ECONOMYNEXT – Sri Lanka should not pave the way to create a banking crisis in attempting to reduce government debt by imposing haircuts on rupee debt in a bid to reach debt sustainability, opposition legislator Eran Wickremeratne has said.
Sri Lanka defaulted on its foreign debt in April 2022 after two year of money printing triggering the worst currency crisis in the history of the country’s intermediate regime central bank and is in talks with the International Monetary Fund.
“We cannot create another problem at the expense of solving an existing problem,” Wickremeratne, a former State minister of Finance and a banker said.
“We cannot afford to give even a signal about a banking crisis in the country when there is no such crisis. We can’t go for solutions that will basically create a banking crisis.
“A haircut (Debt reduction) on local debt cannot be entertained.”
Wickremeratne was referring to comments made by President Wickremesinghe at a forum organized by Advocata Institute, a Colombo-based think tank.
“Second, and the more important issue is have you got to look at the local debt?,” President Wickremesinghe told an economic forum.
“Certainly it will have far reaching consequences. Lazard, the financial advisors are looking at both.”
Rupee debt holders have already suffered a steep real hair cut with the rupee falling from 182 to 360 to the US dollar over the past two years and inflation hitting 60 percent.
When inflation spikes the economy also inflates, nominal government tax revenues rise and the debt to GDP ratio automatically falls at the expense of the debt holders which are mostly banks and pension funds of old people.
Foreign investors on the other had with dollar denominated bonds and loans do not face the fall in the real value of debt. Foreign debt expands to keep pace as the domestic currency falls.
When banks lose their capital the government will anyway have to bail them out adding to the debt.
Countries that face a combined banking and currency crisis, face longer downturn and recovery and the ability to repay debt.
Wickremeratne said opposition SJB was willing to support the government in its efforts to stabilize the economy. (Colombo/Aug09/2022)