Restructuring rupee-denominated domestic debt under fire
The suggested restructure of the rupee-denominated domestic debt by the president has come under fire by many quarters in the country from bankers to economists who warn that a fresh can of worms will be opened if the country decides to do this.
Instead of addressing the symptoms, Sri Lanka should be addressing the cause of its economic crisis, which is what many economists advise.
They point out that the value of the domestic debt has significantly declined due to the exchange rate depreciation and inflation. “As it is already the domestic debt holders have got an implied, – not a nominal – haircut. To add anything on top of this will not be fair and will add more stress to the already stressed ecosystem. Restructuring domestic debt will also, in this case, defeat the very purpose of debt restructuring,” Senaka Kakiriwaragodage, CEO NDB Capital Holdings Ltd told the Business Times. He also pointed out that the rupee debtholders have already lost their value by about 45 per cent compared to the dollar bondholders.
Ravi Abeysuriya, Director CFA Society Sri Lanka, said that already 77 per cent rupee depreciation plus high inflation have eroded the value of the rupee-denominated bonds.
An economist warned that if the domestic debt is restructured with a haircut on the principal amount, the biggest losers will be the EPF, the insurance companies, National Savings Bank, and ETF as they have subscribed to these bonds. An investment banker also noted that if a haircut is given to the domestic debt, the local banking sector will need to invariably raise capital to boost their capital adequacy. “It all depends on the method on how the dentist restructured,” he added. Mr. Kakiriwaragodage agreed to note that a haircut will affect banks’ equity which is their ability to pay liabilities and meet statutory capital requirements which in turn will force these entities to recapitalise.
A second economist noted that there is a big misunderstanding about the domestic debt situation. He said the domestic debt is only a book entry and that it is no more than a national internal transaction. He said that if there is a haircut on this debt the government will have to print money and replenish it. “There are certain comments made without realising this,” he said noting that the larger problem is for the government to fortify the banking and finance sector which is the backbone of the economy. “There is no point in debt restructuring if this sector is not robust.”
He said that the banks should be allowed to make proper provisions based on the recoverability of loans including international sovereign bonds. He said the present crisis is a man-made one because the authorities artificially controlled the exchange rate and recommended artificial accounting treatments for provisioning. “The country’s demand, exchange rate, interest rate, inflation, money supply, borrowing etc are all artificial and this is a typical example of a country in deep crisis.”
Hitad.lk has you covered with quality used or brand new cars for sale that are budget friendly yet reliable! Now is the time to sell your old ride for something more attractive to today's modern automotive market demands. Browse through our selection of affordable options now on Hitad.lk before deciding on what will work best for you!