SRI Lanka’s central bank today unveiled its domestic debt restructuring plan, envisaging a 30% haircut on dollar-denominated bonds, including international sovereign bonds.

The bank said ISB holders can opt to accept a 30% reduction in their capital in exchange for getting the rest of their money back in six years at a 4% interest rate. The same terms were offered to Sri Lankan nationals holding dollar bonds.

Sri Lanka defaulted on its US$46 billion (RM215 billion) foreign debt in April last year after running out of foreign exchange to finance even the most essential food, fuel and medicines.

Months of protest over economic mismanagement led to the toppling of then-president Gotabaya Rajapaksa in July last year.

The treatment of dollar-denominated Sri Lanka Development Bonds (SLDB) will be “comparable to external creditors”, the bank said in a statement.

If the SLDB holder does not agree to a reduction of the capital, the tenure of the bond will be extended to 15 years with interest payments of 1.5% paid after nine years.

The third option is to exchange the dollar bonds for rupee securities, which will mature in 10 years and attract a floating interest rate of one percentage point above the central bank’s policy rate.

The government has not specifically spelt out a scheme for foreign creditors, but made it clear that terms offered to local dollar bond holders will be the same as what will be offered to ISB holders.

Most of the SL Development Bonds have been purchased by commercial banks in Sri Lanka and the total value of the outstanding bonds is about US$1.48 billion, according to official data.

Revised government figures show the government’s direct external debt was US$36 billion, of which US$13.52 billion is bilateral loans, while US$12.5 billion is ISBs.

Some US$10 billion in multilateral credit is not covered by the debt treatment.

The debt restructuring is a key condition for Sri Lanka to secure a US$2.9 billion bailout from the International Monetary Fund in March. That 48-month programme comes up for its first review in September.

The government has summoned parliament on Saturday, three days ahead of schedule to vote on the restructuring proposals.

It has also declared tomorrow a bank holiday on top of religious holidays today and Monday to ensure financial markets remain closed for five consecutive days until the plan is passed by the legislature. – AFP, June 29, 2023.