ECONOMYNEXT – Sri Lanka’s domestic and foreign creditors who can apply to receive suspended debt repayments in rupees under an interim policy could also be paid in bonds as an alternative, Central Bank Governor Nandalal Weerasinghe said .
Under Sri Lanka’s debt suspension policy, interest and principal payments will be capitalized at the applicable interest rate until a restructuring agreement is finalized. The Ministry of Finance has also offered to issue a new debt instrument to those who request it.
In the interim period until the restructuring, debt holders could elect to receive “the Sri Lankan rupee equivalent of an amount maturing during the interim period in lieu of capitalization”, according to the policy of the debt.
“Any external creditor or domestic ISB holder – these will be under restructuring anyway – if the domestic creditor or foreign investor wants rupees, we said there is an option,” he said. Weerasinghe.
“For example, if a foreign investor wants to collect rupees and invest in the stock market, there is an option.”
Of $13,050 million in international sovereign bonds outstanding at the end of 2021, $1,859 million was held by domestic holders. In a $500 million bond that was repaid in early 2022, around $117 million would have been held in the country.
Most of the debt is held by Sri Lankan banks.
“This is also a demand also coming from the domestic banking sector,” Weerasinghe said.
“Some national banks have invested in the secondary market, it is a more suitable option for them. At that time, they can take rupees at the value of the prevailing exchange rate.”
The debt policy stated that payments would be made in rupees as long as it was “feasible under the relevant credit documentation” and “consistent with the monetary policy of the central bank”.
If large sums of money are poured in by short commercial banks (leading to a shortage of reserves which is then replenished by central bank refinancing) or by direct central bank credit, the new liquidity may further destabilize the exchange rate.
Paying in the form of a paper document avoids the risk.
“The option is for the government to cede in rupees,” Weerasinghe said. “The government can transfer funds in cash or the government can give in rupees. It has not been decided. It is something that we must consider at this time.
“We will first have to see if there are any ISB holders who are willing to take this option. If they are willing to do so, the next consideration is whether the government can transfer the funds immediately or post a bond. This is something that can be considered later. »
Creditors wishing to receive rupees must notify the Ministry of Finance within one month of the default. (Colombo/May 1/2022)