Sri Lanka banks seek transparency, clarity on domestic debt ‘optimization’

Sri Lanka
By Editor_1
Sri Lanka’s banks have sought clarity on a proposed domestic debt restructure and called for transparent discussions with all banks -knowlk.info

COLOMBO – Sri Lanka’s banks have sought clarity on a proposed domestic debt restructure questioning whether there was non-voluntary element in the plan and also called for transparent discussions with all banks.

Sri Lanka’s Central Bank and Treasury officials have said there will be voluntary debt ‘optimization’ for domestic debt holders.

Banks said they are seeking clarity on what is meant by voluntary debt optimization, and whether there is a non-voluntary element which applied to state banks and pension funds.

A statement from Sri Lanka Banks’ Association (SLBA) said management of the process including priorities of the Government of Sri Lanka through their agents, the International Monetary Fund (IMF) expectations and all public debt holders was admittedly difficult given the diversity of interests.

“However, the lack of transparency in the negotiations with the SLBA member bank consortium is unhelpful,” the statement added.

Banks also sought disclosure on sovereign bond restructure terms, what IMF’s views are on the duration of the IMF program and where the proposed domestic debt optimization “would resemble the experience of some other countries who have taken this route before us”.

Sri Lanka has projected higher growth than the IMF for the next few years, which would in theory reduce the need to re-structure debt compared to the more ‘pessimistic’ forecasts of the Washington based lender.

Sri Lanka has to restructure debt under an IMF program after prolonged money printing to suppress interest rates and to close a supposed output gap (Keynesian stimulus) backed up by tax cuts under flexible inflation targeting led to external sovereign default.

Several countries with reserve collecting (pegged) central banks which pursued similar monetary policy without tax cuts have also defaulted.

“It must be borne in mind always that the banking sector will have to play an active role in Sri Lanka’s economic revival process,” the statement said.

“The sector Capital Adequacy Ratios (CAR) and Liquidity Coverage Ratios (LCR) are presently within the regulatory requirements. This position must not be depleted through any action including a debt restructuring that threatens the stability of banks and erodes public confidence.”

Full statement from Sri Lanka Banks Association on Government of Sri Lanka debt restructuring process:

The Sri Lanka Banks’ Association (SLBA) represents all of the licensed banks in Sri Lanka and underpins all sectors of the economy. The banking sector is the main mechanism through which the Central Bank of Sri Lanka (CBSL) implements monetary policy influencing the financial markets. Stability of the banking system is critical for the national interest.

Government of Sri Lanka (GoSL) Public Debt Restructuring and Concerns of the Banking Sector

“Having run an unsustainable macroeconomic model in tandem with the longstanding deficits in the budget balance and the external current account, the economy had fully exhausted its buffers by early 2022 as it was straddled by a myriad of vulnerabilities that emanated from both global and domestic sources”. CBSL Annual Report 2022

In this 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 the GoSL 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 management of this process including priorities of the GoSL 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.

It must be borne in mind always that the banking sector will have to play an active role in Sri Lanka’s economic revival process. The sector Capital Adequacy Ratios (CAR) and Liquidity Coverage Ratios (LCR) are presently within the regulatory requirements. This position must not be depleted through any action including a debt restructuring that threatens the stability of banks and erodes public confidence.

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 Optimization (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 us.

Banks have consistently supported the GoSL and CBSL’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 especially with the tax deductibility of these necessary costs of being in business being uncertain.

The banks reiterate that maintaining stability of the banking system is paramount at this time when extremely difficult decisions are being made.

-Sri Lanka Banks’ Association (Guarantee) Limited

 

Editor_1
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