Voluntary domestic debt restructuring under IMF programme being considered

Sri Lankan authorities are exploring options for a domestic debt optimisation (DDO) operation aimed at liquidity relief while preserving financial stability to avoid further eroding 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-Bonds holders,” said a joint statement issued by Central Bank Governor Dr. Nandalal Weerasinghe and Treasury Secretary Mahinda Siriwardene, after they participated in a virtual discussion with Sri Lanka’s creditors.

The statement said that the investor presentation was held on Thursday in order to explain the current macroeconomic situation in Sri Lanka, and outline the key pillars and objectives of the IMF programme as well as the next steps with regard to the engagement with creditors.

The Sri Lankan Government has embarked on an ambitious reform agenda, and “we have successfully achieved all prior actions required to unlock the IMF financing”, it said.

As per the IMF programme, Sri Lanka is fully committed to achieving fiscal consolidation and implementing fiscal structural reforms; restoring public debt sustainability; restoring price stability and rebuilding external buffers; safeguarding financial system stability; and reducing corruption vulnerabilities and further introducing growth-enhancing reforms.

Sri Lankans are the Government’s priority, and as part of the IMF programme, the Government aims to enhance the existing social safety nets to protect the most vulnerable.

As a result, Sri Lanka’s economy has already shown some encouraging stabilisation signs, with year-on- year inflation slowing down and earnings from tourism rebounding to more standard levels. “We will continue to implement our reform agenda in order to support Sri Lanka’s economic recovery and successfully complete the IMF programne,” the statement said.

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 programme period. This financing gap will have to be covered through new external funding and external debt service relief.

“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,” it said.