COLOMBO (BBC): Sri Lanka began a five-day bank holiday from Thursday to allow the crisis-hit nation to restructure $42bn (£33.2bn) in domestic debt.
The country is facing its worst economic crisis since it won independence from the British in 1948.
There are fears that the government’s restructuring plan could lead to volatility in financial markets.
Debt restructuring can involve the extension of the period over which a loan is repaid.
The plans include a 30% “haircut” – or reduction – on some government bonds held by international lenders, central bank governor Nandalal Weerasinghe announced on Thursday.
A day earlier, he had said banks were excluded from the domestic debt restructuring exercise.
“The government expects the entire process to conclude while the markets are closed during these five days,” Mr Weerasinghe said.
“Local depositors are assured of the safety of their deposits and interests will not be affected.”
Local media quoted analysts as saying that the holiday was announced to provide a suitable buffer for any potential market reactions to significant financial announcements.
“The government’s action to call an extended public holiday means it obviously saw the risk of bank runs,” Alex Holmes, a senior economist at Oxford Economics, told the BBC.
Earlier this week, Sri Lanka President Ranil Wickremesinghe reassured the public that the restructuring would “not lead to a collapse of the banking system”.
On Wednesday, his office said the cabinet had approved a restructuring proposal by the country’s central bank, which would be submitted to parliament for approval over the weekend.
Roshan Perera, an economist and a former director at the Central Bank of Sri Lanka, said domestic creditors did not appear to be getting equal treatment.
“From what we see, the banks, private lenders and investors are not being affected from the domestic debt restructuring,” he told the BBC. “The central bank balance sheet and the pension funds are taking a broader hit. This is not equitable.”
The employee pension fund is the largest pension fund in Sri Lanka.
The move to restructure domestic debt comes as the country is struggling to come out of its worst economic crisis.
Last year, Sri Lanka defaulted on its debt with international lenders for the first time in its post-independence history.
However, there have been several important lifelines extended to the country in recent months.
The World Bank has just granted it $700m, following a $3bn bailout package from the International Monetary Fund (IMF).
The World Bank said in a statement on Thursday that it would provide support in a “phased approach”.
The organisation added that it has allocated $500m (£396m) to budgetary support, while the remaining $200m would be used to “provide better-targeted income and livelihood opportunities to the poor and vulnerable”.
The IMF’s bailout in March, which was nearly a year in the making, was viewed as a massive lifeline for Sri Lanka.
However, the bailout came with conditions, such as requiring the country to make “swift progress” on restructuring its debts.
In March, the IMF said Sri Lanka had secured financing assurances from all its major creditors, including China and India, which paved the way for the bailout.
The IMF has so far released about $330m in funds to Sri Lanka, with the rest due in disbursements over four years.
The economic crisis
Sri Lanka’s economy has been hit hard by the pandemic, rising energy prices, populist tax cuts and inflation of more than 50%.
A shortage of medicines, fuel and other essentials also helped to push the cost of living to record highs, triggering nationwide protests which overthrew the government in 2022.
Sri Lanka’s central bank outlined the extent of the country’s economic crisis earlier this year.
According to its latest annual report, “several inherent weaknesses” and “policy lapses” helped to trigger the severe economic problems that engulfed the South Asian nation.
The central bank also forecast that the Sri Lankan economy would shrink by 2% this year, but expand by 3.3% in 2024.
Its prediction is more optimistic than that of the IMF, which forecast economic growth of 1.5% in Sri Lanka next year.