The restructure still on the cards

As Sri Lanka is in the process of securing the disbursement of International Monetary Fund funds to rescue its troubled economy, it will need to do everything possible to avoid a haircut. The negative impact on the economy can, at this point, only be mitigated and not fully be avoided. According to some experts of the debt, 61% is held by the central bank and 27% held by commercial banks, out of Rs. 3.3 trillion outstanding government bonds. 

Similar to government bonds, it has an outstanding balance of Rs. 8.2 billion, with 32% held by the Employees Provident Fund (EPF) and 24% held by banks. It is noteworthy that a debt haircut of just 20% of what the central bank currently holds, has a runaway of Rs. 40 billion. The capital base will also take a hit when commercial banks make a haircut seeping into the local banking system and wider economy.

The Central Bank Governor in late August affirmed that Sri Lanka would not restructure domestic debt, but this was partially in response to comments from President Wickremesinghe that looked to suggest that this policy option was being studied. The President who mentioned the option of restructuring the domestic debt must be investigated without incurring a haircut, opened pandora’s box to speculation. 

This was also met but prudent bankers and market analysts factoring this which would explain the current levels of bank write offs as well as the elevated fixed income rates, as the haircut would mean a direct downwards adjustment to the value of the assets held. An economic haircut will damage everyone and the entire country. However, due to the current situation, is no one able to take a haircut on current level of national debt.

It is also noted that the EPF holders, whose returns were 9% last year, will make up another group of the largest losers. Moreover, because of domestic savings taking another hit on other fronts. There is little to no value due to the approximately 65% inflation rate and the nearly 75% depreciation of the rupee since March, individuals will also suffer. 

The former senior banker argued that since the CBSL is the trustee of the EPF and people have invested there by putting their faith in a government agency, it is wrong to advocate for a haircut because it is their hard-earned money.

Instead, he said that long-term Treasury bill restructuring will give the Government some much-needed breathing room. The Government has not yet made it clear whether the nation’s rupee debt will be restructured alongside its dollar debt. Fitch Ratings recently stated in a report that Sri Lanka’s “CCC” rating “reflects a strong chance that local-currency debt will be included in debt restructuring, given the stock and interest costs are considerable and removing it could increase the restructuring burden on holders of foreign-currency debt.”

Furthermore, alongside debt restructuring, the restructuring of income generating projects should be critically examined. Although listing big SEOs is one of the finest strategies for market expansion, it must be done gradually within a framework for public enterprise reforms. Some SOEs are losing money, while others have substantial sums of debt. 

Therefore, before they can be considered as viable candidates for being sold, either privately or to the public market, state firms will need to be restructured and reform to make them financially sound. Reforms to public companies are therefore a crucial first step in laying the groundwork for potential change in the improvement of the country revenue generating assets. Establishing a national framework for public enterprise policy that is connected to the development of the capital market is as crucial as the short-term management of debt payments.