brand logo

Debt restructuring likely before IMF loan

25 Mar 2022

  • CT CLSA advises refraining restructuring for domestic debt quantum
  • Says no need to restructure  external multilateral debt
CT CLSA in their report 'Sri Lanka Debt Sustainability and IMF' published yesterday (25) stated that an external debt restructuring is likely to take place, prior to IMF providing funding support to Sri Lanka. Explaining further CT CLSA stated that within this external debt restructuring framework, external commercial debt and bilateral debt could be considered as the key areas to be restructured with possible hair-cuts introduced on ISBs and SLDBs. However, given the significance and relatively low debt servicing cost, External Multilateral debt could be continued without a possible restructure. They further stated that given that the systemically important domestic banking sector peers are highly exposed to the Sovereign from a domestic debt point,it will be best to refrain from introducing restructures to the Domestic Debt Quantum. The report further stated that the expected new Interim Budget to be presented prior to the Sinhala and Hindu New Year shall likely announce fiscal reforms and social safety nets. With regard to fiscal reforms, CT CLSA stated that Sri Lanka’s revenue to GDP has fallen to 9.4% in 2021 with expenditure totaling to a relatively high 20.6% in 2021.  Therefore, they stated that the revenue of the country must be increased above the current spending level to ensure a primary surplus. This could be achieved through the increase of previously reduced income taxes and VAT. They further stated that in order to address broader near term issues in this segment, fiscal expenditure must be contained  by limiting further incentives to the public sector and freezing the ongoing money printing. However, CT CLSA did admit that such measures could impact interest rates to overshoot in the short run.  With regard to social safety nets the report provided that, since the fiscal reforms may negatively impact the already high Inflation levels,  introduction of social safety nets would be crucial to avoid any possible social unrest in the near term. Explaining further, the report stated that the ideal mechanism would be to do direct cash transfers to the vulnerable segments of the economy.  CT CLSA further called for structural reforms which included removal of blanket subsidies and the introduction of pricing formulas for energy to reflect market prices. They further called for State Owned Enterprise (SOE) reforms by finding an all party solution to reduce impact on political capital, but to improve economic sustainability and efficiency in the long term. According to CT CLSA addressing the above issues in the upcoming interim budget may help Sri Lanka in its submission of a homegrown plan to the IMF that could possibly improve credibility with the investor community whilst adhering to the debt management strategy of the Monetary Authority in the medium to long term.     


More News..