INSUBCONTINENT EXCLUSIVE:
A full-day special parliamentary session is taking place today during which the lawmakers are debating the domestic debt optimization (DDO)
plan aimed at debt sustainability and economic recovery.The Members of Parliament will vote on the proposed DDO strategy if a division is
requested following the conclusion of the debate from 9.30 a.m
to 7.30 p.m.Upon approval, the plan will be presented to the public on July 04
agree or disagree with the proposed plan.Ahead of the parliamentary debate on the DDO plan, the government announced a five-day cooling-off
period for commercial banks to prevent panic in the market, to maintain stability and to avoid unnecessary volatility.The Cabinet of
Ministers on Wednesday (June 28) unanimously approved the proposed sovereign domestic debt restructuring strategy for restoring sovereign
debt sustainability.Following two days of extensive discussions on the domestic debt restructuring strategy and its impact, the Committee on
Public Finance (COPF), chaired by MP Dr
Harsha de Silva on Friday (June 30), gave its approval for the proposed plan, with amendments binding the Finance Ministry to the proposed
plan, ensuring adherence to the approved concept paper and addressing concerns about potential deviations.The Central Bank governor, Finance
Ministry secretary and its officials, creditors including banks, superannuation funds EPF/ETF and insurance funds had been invited to the
EPF, ETF and the guarantee given to ensure 9% interest rates, the Central Bank governor Dr
Nandalal Weerasinghe assured that their calculations indicate no net present value loss to the EPF
However, COPF chairman has advocated for legislating a minimum return, as done in the 1958 EPF Act.Further, concerns were raised about the
burden falling on the EPF, the largest superannuation fund in the country, without the consent of the depositors.The COPF chairman, Dr
Harsha de Silva said the committee members called for balanced burden sharing among all creditors, not entirely on the superannuation funds,
adherence to the principles of the resolution
Finance Ministry officials acknowledging these concerns, pledged to strengthen the Fiscal Management Responsibility Act (FMRA) for
compliance.Domestic debt restructuring is a key condition in the International Monetary Fund (IMF) program, through which a bailout package
of USD 3 billion was approved for Sri Lanka in March 2023
The IMF program unlocks more help from international funding agencies
Accordingly, the World Bank, earlier this week, approved USD 700 million in financing as budgetary and welfare support for Sri Lanka.After
defaulting on its foreign debt for the time in May 2022, Sri Lanka has been working to get the economy back on track and to meet the
conditions set by the IMF
of the bailout package due in October would require notable progress on debt restructuring
The island nation received the first tranche to the tune of USD 330 million in March soon after the IMF Board approved the 48-month Extended
to USD 83.7 billion at the end of 2022
Out of this amount, the foreign debt stood at USD 41.5 billion, and domestic debt at USD 42.1 billion.Central Bank governor Dr
Nandalal Weerasinghe has ensured the exclusion of commercial banks from the domestic debt restructuring plan, which focuses on restructuring
treasury bills and bonds under the Central Bank, along with the superannuation funds EPF and ETF
He said the move intends to protect the banking sector as its collapse would lead to catastrophic consequences.Treasury bonds of
superannuation funds would be exchanged for longer-maturity treasury bonds from 2027 to 2038, with a step-down from a structure of 12% until
2025 and 9% until maturity
To encourage the participation of superannuation funds, those that do not take part would be subject to an income tax rate of 30% versus the
institutions and ensure them the burden is shared while minimizing the impact on the financial sector.The strategy should be designed to
anticipate, minimize, and manage its impact on the domestic economy and financial system
Casting the net wide across claims can help boost participation in the restructuring by lowering the relief sought from each creditor
group.Fiscal costs might have to be incurred in domestic debt restructuring due to the need to maintain financial stability, to ensure the
functioning of the banking system or to replenish pension savings.-with inputs from agencies
