Sri Lanka has initiated a five-day bank holiday to restructure its domestic debt, which currently stands at USD 42 billion. The decision comes as the country grapples with its most severe economic crisis since independence.

Concerns have been raised about potential market volatility resulting from the government’s restructuring plan. Debt restructuring typically involves extending the repayment period of a loan. This move indicates that the government anticipated the risk of bank runs and wanted to provide a buffer for potential market reactions to significant financial announcements.

Sri Lankan President Ranil Wickremesinghe assured the public earlier this week that the debt restructuring would not lead to a collapse of the banking system. The cabinet, led by President Wickremesinghe, has approved a restructuring proposal from the central bank. This proposal will be presented to parliament for approval during the extended bank holiday.

Sri Lankan Central Bank Governor Nandalal Weerasinghe stated that the government expects the entire debt restructuring process to be concluded while the markets are closed during the five-day holiday. This measure aims to minimise any potential disruptions or market instability during the transition.

Furthermore, Governor Weerasinghe assured local depositors that their deposits are safe and that the debt restructuring would not affect their interests.

The decision to restructure domestic debt is a response to Sri Lanka’s ongoing severe economic crisis.

The adverse effects of the economic crisis have resulted in shortages of essential goods, medicines, and fuel, leading to record-high living costs for the population. Widespread protests against the deteriorating economic conditions played a significant role in the overthrow of the ruling government in 2022.

The country has faced significant challenges, including a depreciating currency, high inflation, rising unemployment, and a mounting fiscal deficit.

In 2022, Sri Lanka experienced its first-ever international debt default. This default highlighted the urgency of addressing economic challenges and finding sustainable solutions.

Sri Lanka has received substantial financial assistance over the past few months to alleviate its economic woes. The World Bank granted USD 700 million as part of a phased approach to supporting the country. Additionally, the International Monetary Fund (IMF) provided a USD 3 billion bailout package, which was seen as a crucial lifeline for Sri Lanka.

The World Bank has stated that its support to Sri Lanka will be provided gradually, allowing for a strategic allocation of funds based on the country’s needs and priorities. This phased approach ensures that assistance is effectively utilised and maximises its impact on the economy.

Out of the USD 700 million World Bank grant, USD 500 million will be allocated to budgetary support, addressing immediate fiscal challenges. The remaining USD 200 million will be utilised to enhance income and livelihood opportunities for the marginalised and vulnerable sections of the population, promoting inclusive growth.

The IMF’s bailout package came with conditions that required Sri Lanka to make swift progress in debt restructuring. This underscores the importance of implementing necessary reforms to ensure long-term financial stability.

In March, the IMF announced that Sri Lanka had obtained financing assurances from its major creditors, including China and India. These assurances played a crucial role in clearing the path for the bailout, providing a favourable environment for the country to address its economic issues.

The IMF has now disbursed approximately $330 million to Sri Lanka, with the remaining amount scheduled to be released in instalments over four years. This phased disbursement allows for a structured approach to addressing the country’s financial needs while ensuring effective utilisation of the funds.