Economics don cautions govt. against rushing to restructure domestic debt

Sri Lanka must restructure domestic debt only after a careful study of what concessions are given by foreign debtors, Wasantha Athukorala, Professor in Economics – University of Peradeniya says.He stressed that Sri Lanka must restructure domestic debt only if there was no other course of action. “Domestic debt restructuring can have a serious impact on the liquidity of banking and other financial institutions,” he warned.

Prof. Athukorala said that the Sri Lankan economy was shrinking and domestic debt restructuring would make matters far worse.

Last week, the Central Bank announced that Sri Lankan authorities were exploring the possibility of domestic debt optimisation (DDO) operations aimed at liquidity relief while preserving financial stability to avoid further eroding of the country’s repayment capacity.

The Central bank said the DDO would be conducted on a voluntary basis and be based on its consultations with major T-Bond holders.

“”Despite the ambitious fiscal consolidation efforts, Sri Lanka’s public debt trajectory is set to remain unsustainable in the absence of a comprehensive debt treatment. Sri Lanka is also facing a significant external financing gap over the IMF program period. This financing gap will have to be covered through new external funding and external debt service relief. The Authorities are also exploring options for a domestic debt optimization (DDO) operation aimed at liquidity relief while preserving financial stability to avoid further erosion of Sri Lanka’s repayment capacity. It is envisaged that this DDO will be conducted on a voluntary basis and be based on our consultations with major T-Bond holders.

As we move ahead, we are looking forward to accelerating and intensifying engagement with all our creditors in a transparent way, in good faith, and we are hoping to reach debt treatment agreements that are consistent with the IMF debt sustainability analysis and with the comparability of treatment principle,” the Central Bank said.