Local debt only on perimeter of debt restructuring
The initial discussions regarding the debt restructuring of the country have placed the locally denominated debt within the remit of instruments that may get adjusted to boost the economy. Concerning the International Sovereign Bond (ISBs) issuances the local banking sector has organized separately from the international holders of the securities. Details of settlement shall not be publicly disclosed.
Sri Lanka has in record time secured a staff level agreement for the disbursement of US 2.9 billion in an extended fund facility. Given assurances made by foreign embassies, Sri Lanka is also expected to receive considerable financing from bilateral creditors.
The countries’ major bilateral creditors China (52%), Japan (19.5%), and India (12%) have already entered into fresh credit arrangements and have signalled a willingness to venture into new financing arrangements for major capital expenditure projects.
This was disclosed to the creditors in a public call organized by Clifford Chance, the Ministry of Finance, and the Central Bank on 23 September.
China has signalled a willingness to roll over all credit allowing the country to organize itself to make payments. India has signalled a desire to create more linkages in the spheres of energy and logistics infrastructure for which it will provide financing/investment. Japan has shown interest in sharing its technological know-how in the mass transit sphere and further support for the port infrastructure through the ADB.
All creditors may not be treated equally in the debt restructuring but the country assured all lenders that there would be a fair and comparable treatment across creditor groups. Sri Lanka has previously been successful in swapping debt arrangements for equity stakes in bilaterally financed projects. CBSL Governor Dr Nandalal Weerasinghe assured the safety of the local financial sector.
IMF Board Approval is envisaged by mid-December. Currently, with swap arrangements and other unpaid obligations by state-owned enterprises, there is significant demand for foreign currency by entities within the economy.
The country aims to come into a primary balance in the budget by 2024 increasing to a primary balance surplus of 2.3% by 2025 onwards. The country is expected to have negative growth from 2022 to 2023 with growth rebounding to 1.5% in 2024 and rising to 2.6% in 2025.
The country has also assured foreign creditors and the IMF that it will pivot to an autonomous monetary authority framework whose legal framework has already been finalized.
The country shall pivot to a mid-single digit inflation framework from 2024 (6%). In the interim period, the country is expected to face inflation of 48.2% in 2022 and 29.5% in 2023.
The local private banks holding ISBs in values slightly above US$ 1 billion are being advised by Baker and Mackenzie. Other international ISB holders have for the most part (holding close to 55%) formed a group being advised by Rothschild and White and Case.
Given the limited legal recourse by ISB holders, the strength of the foreign policy standing of the country, and the minor scope of the default proportionate to global incidents, debt restructuring is expected to be a fairly smooth affair. (DP)