Banks speak up on possible Domestic Debt Restructuring

• Stresses need for careful look at impact to banking sector capital, liquidity and public confidence due to proposed DDR
• Warns further risks to banking sector must be avoided
• Points to lack of transparency in negotiations with banks

The Sri Lanka Banks’ Association (SLBA) has raised concerns over a possible Domestic Debt Restructuring (DDR) urging a proper evaluation and warning that additional risks to industry stability and public confidence must be avoided.

“The banks believe that all stakeholders involved in structuring the restoration of Sri Lanka’s Balance of Payments to a sustainable equilibrium must necessarily take a careful look at the resulting outcomes – impact to the banking sector capital and liquidity in a potential Domestic Debt Restructuring (DDR) and minimise the risk to the sector. A further escalation of the situation we are in must be avoided,” SLBA said in a statement.

It said that banks have consistently supported the Government’s and CBSL’s efforts over the years through severe economic hardship that led to both public anxiety and political upheaval reflected in crises especially in recent times with debt repayment moratoriums, rescheduling of viable businesses and necessary recovery arrangements on generally disadvantageous terms predicated by the many incidents of inclement weather, post Easter Sunday 2019 attacks, COVID-19 pandemic, political, and social unrest.

“Credit impairments have hit an all-time high hitherto unseen. Taking further impairment costs on top of these strains on capital and liquidity is not sustainable especially with the tax deductibility of these necessary costs of being in business being uncertain,” SLBA warned.

“The banks reiterate that maintaining stability of the banking system is paramount at this time when extremely difficult decisions are being made,” it added.

SLBA said its members have asked for clarity on what is meant by “voluntary” debt optimisation, is there a non-voluntary element and to whom does this apply (limited to the larger Treasury Bills/Treasury-Bond holders such as the superannuation and pension funds and State-owned banks), more disclosure on proposed Domestic Debt Optimisation (DDO) and International Sovereign Bond (ISB) restructuring terms, what is the IMF’s view of Sri Lanka’s economic growth prospects over the duration of the IMF Extended Fund Facility (EFF) and whether proposed DDO would resemble the experience of some other countries who have taken this route before us.

“The management of this process including priorities of the GoSL through their agents, the IMF expectations and all public debt holders is admittedly difficult given the diversity of interests. However, the lack of transparency in the negotiations with the SLBA member bank consortium is unhelpful,” the statement added.

Following is the full statement titled “GoSL Public Debt Restructuring and Concerns of the Banking Sector” by SLBA.

The Sri Lanka Banks’ Association (SLBA) represents all of the licensed banks in Sri Lanka and underpins all sectors of the economy. The banking sector is the main mechanism through which the Central Bank of Sri Lanka (CBSL) implements monetary policy influencing the financial markets. The stability of the banking system is critical for the national interest.

“Having run an unsustainable macroeconomic model in tandem with the longstanding deficits in the budget balance and the external current account, the economy had fully exhausted its buffers by early 2022 as it was straddled by a myriad of vulnerabilities that emanated from both global and domestic sources” – CBSL Annual Report 2022.

In this background, the country’s debt repayment burden was declared unsustainable in April 2022 and proceedings were initiated to seek International Monetary Fund (IMF) help via financing the acute balance of payments deficit. In this process, it is necessary to arrive at a consensus with creditors that repayment relief will be afforded to the Government of Sri Lanka (GoSL) by their debt holders to enable repayment to commence within sensible repayment capacity limits that do not result in social strife and political disruption.

The management of this process including priorities of the GoSL through their agents, the IMF expectations and all public debt holders is admittedly difficult given the diversity of interests. However, the lack of transparency in the negotiations with the SLBA member bank consortium is unhelpful.

The banks believe that all stakeholders involved in structuring the restoration of Sri Lanka’s Balance of Payments to a sustainable equilibrium must necessarily take a careful look at the resulting outcomes – impact to the banking sector capital and liquidity in a potential Domestic Debt Restructuring (DDR) and minimise the risk to the sector. A further escalation of the situation we are in must be avoided.

It must be borne in mind always that the banking sector will have to play an active role in Sri Lanka’s economic revival process. The sector Capital Adequacy Ratios (CAR) and Liquidity Coverage Ratios (LCR) are presently within the regulatory requirements. This position must not be depleted through any action including a debt restructuring that threatens the stability of banks and erodes public confidence.

Banks have asked for clarity on what is meant by “voluntary” debt optimisation, is there a non-voluntary element and to whom does this apply (limited to the larger Treasury Bills/Treasury-Bond holders such as the superannuation and pension funds and State-owned banks), more disclosure on proposed Domestic Debt Optimisation (DDO) and International Sovereign Bond (ISB) restructuring terms, what is the IMF’s view of Sri Lanka’s economic growth prospects over the duration of the IMF Extended Fund Facility (EFF) and whether proposed DDO would resemble the experience of some other countries who have taken this route before us.

Banks have consistently supported the GoSL and CBSL’s efforts over the years through severe economic hardship that led to both public anxiety and political upheaval reflected in crises especially in recent times with debt repayment moratoriums, rescheduling of viable businesses and necessary recovery arrangements on generally disadvantageous terms predicated by the many incidents of inclement weather, post Easter Sunday 2019 attacks, COVID-19 pandemic, political, and social unrest. Credit impairments have hit an all-time high hitherto unseen. Taking further impairment costs on top of these strains on capital and liquidity is not sustainable specially with the tax deductibility of these necessary costs of being in business being uncertain.

The banks reiterate that maintaining stability of the banking system is paramount at this time when extremely difficult decisions are being made.