Sri Lanka’s Domestic Debt Optimisation (DDO) was more about appeasing international creditors in an attempt to unlock external debt relief, rather than actually contributing to reducing the debt burden itself, an international think tank said.
Accordingly, a report by the Australian-based independent think tank Lowy Institute has said that Sri Lanka brought in a domestic debt restructuring to appease its external creditors rather than reducing the overall debt burden while Imposing losses on domestic creditors, essentially imposes losses on the country itself.
It also said that another issue for the DDO is that some of Sri Lanka’s domestic law debt is in the form of US dollar bonds held by both domestic banks and foreign private creditors, which need to be restructured on similar terms to Sri Lanka’s International Sovereign Bonds (ISBs).
“But on this front, the proposed restructuring looks light. In part, this again reflects the need to limit further damage to domestic banks. However, it also seems to reflect low expectations for Sri Lanka’s ability to achieve a prompt and meaningful restructuring with its external creditors,” the Lowy Institute said.
Moreover, the report said that problems are readily visible in the debt sustainability assessment and targets set by the International Monetary Fund (IMF) programme as under those targets, the government debt would still be more than 100% of GDP in five years, and 95% of GDP in a decade.
It said that instead of total debt, the IMF has put the emphasis on reducing debt servicing payments over the coming years to less than 14% of GDP, itself still a very high level which according to sovereign debt expert Brad Setser of the Council on Foreign Relations notes, in doing so, the IMF may be setting Sri Lanka up for failure.
The IMF staff report on the Extended Fund Facility (EFF) in Sri Lanka, virtually admits defeat, stating that “even after a successful programme and debt restructuring, debt risks will remain high for many years.”.
The IMF notes that the reasoning behind its (soft) debt restructuring targets is to ensure a “higher likelihood for debt reduction”. “This would seem to reflect strong concerns that asking for more would increase the risk of a creditor holdout situation, which was the case in Suriname, or an otherwise drawn-out process, as in Zambia.” Lowy Institute added.
The report said that It is in the own interests of Sri Lanka’s external creditors to do far more and much faster as restructuring domestic debt is a distraction and itself cannot do enough to resolve the crisis.