lanka men killing their women

ECONOMYNEXT – Sri Lanka’s legislators have politicized the topics of rape and violence without addressing the elephant in the room, Jeevan Thondaman, Minister of Water Supply and Estate Infrastructure Development said in parliament on Monday (4).

“All the members here are talking about rape. What happens after that? We must talk about abortion rights. That is not something anyone wants to touch on, and that is why we are in this place right now,” Thondaman said.

“Despite alarming statistics on rape and violence, women are often blamed and punished for it. The criminalisation of abortion is a major example of this.”

Sri Lanka has some of the most restrictive abortion laws in the world. According to a 2016 estimate by the Health Ministry, he said, approximately 658 abortions take place a day, and close to 250,000 a year.

“That’s 250,000 women whose lives you are endangering.”

He added that what was needed at this point in time was comprehensive sexual education (CSE) for children and young people.

“Only through CSE in schools will children and young people develop, accurate, age appropriate knowledge attitude and skills; positive values such as respect for human rights, gender equality, diversity and attitude and skills that contribute to a safe, healthy and positive relationship.”

Thondaman pointed out that CSE plays a pivotal role in preparing young people for a world where HIV, AIDS, sexually transmitted infections, unintended pregnancies, and sexual and gender based violence still pose a risk to their well-being.

“CSE basically empowers children take control and make informed decisions freely and responsibly.”

Thondaman also highlighted the findings of a 2021 study (Fatalities_20211109_UNFPA) by the UNFPA and the University of Kelaniya that showed that a majority of women killed in Sri Lanka were murdered by those close to them.

“62 percent of homicides of Sri Lankan women are committed by either an intimate partner, ex-partner or family member. 84 percent are killed in their own homes by someone they know.”

Police and the judiciary have failed Sri Lanka’s women, the minister pointed out.

“Only 5 percent of these cases, between 2013-2017, were ever concluded. Men claim they were provoked, or are of unsound mind or have mental illness: These have been successful defenses. And the Police often express sympathy to this narrative as opposed to the victim’s.”

“We have a history of protecting oppressors.”

It takes 7-10 years for a child rape case to conclude, he pointed out.

Establishment of child courts are needed, he said, as well as several legislative amendments. “The government is working on a new law to reform the domestic violence act, reform of marriage and divorce laws to ensure there is an easier path to divorce: no one should be forced to remain in a marriage that is either abusive or not healthy.” (Colombo/Dec4/2023)

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