Sri Lanka’s banks raise concerns over debt restructuring

Sri Lanka’s banking sector said this week that maintaining stability of the banking system is paramount at this time when extremely difficult decisions are being made.

This comment was made through a communique issued by the Sri Lanka Banks’ Association (SLBA) saying “stability of the banking system is critical for the national interest”, while referring to moves to resort to local debt restructuring, which the banks are worried about.

“Banks have consistently supported the Government and the Central Bank’s (CB)’s efforts over the years through severe economic hardship that led to both public anxiety and political upheaval reflected in crises especially in recent times with debt repayment moratoriums, rescheduling of viable businesses and necessary recovery arrangements on generally disadvantageous terms predicated by the many incidents of inclement weather, post Easter Sunday 2019 attacks, COVID-19 pandemic, political, and social unrest. Credit impairments have hit an all-time high hitherto unseen. Taking further impairment costs on top of these strains on Capital and Liquidity is not sustainable specially with the tax deductibility of these necessary costs of being in business being uncertain,” the association said.

In the recent crisis background, the country’s debt repayment burden was declared unsustainable in April 2022 and proceedings were initiated to seek International Monetary Fund (IMF) help via financing the acute balance of payments deficit. In this process, it is necessary to arrive at a consensus with creditors that repayment relief will be afforded to Government by their debt holders to enable repayment to commence within sensible repayment capacity limits that do not result in social strife and political disruption, the statement said.

“The management of this process including priorities of the Government through their agents, the IMF expectations and all public debt holders is admittedly difficult given the diversity of interests. However, the lack of transparency in the negotiations with the SLBA member bank consortium is unhelpful.” 

The banks believe that all stakeholders involved in structuring the restoration of Sri Lanka’s Balance of Payments to a sustainable equilibrium must necessarily take a careful look at the resulting outcomes - impact to the banking sector capital and liquidity in a potential Domestic Debt Restructuring (DDR) and minimise the risk to the sector. A further escalation of the situation we are in must be avoided.

Banks have asked for clarity on what is meant by “voluntary” debt optimization, is there a non-voluntary element and to whom does this apply (limited to the larger Treasury Bills / Treasury -Bond holders such as the superannuation and pension funds and state-owned Banks), more disclosure on proposed Domestic Debt Optimisation (DDO) and International Sovereign Bond (ISB) re-structuring terms, what is the IMF’s view of Sri Lanka’s economic growth prospects over the duration of the IMF Extended Fund Facility (EFF) and whether proposed DDO  would resemble the experience of some other countries who have taken this route “before u”, the statement said.