Domestic debt restructuring raises fiscal sustainability issues
The Government is now considering domestic debt restructuring as a part of a broader policy package to address massive debt vulnerability running up to trillions of rupees, Finance Ministry sources said.
Total outstanding domestic debt was Rs. 12 trillion as at the end of March 2022 while the gross domestic borrowings of the Government surpassed Rs 1.6 trillion in the first four months of 2022, ministry data shows.
Around 60 per cent of the domestic borrowing (over Rs. 1 trillion) was raised from Treasury bonds, 31 per cent (Rs. 518.2 billion) from Treasury bills, 4.4 per cent (Rs. 73.8 billion) through provisional advances from the Central Bank (CB), and Rs. 65.6 billion raised from Sri Lanka development bonds.
According to CB sources, the restructuring of domestic debt would exert an adverse impact on domestic bank balance sheets.
In order to avoid the impact on the domestic financial system, measures should be taken to recapitalise some banks or replenish superannuation funds such as Employees Provident Fund and Employees Trust Fund, the sources said.
A country’s debt is sustainable if it can repay it by borrowing from the market; this is known as ability to refinance, former Central Bank Deputy Governor Dr. W.A. Wijewardena told the Business Times.
In the case of forex debt, if repayment has to be made by using reserves or borrowing from friendly countries it’s not sustainable and if the domestic debt is repaid by borrowing from the CB, then, it’s also not sustainable, he explained.
The CB Governor tries hard to avoid this by increasing rates and borrowing everything from the market. But, there’s a liquidity crunch in the domestic financial system and so, he might one day run into problems, he added.
If this happens, it’s outside the control of the local monetary authority and terms will be dictated by outside creditors and prospective lenders like International Monetary Fund (IMF), he said adding that in the case of the IMF, it cannot lend to a member whose debt, either foreign or domestic, is not sustainable.
The government is now compelled to present a debt sustainability analysis (DSA), to the IMF and the country’s foreign creditors, the sources disclosed.
Therefore it has to consider potential restructuring of domestic debt in order to achieve debt sustainability, they said.
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