Inclusion of Governance Linked Bonds in the bondholder deal is worthwhile as governance directly influences the debt sustainability, Bloomberg said.

The report by Bloomberg said that one aspect of governance directly influences the pile of dollars available to repay liabilities.

“There is no reason why the Government should pay an extractive coupon, instead of sharing the fruits of a lower debt burden with citizens who have suffered crushing inflation and shortages,” Bloomberg said. 

Moreover, it said that the misrule of former President Gotabaya Rajapaksa and his brothers caused the crisis in the first place, and as Verité Research says, if governance is not improved, it will affect debt sustainability in the future as well.

In addition to the GDP linked bonds agreed between the bondholders and the authorities, have agreed to incorporate features of a so-called ‘governance-linked bond’ in that part of the debt that won’t be tied to GDP. How governance will be measured hasn’t been disclosed. 

But Colombo-based Verité Research, which made the proposal, has suggested steps to curb corruption, strengthen banks and improve tax collection. If the nation of 22 million meets these goals, creditors should accept a discounted coupon even on vanilla bonds. These are currently designed to offer a higher rate every few years, rising to 9.25% by 2033.

Also, Bloomberg states that as with the GDP linked bond, pegging debt servicing to output measured in dollars is problematic. The debtor might appear to be generating incomes to repay creditors when that isn’t the case. 

That’s because nominal GDP can just as easily get a boost from steeper prices as higher production. And the dollar value of goods and services can rise if the local currency appreciates. Both things happened last year.

The Government has, therefore, persuaded the lenders to accept a second test. Only if the cumulative real GDP growth between 2024 and 2027 turns out to be higher than the IMF’s projection of 11%, will the creditors be given their upside. Conversely, Sri Lanka will get the promised downside protection only if growth is below 11%.