The political fallout from domestic debt restructuring and the role of the Opposition in governance

The political fallout from domestic debt restructuring and the role of the Opposition in governanceOpposition parties are skeptical about government’s assurances.

Domestic debt restructuring or debt optimization is the buzzword being tossed around in business circles and influential political outfits who want more news about the process.

Domestic debt restructuring involves the renegotiation of debt terms between debtor and creditor. This could potentially reduce debt or interest payments. Many talked about how it could affect the common man in general.

The pertinent question is whether Sri Lanka should have agreed to a domestic debt restructuring at all. The Opposition, especially Professor G.L. Peiris and Harsha De Silva, claim the International Monetary Fund did not set any conditions which required Sri Lanka to undergo a domestic debt restructuring.

Prof. Peiris claimed the main reason behind the five-day bank holiday is to mesmerise the whole nation and bring disastrous consequences to the country through domestic debt restructuring.

In Parliament this Sunday, when it will be debated for approval, he says there will be no choice but to oppose it vehemently. The government would have thought that the long holiday planned by it will be the ideal climate for the government to bring about debt restructuring by pulling the wool over people’s eyes.

Professor Pereis said that the Employees Provident Fund (EPF) and the Employees Trust Fund (ETF) would be severely affected by the move, causing untold pain in the minds of people who were waiting to receive their dividends and retirement benefits after working for long years.

Professor Peiris also put Central Bank Governor Dr. Nandalal Weerasinghe in a challenging position. He said that the governor misled the country earlier by saying there would be no domestic debt restructuring.

However, the Central Bank of Sri Lanka’s governor tried to cushion the adverse publicity given to the effects of debt restructuring using many words. He comforted the general public with assurances that the process wouldn’t harm the banking system or the common man’s deposits.

“The main reason for the announcement of the bank holiday on June 30th is to create a sufficient number of days for the domestic debt optimisation strategy that has been discussed with the Central Bank and the Ministry of Finance”, Dr. Weerasinghe said.

Furthermore, he emphasised that the strategy must be announced, implemented, and proper approval obtained from the Cabinet of Ministers, committees in parliament, and also parliament debates. He added that the process requires at least four days.

In addition, during these dates, the debt market and the economy market should not function because their information is very market-sensitive. If those proposals were discussed publicly, those sensitive markets would not function”, he added.

In addition, the CBSL chief also mentioned that even though June 30th is a bank holiday, all banking activities can be done during the period. This depends on whether banks are physically opened or not. They can continue as usual.

He said Internet banking, ATM withdrawals, and fund transfers on accounts are possible without any problems. To facilitate this, the Central Bank has directed all commercial banks to keep their core banking systems open and operational, regardless of whether the physical branches are open or not. This will enable customers to continue carrying out banking activities such as deposits, transfers, and withdrawals as usual.

Meanwhile, Dr. Weerasinghe assured that there will be no reduction in bank deposits in commercial banks and non-banking institutions, nor will there be any reduction in the interest rates that they are currently receiving in terms of their contracts with the banks.

Deposit holders will continue to receive interest rates if the banks agree to provide them. They will not be adversely affected by the domestic debt optimisation strategy”, he asserted.

However, during a meeting with opposition parliamentarians, he was vague about the fate of the Employees Provident Fund. Tamil National Alliance parliamentarian M.A Sumanthiran after meeting with the authorities at Jet Wing Hotel Colombo said that though the CBSL governor said they would not touch the EPF funds all indications at the meeting were that the EPF funds would be affected. The parliamentarians also queried about the Treasury Bonds bought by multi-billionaires at a higher coupon rate when the country was reeling under an economic crisis. The question was why those T-Bonds were not subject to any of the conditions laid down under domestic restructuring.

 At a separate talk show, CBSL Governor Dr Nandalal Weerasinghe said EPF funds bought T-Bonds worth 3.5 trillion rupees. The government derives only 14 per cent as income tax whereas the corporate sector pays 30 per cent as taxes. The banking sector, which holds 57 million accounts of a 20 million population, accounts for 15 trillion rupees in deposits. They pay 50 per cent as taxes, he stressed that under the circumstances it is not possible to stress the banking sector to the point where it would lead to a collapse

On June 23, the government declared a special bank holiday for June 30, 2023.

This was announced in a special gazette notification issued by Prime Minister Dinesh Gunawardena in his capacity as Minister of Public Administration, Home Affairs, Provincial Councils, and Local Government.

The special bank holiday was declared under Section 10(1) of the Holidays Act, No. 29 of 1971.

Financial analysts believe Treasury Bills held by the Central Bank of Sri Lanka will be restructured or optimised. At the moment, it stands at 52 percent, and T-Bonds will be restructured voluntarily without coercion.

According to restructuring plans, there could be a reduction of interest rates (coupon rates) or a haircut, meaning a reduction of the debt portfolio or re-profiling the debt with a longer period granted for debt servicing.

The position taken up by the Central Bank of Sri Lanka is that it would never harm the deposits of the depositors and would not harm local banks owing to the process.

If the restructuring wouldn’t affect local depositors, the Opposition questions why banks and financial institutions should be closed for five days. Wasantha Samarasinghe, the JVP activist, took the government to task over the debt restructuring and the government’s ambitious Aswesuma programme. He stated that it had brought misery to scores of people who were denied any support for their existence.

The Opposition also criticised the government for having a parliamentary debate on Sunday. This has never happened before here or in any other democracy in the world.

However, the opposition benches toned down their severe criticism of the government after they received many assurances.

 Samagi Jana Balawegaya MP Dr. Harsha de Silva said opposition parties are cautious about the potential consequences. He would discuss the need for careful domestic debt optimisation if deemed necessary.

Besides, President Ranil Wickremesinghe said that the debt restructuring programme will be presented to Parliament this weekend for a two-day debate on Saturday and Sunday and for subsequent approval. Wickremesinghe made this observation in an interview with France24: The debt restructuring programme will be presented to the Cabinet on Wednesday and the Public Finance Committee on Friday for approval before being submitted to parliament, he said before arriving in Colombo from Paris. The President also stated that Sri Lanka qualified for World Bank financial assistance.

“We have fulfilled all the benchmarks,” the President emphasised.

The President, having arrived in Sri Lanka after a tour of London and Paris, addressed a meeting in Gampaha, where he said that the debt restructuring programme would not affect the country’s banking system. He emphasised that the rate of return on superannuation funds would not be affected in any way.

Furthermore, the President stated that the restructuring of domestic debt would not pose any threat to the stability of the country’s banking system, whether it be public or private.

He specifically mentioned that the deposits of more than 50 million bank depositors will remain unaffected and that there will be no changes to the current interest rates paid on bank deposits.

On Wednesday, the President presented the proposal for domestic debt optimisation to the Cabinet. It was approved unanimously by the ministers. Central Bank Governor Dr. Nandalal Weerasinghe presented a 35-page document to the Cabinet explaining the domestic debt restructuring process. The Public Finance Committee also discussed the matter at length, with Opposition Leader Sajith Premadasa participating in the meeting.

Most of the envisaged restructuring proposals are out in the public domain and what is more relevant is the proposal presented in parliament for debate. People associated with business and financial markets are eagerly awaiting the debate in order to get a better idea of the restructuring process.

Be that as it may, the geopolitical issues in the region are also critical for Sri Lanka as it may be the case of the lingering financial crisis taking its toll.

During an interview with France 24, the President answered questions about Chinese influence in Sri Lanka. He emphasised that the Chinese have been in Sri Lanka for 1500 years, and since their presence in Hambantota, it has given rise to speculation in political circles. He reiterated that there is no Chinese military presence in Hambantota and that port security is manned by the Sri Lanka Navy. He also said that the Southern Naval Command would be shifted to Hambantota, and another brigade would be stationed there. The President was quite emphatic when he asserted that there was no military agreement with China. ‘Sri Lanka wants to be neutral’, he said. “Sri Lanka wouldn’t do anything inimical to India’s interests in the region. This was an assurance he gave India before his short visit scheduled for July 20.

President Wickremesinghe also talked about his plan to introduce the Truth and Reconciliation Commission (TRC) to resolve residual issues relating to the ethnic question. Legislation is expected to be passed through Parliament in August. He said he would like to discuss the South African experience on the matter. He invited President Ramaphosa to come and help Sri Lanka in the endeavour.

Asked about the Matale mass graves and whether there would be a separate inquiry or whether he prefers it to go before the TRC, the President said that whoever wants an investigation done can go before the Truth and Reconciliation Commission to seek redress; otherwise, a separate investigation would undermine the authority of the Truth and Reconciliation Commission. He also said that plans are underway to set up a TRC secretariat and move forward.

All in all, this weekend will be crucial to all Sri Lankans, since people will be eager to see what domestic restructuring would mean to them during the Parliamentary debate and the subsequent passage by Parliament of the debt restructuring programme envisaged by the government. Since many commercial and private banks have a substantial stake in local lending, they are keeping their fingers crossed. However, assurances are abundant that the local banking system will not be affected since it contributes a massive 50 per cent of its earnings as income tax to the government. The government’s position is that they could not exert pressure on the banking system anymore which could paralyse the entire economy.

Ultimately, the main opposition will vote against the government proposal, and many breakaway groups from the government, including the JVP, is likely to join hands with the main opposition.