ECONOMYNEXT – Sri Lanka has announced a suspension only on foreign debt and rupee securities are not part of the re-structuring, Central Bank Governor Nandalal Weerasinghe said amid concerns that a rupee securities will be subject to a second nominal hair cut.
Unlike dollar denominated debt, rupee securitieshad already suffered a severe haircut when the rupee fell from 200 to 360 to the US dollar, and their holders including pensioners have lost their purchasing power, reducing the burden on the budget, and while more taxes to support the state expenditure.
“Right now, our position is we will restructure only external debt,” Governor Weerasinghe told reporters.
“That position is being maintained as of now by the Ministry of Finance.”
Multilateral debt including that of International Monetary Find, the World Bank, Asian Development Bank and Asian Infrastructure Investment Bank of China are not re-structured as ‘senior’ creditors.
Hamilton Reserve, a sovereign bond holder had gone to court protesting repayment of domestic US dollar debt and full payment on their sovereign bond holdings of 250 million US dollars in a security maturing on July 2022.
Governor Weerainghe said, in parallel to the staff level agreement discussions with the International Monetary Fund, Sri Lanka’s financial and legal advisors are also working on the problem.
“And they have to share some information about what is going on,” Weerasinghe said.
“Based on that they will tell us what kind of reliefs we have to seek from different kind of creditors.
“That process is going on. We are making some progress but the first thing is to reach a staff level agreement and do what we call a debt sustainability analysis. And base on that, the future actions can be decided.”
When currencies depreciate and inflation go up, the real value to debt denominated in the collapsed currency goes down, helping in fiscal consolidation.
However debt denominated in currencies with better monetary policy retain their value.
In the past it was the practice to extend the maturity of such debt, however Washington later started to push for hair cuts as part of failed solutions to Latin America chronic currency crises and default cycles.
The Fed also went on a money printing spree under Jerome Powell, who like economists in Sri Lanka who claim monetary printing and depreciation does not cause inflation said the link between the economy and money supply was “something we have to un-learn I guess”.