(Bloomberg) -- Sri Lanka is on the final lap of unveiling its debt restructuring strategy, highlighting a key step in the nation's efforts to pull its economy from the worst crisis in seven decades.
The South Asian island's cabinet at a special meeting on Wednesday, unanimously approved a blueprint for the overhaul of domestic debt, according to the media unit of President Ranil Wickremesinghe, who is also finance minister. The nation's Parliament will convene on July 1 to discuss the strategy proposed by the finance ministry, the unit said in a text message.
The restructuring blueprint is key to cash-strapped Sri Lanka striking a deal with its creditors, as the island nation seeks to balance demands of domestic institutions, foreign bondholders and bilateral creditors. It will also help in wrapping the debt recast and unlocking further funding post the first review of Sri Lanka's $3 billion International Monetary Fund program, which is expected around September.
The island nation's rupee debt stood at around $38 billion in 2022, while its external borrowings totaled $41 billion, according to the IMF. Sri Lanka is set to receive debt relief of $17 billion from foreign creditors in the next five years, the president's media unit said in a statement late Tuesday.
Overseas investors have demanded that domestic bond holders share in the losses. Some of the nation's biggest lenders including Commercial Bank of Ceylon Plc and Hatton National Bank Plc have raised concerns about capital impairment.
The domestic debt restructuring plan will be limited to a maturity extension and reduction in interest, Minister of State for Finance Ranjith Siyambalapitiya said last week.
READ: Sri Lanka to Unveil Domestic Debt Restructuring Plan This Week
“Based on our statistical model, it is possible to meet the gross financing needs target comfortably by extending the maturities of bonds in superannuation funds and the three state banks,” said Udeeshan Jonas, chief strategist at Capital Alliance group in Colombo. “But the interest rates on the restructured bonds will have to be around 12% to 13% so that there won't be any major capital loss to the banks,” he said.
Authorities have reassured that local debt restructuring will have no impact on the stability of the country's banking system and interest on bank deposits currently being paid. Local financial markets will be closed for five days from Thursday.
The Sri Lankan rupee edged 0.1% higher to 308 per dollar, while the 7.55% 2030 dollar bond traded steady at 39 cents on the dollar.
--With assistance from Ronojoy Mazumdar.
(Updates with cabinet approving strategy in second paragraph)
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