Sri Lanka, on Thursday (June 29) began a five-day bank holiday as the crisis-hit nation is in the midst of restructuring $42 billion in domestic debt. Analysts say that this long bank closure will help absorb any shocks to the country’s market after the restructuring process is over.
The IMF and World Bank funding
Sri Lanka was able to get a nearly $3 billion bailout package from the International Monetary Fund (IMF) in March, to ease the overall public debt load which stood at a whopping $83.6 billion, nearly 130 per cent of the country’s GDP last year. This also followed the World Bank’s approval of $700 million in budgetary and welfare support for the island nation.
The aim is to use the funds to reduce this domestic debt to below 95 per cent of the GDP by 2032. The funding also comes months after India extended a $1 billion credit line for Sri Lanka. Around $500 million of the funds from the World Bank will be allocated for budgetary support, while the remaining $200 million will be for welfare support earmarked for those worst hit by the crisis.
In a statement, World Bank’s country director for Sri Lanka, Faris Hadad-Zervos, said, “Through a phased approach, the World Bank Group strategy focuses on early economic stabilisation, structural reforms, and protection of the poor and vulnerable.” He added, “If sustained, these reforms can put the country back on the path towards a green, resilient and inclusive development.”
What is this financial restructuring about?
The debt restructuring could involve the extension of the period over which the loan is repaid. This comes as Sri Lanka has been witnessing its worst economic crisis after it defaulted on its debt with international lenders for the first time since its independence from the British in 1948.
Recently, the government also reportedly pushed forward to reworking its foreign debt with bondholders and bilateral creditors, including China, Japan and India.
Meanwhile, the $42 billion domestic debt will be worked on by exchanging shorter-term treasury bills for longer-term bonds in the overhaul, said Sri Lanka’s central bank chief, Nandalal Weerasinghe, last week, in a press conference.
What have the analysts said about the long bank holiday?
Local media reports citing analysts said that the long bank holiday was announced to help absorb any possible shocks from market reactions to significant financial announcements. “The government’s action to call an extended public holiday means it obviously saw the risk of bank runs,” Alex Holmes, a senior economist at Oxford Economics, told the BBC.
The process of restructuring involves the announcement of the strategy to its implementation following the approval from the cabinet and the parliament.
“The long holiday would allow any day one loss – as the cash flows are adjusted in the banks – to be pushed to the next quarter,” said Udeeshan Jonas, chief strategist for Sri Lankan investment bank CAL, as quoted by the South China Morning Post.
Earlier this month, Weerasinghe, said that the government expects the “entire process to conclude while the markets are closed during these five days.” He also said that the internal analysis indicates that any shocks from the central bank’s planned restructuring of the financial bills would be “manageable”.
(With inputs from agencies)
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