Domestic debt restructuring: Are all politicians groping in the dark?

On Saturday, Parliament passed the domestic debt restructuring process giving the Finance Minister and President Ranil Wickremesinghe, a free hand virtually, to take appropriate steps to face the financial challenges faced by the government.

Opposition political parties put the government in the dock over the process.

Their claim is that the process does not provide sufficient protection for citizens, especially those who depend on superannuation funds and their life savings for their retirement. They accused the government of undermining voiceless workers, including the plantation workforce, who have no idea of domestic debt restructuring and what it will mean to them in the long run. The opposition’s argument is thatthe working class has no voice except in the Monetary Board and the Central Bank of Sri Lanka. Both of these institutions have teamed up with the government to restructure working-class pension funds.Their assertion is that citizens should not have to bear the brunt of government mistakes, whoever makes them.

The opposition’s gripe gets traction because the restructuring will leave the billionaire’s funds untouched. Most of the rich bought Treasury bonds at a higher coupon rate when the country was reeling under the pressure of an economic downturn.

Although the government says there is no coercion on its part, the Employees Provident Fund and the Employees Trust Fund had been given twenty-one days to decide whether they are willing to convert their stocks to Treasury Bonds with a yield of nine percent or subject to a thirty percent income tax slab as in the case of the corporate sector.

 The President has already issued a gazette notification which outlines the Cabinet and Parliament’s decision on debt restructuring or optimisation.

The gazette notification issued by the President said:

1. I hereby declare and authorise the Secretary to the Ministry of Finance, Economic Stabilisation, and National Policies and the Registrar of Public Debt to:

 2.1 to offer to any holder of any stock or securities issued in Sri Lanka under the provisions of the Ordinance or any other enactment the option of converting or exchanging, as the case may be, the holding as of June 28, 2023, or part thereof.

 2.2 to convert or exchange, as the case may be, any stock or securities issued in Sri Lanka under the provisions of the Ordinance or any other enactment held by holders into Treasury Bonds to be issued under the Ordinance.

 2.3 to specify how payment of interest is made and the conditions subject to which such Treasury Bonds may be converted or exchanged, as the case may be, under the Ordinance.

 Some analysts point out that the Finance Secretary’s discretion is not only limited to superannuation funds but has a wider scope.

Nevertheless, there were widespread sentiments expressed in the speech by M. A. Sumanthiran in Parliament, taking the government to task for the loss caused to the pension funds.

The government points out that his hypothetical calculation of a 14 percent contribution for the remainder of the period may be incorrect. He argued that pension funds would grow at a lower rate than other Treasury bonds that the government was reluctant to touch. MP Sumanthiran said those would grow according to the agreed coupon rate, which is more than 20 percent. With a lower interest rate, pension funds will take an unannounced haircut in the long run.

 Other economic experts say that until May 31st, the superannuation funds received an interest rate of 13.5 percent. It has been resolved to reduce it to 9.1 percent by 2038. Hence, the loss that the EPF and ETF funds would incur amounts to approximately Rs 12 trillion if the interest rate was calculated at 13.5 percent with compound interest.

 People are up in arms over the restructuring of pension funds since it is the only security that retiring people will have. It is estimated that by reducing the rate of interest, retirees will lose out a massive amount in the next two decades due to the reduced rate of interest. This is a major concern for those who are relying on retirement funds for security in their old age.

 Despite this, some analysts question whether any of these gung ho expressions existed when the EPF lost its entire 53 percent investment, valued at Rs. 5000 million in Canwill holdings in 2013. Canwill Holdings is part of the Grand Hyatt Colombo project.

In addition, banks also stand to lose a substantial amount when the government proposes a 30 percent haircut on the Sri Lanka development bonds held by local banks in US dollars. Nearly 80 percent of Sri Lanka’s Development Bonds are held by banks. Therefore, banks cannot escape, even though they said there would be no restructuring. According to MP Udaya Gammanpila, the loss to the banking sector  will be over 97 billion rupees. However, it is likely to be distributed among banks according to their Sri Lanka development bond holdings.

The government was compelled to engage in domestic debt optimisation owing to an undertaking given to bilateral lenders that a domestic restructuring would take place. It was a prerequisite to restructure the international debt.

 Foreign Minister Ali Sabry, who toured China, is optimistic that China will also come round and agree to debt restructuring, as the others did. They included India, Japan, members of the Paris Club, and non-members of the Paris Club. However, it was observed that although  China participated as an observer in the debt restructuring talks, it is reluctant to join the common platform with other creditors. Under the circumstances, the Sri Lankan government has decided to hold bilateral talks on restructuring with China on the same terms and conditions as the talks that were conducted with other lenders. The government believes that since China participated in the restructuring talks as an observer, they are familiar with the talks that may take place in Beijing shortly with Sri Lankan finance ministry officials headed by Treasury Secretary Mahinda Siriwardene. Meanwhile, it is anticipated that the bilateral lenders will agree to a haircut, reducing the debt burden by at least 17 billion US dollars.

Nevertheless, there are likely to be demands for accountability and the first step towards this will be the IMF’s governance diagnostic to examine the severity of corruption in Sri Lanka. Th findings are expected to be published in a Governance Diagnostic Report by September this year, making Sri Lanka the first country in Asia where such a diagnostic will be carried out. 

According to government politicians, Sri Lanka is slowly moving out of its status as a bankrupt country since the domestic debt restructuring process started.

 Foreign minister Ali Sabry, was optimistic that a large investment of 1.2 billion dollars of Chinese FDI’s are now likely to pour into the Colombo Port City.

Meanwhile, development regulations concerning the Colombo Port City have now been finalized, replacing what was in force.

As a result, the Colombo Port City Economic Commission is now open to receiving development proposals for evaluation and the issuance of Planning Clearance, Development Permits, and Certificates of Conformity. They will be aligned with an approved Master Plan, which spans a buildable area of 6.3 million square metres. It will offer a world-class environment for various amenities, including a marina facility, luxury villas, apartments, an integrated resort, a convention centre, an international school and university, a hospitaland a financial centre among other facilities.

These and all other developments in Colombo Port City will be subject to the newly publishedDCR2023 (Development Control Regulations 2023) regulations.

The primary objective of the DCR 2023 is thatdevelopers, residents, investors, and all stakeholders, including the surrounding community, should benefit from it.

Meanwhile, President Ranil Wickremesinghe participated in the felicitation ceremony which was held to honour Minister Mahinda Amaraweera on the completion of thirty years in politics. During the ceremony, the president said that nothing had happened to EPF or ETF funds or bank accounts as claimed by the opposition. The accounts of the 57 million account holders are intact he said, taking swipes at oppositionpoliticians.

The President said that the opposition had failed to come up with anything constructive about the DDR. ‘At the public finance committee, the opposition agreed it was reasonable, but in Parliament, they voted against it’, said the President. ‘In the first demand, we were asked not to touch EPF and ETF funds. The previous government had already reduced the interest rate from ten percent to nine percent. So we did not touch the EPF or ETF. We made it a law that the minimum interest rate should be nine percent. Then they said that private holders have yields of up to 24 percent. However, it would drop dramatically when inflation was reduced to one digit. The Central Bank Governor told me it would be reduced to nine. Now that they say that they should be taxed, the opposition should tell us the percentage of the tax to be levied so we can discuss the matter in the Cabinet and decide. Then the allegation was that we were not taxing the banks because if we did, they would pass it on to the consumer. We cannot do that since we do not want to burden the tax payer any more’. The President invitedopposition leader Sajith Premadasa and the entire opposition to help the government. ‘We will ensure the opposition leader is protected. He can work with us and later run for president and we can also help him’, the President said. Political analysts see these overtures by the President to the Leader of the Opposition as signs of the power struggles that have been rumbling between him and his prop, the Sri Lanka Podu Jana Peramuna.    

The President also told the people that the dairy industry will be developed in the area since the Ambewala dairy products has asked for the Ridigama farm to expand their business.  With this expansion, the production of curd, kithul treacle and jaggery could be developed substantially. He also said that the Amul Group in India has been asking for land in plantation areas for dairy industry investments.

With debt restructuring gathering momentum, it is the fervent view of government politicians that Sri Lanka is once again entering an era of foreign direct investments. This would push the economy out of the doldrums.