Central Bank Governor outlines potential for increased haircuts

In a bid to stabilize its economy, Sri Lanka may see an increase in the proposed 28 percent haircut on debt to around 35 percent if it improves transparency and successfully reduces corruption while boosting government revenue, according to Central Bank Governor Dr. Nandalal Weerasinghe.

Dr. Weerasinghe emphasized the importance of achieving debt relief on par with what bilateral parties receive, even if it does not take the form of a traditional haircut. "If bilateral creditors do not offer a haircut, they may provide a similar form of relief. According to the IMF, achieving sustainability with a 28 percent haircut is feasible if the economy performs as projected," he stated.

The governor explained that if Sri Lanka's economy grows at an average rate of 3 percent, it can meet the current debt reduction requirement. However, if growth reaches 5 percent, creditors expect the haircut to reduce from 28 percent to 20 percent. This means that with higher growth rates and increased government revenue, more of the gains should be allocated to bondholders.

Conversely, if the growth rate falls below 3 percent, there is a possibility of negotiating a higher haircut, potentially reaching 35 percent or 40 percent instead of the initial 28 percent. "This provides a safeguard in case our country’s economic growth slows down unexpectedly," said Dr. Weerasinghe.

The proposed adjustments and safeguards aim to ensure that Sri Lanka's debt restructuring efforts remain viable under varying economic conditions.