Sri Lanka is set to pass legislation that will provide the necessary framework for pension funds to participate in a bond swap program. State Minister for Finance Shehan Semasinghe confirmed this development in an interview.
The deadline for pension funds to submit their offers to exchange defaulted Treasury bonds for new securities with longer maturities has been extended for a second time to August 28. Once the legislation is enacted, pension funds will have the option to either swap their defaulted bonds for new debt or face a higher tax rate of 30%, compared to the current rate of 14%, as part of Sri Lanka's domestic debt restructuring.
Completing the domestic component of its debt restructuring is crucial for Sri Lanka as it will pave the way for negotiations with external creditors such as bondholders, as well as countries like India and China, and the Paris Club. Reaching a deal with these creditors is essential for sustaining the flow of funds from an International Monetary Fund (IMF) program, which is scheduled for its first review in September.
Semasinghe mentioned that Sri Lanka is keen to meet with its creditors soon, but the specific dates will depend on the engagement between the Paris Club and other creditors. He assured that Sri Lanka will adhere to transparency and equal treatment for all creditors, without any special treatment being provided to any creditor.
The announcement of this development has already had a positive impact on Sri Lanka's bond market. Sri Lanka's 7.55% 2030 dollar bond saw an increase of 0.5 cents to 45.2 cents on the dollar, marking its highest level in over a month. These bonds have experienced a surge of 15% since Sri Lanka unveiled its domestic debt restructuring plan at the end of June. In early July, Foreign Minister Ali Sabry stated that private creditors had "almost agreed" to a 30% reduction in their holdings.
Once the domestic debt restructuring is successfully completed, the next major challenge will be to reach an agreement with external creditors. Currently, a case filed by bondholder Hamilton Reserve Bank Ltd. in a New York court demanding full repayment on its holdings is ongoing. However, Semasinghe remains confident that Sri Lanka will finalize its debt restructuring by September, expressing little concern about the ongoing Hamilton Bank case.