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ECONONOMYNEXT – Sri Lanka has not made a decision to re-structure domestic debt, State Minister for Finance Shehan Semasinghe said amid speculation that a second hair cut or default will be imposed on holder of rupee debt.

There was no intention to impose hair cuts on banks, pension funds and insurance funds, he said.

The Sri Lanka rupee collapsed from 200 to 360 to the US dollar inflating the economy and rupee tax revenues, reducing the real value of rupee debt in a so-called IFR (High Inflation and Financial Repression) haircut.

The dollar value of domestic debt had collapsed to 32 billion US dollars by June 2022 from around 55 billion dollars at the end of 2021 (at 201 to the Us dollar).

However there is speculation than a second nominal default and re-structure will be imposed on rupee debt holders, which has kept interest rates elevated.

“Government has not made any decision to restructure domestic debt as negotiations of treatments on external debt still been discussed with external bilateral and commercial creditors,” Minister Semansinghe said in a message.

“GOSL has no intention to impose any treatment on domestic debt which will have adverse impact on domestic banking sector, insurance sector and superannuation funds.

“There is no basis for recent speculation announced on restructuring domestic debt.”

Sri Lanka has in a statement released after talks with creditor said certain domestic creditors are to be ringfenced for financial stability or social reasons.”

“We are still assessing precisely, with the assistance of our debt advisors and the IMF team, the impact certain reforms of the domestic financial sector may have on our fiscal accounts and growth estimates,” the statement said.

“Yet, we want to reassure our external partners that this topic is being looked at with an open mind, and by reference to the principle of fair and equitable treatment of all creditors.

“This does not mean however that strict comparability of treatment will necessarily apply between external and domestic creditors (even more so given that certain domestic creditors are to be ringfenced for financial stability or social reasons).”

Due to the uncertainty over whether or not domestic debt is to be re-structred, rates remain elevated, though at less than half the inflation of the past year of around 70 percent.

Sri Lanka’s central bank owns over two trillion rupees acquired over two years in the process of triggering the currency crisis and default, which some analysts say could be re-structured.

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