Recovery at stake as deal with bondholders delays: Economists

• By Shabiya Ali Ahlam

Economists yesterday cautioned that Sri Lanka failing to reach an agreement with its bondholders on restructuring terms within the set deadline will have serious implications for the island nation’s recovery efforts.
Although restructuring of the US$ 12 billion debt is one of the requirements set by the International Monetary Fund (IMF), it is essential for Sri Lanka to ensure that there are no delays in meeting the deadlines as failing to do so will pull the country back.

The government has repeatedly expressed confidence in Sri Lanka finalising the agreement with bondholders by April, and implementing a debt restructuring framework by June.

“The main implication is that we will remain in selective default, so the ability to access foreign borrowings will be constrained. It will also be a damper on foreign investments into Sri Lanka,” Advocata Institute Chair Murtaza Jafferjee told Mirror Business.

He asserted that the more Sri Lanka delays in finalising its agreements, more the arrears will pile up.
“Sri Lanka has over US$ 12 billion bonds outstanding, since we put a standstill, we have accumulated US$ 1.6 billion. Unless we can offset this with a deeper haircut, it is in our interest to settle as soon as possible,” added Jafferjee.

Jafferjee asserted that the government should not relent easily since the domestic debt restructuring was a light touch.

“For them (government) to be within the IMF debt sustainability analysis, they have to hold their guns and negotiate the minimum that is required,” he said.
 Reflecting similar sentiments, Economist Talal Rafi stated that Sri Lanka’s failure to agree with the private creditors is going to complicate matters, especially with an IMF review due soon and a presidential election due around the corner.

He noted that the island nation should conclude the debt negotiations with the private creditors sooner, as the further it delays, the closer the negotiations get to elections, and the government will come under undue pressure.
“A lot is at stake for Sri Lanka in getting through the next IMF review and concluding the debt negotiations as investor confidence is impacted. The general uncertainty of not knowing what the deal will be is also affecting the economy in a negative way,” he said.

Meanwhile, Verité Research Lead Economist Raj Prabu Rajakulendran noted that Sri Lanka is much closer than it has been before to entering into an agreement with bondholders on the terms of its debt restructuring.

One of the gaps between the bondholder proposals and what Sri Lanka has put forward consists of how the potential upsides of Sri Lanka’s GDP growth can be shared. The IMF is also deliberating on whether the bondholder proposal can meet the parameters of the debt sustainability analysis it has provided for Sri Lanka.
A novel instrument proposed by Verité Research, a ‘Governance Linked Bond has for the first time been included in the most recent negotiations. The instrument is designed to adjust downwards (coupon step-down) in response to Sri Lanka achieving specific governance targets outlined in the IMF programme.

“This structure not only incentivises the Sri Lankan government to implement necessary structural reforms by offering a coupon reduction on success but also aligns the financial interests of the bondholders with the broader macro-economic stability of the country.
“If this proposal is accepted by Sri Lanka, it could help close the gap and allow debt restructuring to be completed quickly and effectively,” said Rajakulendran.