By Shantha Jayarathne
(Lanka-e-News -28.June.2023, 2.35PM) The government's decision to close banks for five days has sparked speculation about its intentions and plans for debt restructuring. In a recent press conference led by the Governor of the Central Bank, Mr. Nandalal Weerasinghe, it was revealed that the government has been quietly making arrangements and will soon disclose its debt restructuring strategy. However, some undisclosed factors and the Governor's uneasy demeanor indicated that he may face accountability from the President for the entire process.
The government's upcoming strategy, though concerning, cannot be dismissed lightly. It appears that they are aligning with the conditions set by the International Monetary Fund (IMF) for debt restructuring, as we previously predicted. By next week, the truth behind these plans will come to light.
The new term being used for debt restructuring is "debt optimization," making Sri Lanka the first country in the world to adopt such phrasing. Regardless of the terminology used, it is crucial to understand that this process involves restructuring debts, which no one can deny. While there may be slight variations in the approach, the ultimate consequence will be someone shouldering the cost.
The initial focus of the government's debt restructuring efforts will be on the local banks, financial companies, the Employees' Provident Fund (EPF), and other invested funds related to treasury bills and treasury bonds.
Three potential instruments could be employed in the debt restructuring process:
Suppose an individual invests Rs. 100 in treasury bonds with a maturity date of July 1, 2025, and a yield of 20% annually. Since the yield is released every six months, the total return at maturity would be Rs. 140 (10 Rs. for each six-month interval). If the government chooses to implement a 50% "haircut," the yield received from the investment would reduce to Rs. 70 (20 + 50% of the face value).
Considering the EPF's total wealth as of December 2022, which amounted to Rs. 3459.90 billion, with around 96% invested in government bonds (Rs. 3380.60 billion), any substantial reduction in face value would severely impact the EPF's financial stability. Therefore, limiting the haircut to no more than 2% (around Rs. 64 billion) seems detrimental. However, the IMF has instructed the government to adhere to this method when restructuring foreign debts.
This method involves leaving the face value untouched while reducing a portion of the yield. Under the first hypothesis, an investment would yield Rs. 120, including interest. While this approach also affects banks, financial services, the EPF, and other institutions to a certain extent, it requires them to adjust their balance sheets accordingly.
In this method, the government extends the maturity date of bonds without altering the face value. For instance, if the maturity date initially set for July 1, 2025, is postponed to 2030, the maturity period would extend to seven years, with yields paid every six months. While this approach has a lesser impact compared to a haircut or coupon clipping, it can adversely affect the budget deficit and still have consequences for investors.
By Friday or Saturday, the government's decision on which method or combination of methods to utilize should become clear. However, it is important to bear in mind that regardless of the chosen mechanism, relying on debt as a means to solve the economic crisis will likely lead to the need for further restructuring in five years' time.
Given the adverse effects of the government's economic strategies thus far—resulting in a shrinking economy, increased poverty, and severe economic damage—rebuilding the country's economic foundations will be an arduous task. History has shown that no country has truly flourished solely through the neoliberal economic reforms imposed by the IMF. Trial and error methods will prove futile unless the rulers and their followers grasp this reality. Unfortunately, it is the innocent citizens who suffer from this misfortune.
Former Senior Consultant
Sri Lanka Institute of Development Administration (SLIDA)
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by (2023-06-28 09:13:24)
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