Sri Lankan authorities have ordered a five-day financial market shutdown beginning Thursday, ahead of a contentious drive to restructure the government’s domestic debt totaling more than $51 billion.
The restructuring affects government bonds in accordance with an IMF bailout agreement reached in March, following Sri Lanka’s default on foreign debt in April last year and declaration of bankruptcy.
According to a legislative official, MPs will meet on Tuesday to discuss conducting a special session of the legislature later this week to approve debt restructuring proposals.
According to Central Bank Governor Nandalal Weerasinghe, officials have ordered that Friday be declared a holiday, in addition to the existing religious holidays on Thursday, Monday, and the weekend.
He told local news networks that keeping markets open while the debt restructuring was being debated in parliament would be harmful.
“Markets should not function when sensitive debt restructuring is discussed,” Weerasinghe told the Hiru TV network. “We hope to complete the restructuring process within these five days.”
Individual accounts would not be affected, according to Weerasinghe, but the government intends to restructure treasury bills and bonds owned by commercial banks and pension funds.
The administration is still negotiating with its international creditors to restructure external debt, which is a fundamental condition for continuing with the four-year $2.9 billion IMF bailout program.
The administration had hoped to complete foreign debt restructuring by August of last year, but it was delayed because China, the country’s major bilateral creditor, was first hesitant to take a haircut and instead provided extra loans to pay off old bills.
More over $14 billion of total foreign credit is in bilateral debt to foreign governments, with China owing the lion’s share (52%).
To balance its books and escape from the island’s worst economic crisis, the government must slash its domestic and foreign debt servicing by more than half, according to IMF criteria.
Earlier this year, the country ran out of foreign currency to pay for even the most basic imports, resulting in unprecedented food, gasoline, and medication shortages.
Months of unrest over economic mismanagement culminated to the ouster of then-President Gotabaya Rajapaksa in July.
To stabilize the economy, Rajapaksa’s successor, six-time Prime Minister Ranil Wickremesinghe, has cracked down on protesters, hiked prices, eliminated subsidies, and doubled taxes.
The IMF warned earlier this month that Sri Lanka’s economy showed “tentative signs of improvement,” but recovery remained difficult and Colombo must pursue costly changes.