Sri Lankan Central Bank moots recast of pension funds, haircut on sovereign bonds 

Central Bank Governor Nandalal Weerasinghe unveiled the Ranil Wickremesinghe government’s domestic debt restructuring plan that seeks to protect local banks.

Sri Lanka’s Central Bank has proposed restructuring the beleaguered nation’s debt by recasting the outgo on the country’s pension funds and offering international sovereign bondholders a repayment plan that entails a 30% haircut.

Addressing a media briefing in Colombo Thursday morning, Central Bank Governor Nandalal Weerasinghe unveiled the Ranil Wickremesinghe government’s domestic debt restructuring plan that seeks to protect local banks, while effectively transferring the burden to superannuation funds, including the Employees’ Provident Fund (EPF). The Central Bank will convert treasury bills and exchange superannuation funds’ treasury bonds to longer-term maturity treasury bonds at a lower interest rate.

On the decision to exclude local banks from the restructuring plan, he said: “It is vital to protect the banking sector, as a collapse [of it] would have a catastrophic consequence for some 57 million depositors.”

The plan for domestic debt restructuring, cleared by the Cabinet on Wednesday, will be debated in Parliament the coming weekend, ahead of a vote. Amid some speculation of a bank run, the government announced a five-day banking holiday beginning on Thursday. “The holiday is mainly to prevent any market-panic [around the parliamentary debate],” Mr. Weerasinghe said, as he sought to allay fears.

Sri Lanka to restructure domestic debt amid challenges

The government’s latest move is part of its efforts to restructure both its foreign and domestic debt, in line with the expectations of the International Monetary Fund (IMF) that extended a nearly-$3 billion External Fund Facility in the wake of Sri Lanka’s painful economic crash last year. As of March 2023, the crisis-hit country’s foreign and domestic debt were estimated at about $41.5 billion and $42.1 billion, respectively. Earlier this week, President Wickremesinghe said his government hopes to restructure $17 billion of its foreign debt in five years. After indiscriminate borrowing for years, and spending beyond its means, Sri Lanka is now aiming to reduce its public debt to GDP ratio from 128% to 95% by the year 2032.

Key bilateral creditors, India and Japan, along with the Paris Club group of creditors, have set up a common platform to jointly evolve a debt restructuring plan for Sri Lanka, based on the principle of creditor parity. All eyes are on China, Sri Lanka’s largest bilateral creditor, which is yet to officially join in the process and remains an observer, although Beijing has assured Colombo of cooperation.