Sri Lanka Requests 30% Debt Reduction from Dollar Creditors

The government plans to implement a domestic debt restructuring program, which includes exchanging treasury bills for long-term bonds, according to Nandalal Weerasinghe at a press conference. This comes as Sri Lanka faces its worst financial crisis since gaining independence from Britain in 1948, with record-low foreign exchange reserves and its first foreign debt default last year.

In order to address these challenges and put the country’s debt on a sustainable track, Sri Lanka secured a $2.9 billion bailout from the IMF in March. The domestic debt restructuring is a crucial step towards achieving the IMF program goal of reducing overall debt to 95 percent of GDP by 2032.

In addition to the domestic debt restructuring, the government is also working on renegotiating its foreign debt with bondholders and bilateral creditors, including China, Japan, and India.

Under the domestic debt revamp, holders of locally issued dollar-denominated bonds, such as Sri Lanka Development Bonds (SLDBs), will be given three options. The first option is similar treatment to investors in the country’s international sovereign bonds, which includes a 30% reduction in principal, a 6-year maturity, and a 4% interest rate. The government is currently discussing this option with foreign debt holders.

Sri Lanka currently has $12.5 billion in international sovereign bonds.

For domestic bondholders, there are two other options available. The second option is similar treatment to bilateral dollar creditors, with no reduction in principal, a 15-year maturity, a 9-year grace period, and a 1.5% interest rate. The third option is exchanging their holdings for local currency denominated instruments, with no reduction in principal, a 10-year maturity, and an interest rate of SLFR + 1% (Sri Lanka Standing Lending Facility Rate).

Boost in international support

In a separate development, the World Bank has approved $700 million in funding for Sri Lanka, which includes budgetary and welfare support. This is the largest funding tranche the country has received since the IMF deal in March. $500 million will be allocated for budgetary support, while $200 million will be for welfare support, specifically targeting those most affected by the crisis.

Approval of Sri Lanka’s Debt Program

The domestic debt program has been approved by Sri Lanka’s cabinet at a special meeting, according to a source at the president’s office. The program aims to address a portion of the country’s $46.9 billion domestic debt, with $27.8 billion held in treasury bonds, as reported by the latest Finance Ministry data.

In addition, local currency bonds held by superannuation funds, including pension funds, will be replaced with new bonds that carry a 9% interest rate, as stated by Weerasinghe.

Start of Debt Restructuring Discussions for Sri Lanka

The restructuring program will be presented to parliament for approval on Saturday.

 

Reference

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