Local debt only on scope of debt restructuring

Early discussions regarding the restructuring of the country’s debt placed locally denominated debt within the framework of instruments that could be adjusted to revive the economy. With regard to international sovereign bond (ISB) issues, the local banking sector has organized itself separately from the international holders of securities. Details of the settlement will not be disclosed publicly.

Sri Lanka secured staff-level approval in record time for the disbursement of US$2.9 billion under an expanded funding facility. Given assurances from foreign embassies, Sri Lanka is also expected to receive considerable financing from bilateral creditors.

The countries’ main bilateral creditors, China (52%), Japan (19.5%) and India (12%) have already concluded new credit agreements and have indicated their willingness to venture into new financing agreements for major investment projects.

This was revealed to creditors in a public call organized by Clifford Chance, the Department of Finance and the Central Bank on September 23.

China has signaled its willingness to renew all the credits allowing the country to organize itself to make the payments. India has signaled its desire to create more linkages in the areas of energy and logistics infrastructure for which it will provide finance/investment. Japan has expressed interest in sharing its technological know-how in the field of public transport and further supporting port infrastructure through the AfDB.

All creditors may not be treated equally in debt restructuring, but the country has assured all lenders that there will be fair and comparable treatment between groups of creditors. Sri Lanka has already successfully swapped debt agreements for equity in bilaterally funded projects. CBSL Governor Dr. Nandalal Weerasinghe provided security for the local financial sector.

IMF Executive Board approval is expected by mid-December. Currently, with swap agreements and other outstanding obligations by public enterprises, there is a large demand for foreign currencies by entities within the economy.

The country aims to achieve a primary balance in the budget by 2024, moving to a primary balance surplus of 2.3% by 2025. The country is expected to experience negative growth from 2022 to 2023, with growth rebounding to 1 .5% in 2024 and reaching 2.6% in 2025.

The country has also assured foreign creditors and the IMF that it will switch to an autonomous monetary authority framework whose legal framework has already been finalized.

The country will switch to a mid-single-digit inflation framework from 2024 (6%). In the meantime, the country is expected to face inflation of 48.2% in 2022 and 29.5% in 2023.

Local private banks holding ISBs worth just over US$1 billion are advised by Baker and Mackenzie. The other international holders of ISB have for the most part (holding almost 55%) a group advised by Rothschild and White and Case.

Given the limited legal recourse of ISB holders, the strength of the country’s foreign policy and the minor scope of default commensurate with global incidents, the debt restructuring should proceed smoothly. (DP)

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