Sri Lanka has initiated a five-day bank holiday starting Thursday to facilitate the restructuring of its domestic debt, totaling $42 billion (£33.2 billion). This move comes after securing $700 million in support from the World Bank, a multinational lender.
The country is currently facing its most severe economic crisis since gaining independence from British rule in 1948. Concerns have arisen regarding potential volatility in financial markets due to the government’s restructuring plan.
Experts quoted in local media have suggested that the holiday was announced to provide a suitable buffer for any significant financial announcements that might trigger market reactions.
Debt restructuring involves extending the repayment period for loans. Sri Lanka’s President, Ranil Wickremesinghe, assured the public earlier this week that the restructuring process would not lead to a collapse of the banking system.
On Wednesday, President Wickremesinghe’s office confirmed that the cabinet had approved a restructuring proposal put forth by the central bank. The plan is expected to be submitted to parliament for approval over the weekend.
Sri Lanka’s central bank chief, Nandalal Weerasinghe, stated that the entire restructuring process is expected to conclude during the five-day bank holiday when markets are closed. He reassured local depositors that their deposits were safe and that their interests would not be affected.
The decision to restructure domestic debt reflects Sri Lanka’s ongoing struggle to emerge from its severe economic crisis. Last year, the country defaulted on its debt with international lenders, marking the first default in its post-independence history.
However, Sri Lanka has received several crucial lifelines in recent months. In addition to the World Bank’s support, the country received a $3 billion bailout package from the International Monetary Fund (IMF).
The World Bank has announced a phased approach to its support, allocating $500 million for budgetary assistance and $200 million to provide targeted income and livelihood opportunities to the poor and vulnerable.
Sri Lanka’s economic crisis can be attributed to various factors, including the impact of the pandemic, rising energy prices, populist tax cuts, and inflation rates exceeding 50%. A shortage of essential commodities, including medicines and fuel, further exacerbated the situation, leading to nationwide protests that resulted in the overthrow of the ruling government in 2022.
Earlier this year, Sri Lanka’s central bank outlined the extent of the economic crisis, highlighting inherent weaknesses and policy lapses as contributing factors. According to the bank’s annual report, the Sri Lankan economy is projected to contract by 2% this year but is expected to rebound with a 3.3% expansion in 2024.
It is worth noting that the IMF’s forecast for economic growth in Sri Lanka next year is less optimistic, at 1.5%.
Sri Lanka’s Domestic Debt Restructuring and Support
| Key Points | |
|---|---|
| Purpose | Restructuring $42 billion of domestic debt |
| Duration | Five-day bank holiday |
| Support | $700 million from the World Bank |
| Concerns | Potential volatility in financial markets |
| Government’s assurance | No collapse of the banking system |
| Central bank’s plan approval and submission | Approved restructuring proposal to be submitted to parliament |
| Depositor assurance | Safety of deposits ensured, no impact on interests |
| Sri Lanka’s economic crisis | Worst since independence, default on international debt in 2022 |
| Additional support | $3 billion IMF bailout package, phased World Bank support |
| Factors contributing to |
