In a crucial presentation to the Cabinet, the Governor of the Central Bank of Sri Lanka (CBSL), Dr. Nandalal Weerasinghe, outlined the proposed terms and incentives of the Domestic Debt Optimization (DDO) plan. The presentation provided insights into the debt restructuring strategy, its impact on the country's fiscal health, and the remaining timeline for approval.

Here are the key takeaways from Governor Weerasinghe's presentation:

1. Indicative Terms of the Domestic Debt Optimization:

   • Superannuation funds' treasury bonds will be exchanged for longer maturity T-bonds, with a step-down coupon structure. The proposed maturity period is from 2027 to 2038, with a coupon rate of 12% until 2025 and 9% until maturity.
   • CBSL holdings of Treasury bills will be converted to T-bonds with maturities between 2029 and 2038, also featuring a step-down coupon structure. This conversion will be implemented in Phase 2 of the DDO.
   • T-bill and T-bond holdings of the banking sector are excluded from the DDO to mitigate stress on banks due to increasing non-performing loans (NPLs), the impact of external debt restructuring, and high taxation.
   • Three options are presented for Sri Lanka Development Bonds (SLDBs) and Foreign Currency Banking Units (FCBUs), including treatment similar to International Sovereign Bonds (ISBs) and official USD creditors, as well as an exchange for LKR instruments.

2. Incentives for Participation:

   • To encourage the participation of superannuation funds, non-participating funds will face a higher income tax rate of 30% compared to the current rate of 14%. This measure aims to provide an average return of 7.7% instead of 9.1% under a participating scenario.

3. Impact on Government Fiscal Numbers (GFN) between 2027E to 2032E:

   • IMF target: 13% of GDP
   • Current trajectory: 16.8%
   • With External Debt Restructuring (EDR) only: 14.2%
   • With EDR and DDO: 12.7%

4. Remaining Timeline for DDO Approval:

   • June 29: Session 1 - Feasibility discussion with government officials, CBSL representatives, and Committee of Public Finance (COPF) officials.
   • June 29: Session 2 - Views and feedback on DDO from all creditors with the COPF.
   • June 30: Further discussion with the above parties, leading to COPF approval.
   • July 1-2: Proposal to be tabled for debate.

Governor Weerasinghe's presentation provided a comprehensive overview of the proposed debt restructuring plan, its potential impact on the country's fiscal health, and the timeline for approval. The government and relevant stakeholders will engage in further discussions and debate before finalizing the DDO strategy.