YES On Prop 30

The Sri Lankan stock market bounced back strongly in early 2024. The All Share Price Index (ASPI) jumped by 15%. This surge shows growing investor trust in the country’s economic stability.

The Colombo Stock Exchange (CSE) saw busy trading days. Daily turnover ranged from Rs. 3.3 billion to Rs. 5.3 billion. Nine straight positive sessions highlighted the market’s strong performance.

The blue-chip S&P SL20 index also grew, rising 2.41% to 2,794.15 points. Better-than-expected company earnings fueled this growth. The nation’s economy looks promising, with GDP growth predicted to hit 2-3% by year-end.

Offboard deals on specific stocks made up 15% of total turnover. These deals involved companies like Watawala Plantations and Commercial Bank of Ceylon. This shows strong investor interest in these firms.

The bull market proves Sri Lanka’s economic resilience. It’s attracting both local and foreign investors. As the rally continues, it’s expected to boost overall economic growth.

Stock Market Recovers, ASPI Gains 15% in First Half of 2024

The Sri Lankan stock market has shown impressive growth in 2024’s first half. The All-Share Price Index (ASPI) jumped 15%, while the S&P 20 rose 19%. Lower inflation rates and interest rates have boosted investor confidence.

Inflation Eases and Interest Rates Decline, Boosting Investor Confidence

Falling inflation and interest rates have fueled the stock market’s recovery. Investors now feel more optimistic about listed companies’ future. Quarterly interest costs for core companies have dropped significantly since 2020.

Foreign Inflows Contribute to Market Rally

Foreign portfolio investment has driven the market rally. As the economy improves, foreign investors have become net buyers. Completing external debt restructuring is vital for market sentiment.

Sticking to the IMF reform program is crucial for sustained growth. Any deviation may create uncertainty and discourage foreign investor participation.

Key Sectors Like Capital Goods and Diversified Financials Lead the Surge

Capital Goods and Diversified Financials sectors are leading the market recovery. These companies have reported strong earnings growth and improved profitability. The banking sector is expected to see a re-rating.

Core earnings will be driven by loan growth amid positive GDP expectations. Non-Banking Financial Institutions should benefit from the current declining interest rate cycle.

Sector	Allocation
Banks/NBFI	30%
Conglomerates	25%
Manufacturing	20%
Consumer	15%
Leisure	10%

Increased trading volume and investor participation have supported market growth. Small to mid-cap companies may outperform large caps due to falling fixed-income yields. CSE earnings are expected to grow by 15.0% in 2024.

The ASPI target is set at 13,800 levels by year-end. The Sri Lankan stock market is ready for further growth and recovery.

Factors Driving the Bull Market

Sri Lanka’s stock market bull run stems from improved economic outlook and investor sentiment. Successful debt restructuring talks led to an IMF agreement for a $2.90 billion Extended Fund Facility. This boosted investor confidence, showing the government’s commitment to economic reforms.

Government reforms and the IMF program have stabilized the macroeconomic environment. Inflation dropped to about 35% in April 2023 from over 70%. Market-based pricing for fuel and cooking gas has aided the economic turnaround.

Sri Lanka has made progress in overcoming its economic crisis. The tourism sector’s rebound has been a key factor in 2023’s economic growth.

Lower Inflation and Interest Rates Spark Multiple Expansion for Equities

Falling inflation and interest rates have fueled the Sri Lankan stock market bull run. Inflation is expected to hit single digits by Q3 2023. This has made investors more optimistic about the country’s economic future.

Lower interest rates have led to higher stock prices. Investors are willing to pay more due to improved earnings visibility. The Sri Lankan Rupee gained about 10% in February 2023 alone.

Successful Debt Restructuring Negotiations Improve Economic Outlook

Debt restructuring talks have been a game-changer for Sri Lanka’s economy. Foreign debt was 55% of total debt in early 2022. The IMF agreement and fiscal plans have greatly improved the economic outlook.

This has boosted various sectors, like Financial Services and Leisure. Maldivian Resorts and Colombo Hotels have performed well. The Group’s Bunkering business has seen higher profits from fuel prices and volumes.

Government Reforms and IMF Extended Fund Facility Program Support Recovery

Government reforms and the IMF program provide a strong base for Sri Lanka’s recovery. These measures address macroeconomic imbalances and set the stage for future growth. The Group reported 17% EBITDA growth to Rs.45.74 billion despite challenges.

The Supermarket business showed resilience with 45% EBITDA growth to Rs.7.46 billion. Ongoing reforms and fiscal discipline are expected to brighten economic prospects. This provides a solid foundation for the continuing bull market in Sri Lankan stocks.

The Central Bank of Sri Lanka has raised key policy interest rates to fight inflation. This move aims to support economic recovery and align with IMF negotiations. The CBSL increased the SDFR and SLFR by 100 basis points each.

This rate hike addresses Sri Lanka’s high inflation, which peaked in September 2022. The economy shrank by 9.2% last year, with inflation hitting 50% in February. The central bank had already raised rates by 950 basis points in 2022.

The CBSL’s decision aligns with IMF staff recommendations. It’s a key step towards securing the $2.9 billion IMF bailout package. Sri Lanka is restructuring its debt before IMF funds can be released.

The country seeks approval under a special Lending Into Official Arrears policy. India and the Paris Club of creditors have offered their support in this process.

These changes aim to reduce the gap between policy and market interest rates. The CBSL expects single-digit inflation by late 2023. They also anticipate a continued decrease in market interest rates.

Stable monetary policies are crucial for Sri Lanka’s economic recovery. They support long-term growth and reinforce the importance of price stability. These measures are essential for sustained economic development in the country.

Central Bank Raises Interest Rates to Combat Soaring Inflation

Sri Lanka’s Central Bank has raised policy interest rates to tackle rising inflation. This action aligns with IMF negotiations and the Extended Fund Facility arrangement. The goal is to reduce the gap between policy and market interest rates.

This move aims to ease pressure on consumer spending and the overall economy. It’s a crucial step towards economic stability and growth.

Monetary Board Decision to Raise Policy Interest Rates

The Central Bank’s Monetary Board agreed with IMF staff to increase policy interest rates. The raise was smaller than initially planned during negotiations. This decision helps fulfill ‘prior actions’ needed for the IMF Extended Fund Facility arrangement.

Standing Deposit Facility Rate (SDFR) and Standing Lending Facility Rate (SLFR) Increased

The Monetary Board increased the Standing Deposit Facility Rate to 15.50%. They also raised the Standing Lending Facility Rate to 16.50%. These changes took effect from March 3, 2023.

This decision shows the Central Bank’s commitment to fighting inflation and stabilizing the economy. It’s a significant step towards financial stability.

Policy Rate	Previous Rate	New Rate (Effective 03 March 2023)
Standing Deposit Facility Rate (SDFR)	14.50%	15.50%
Standing Lending Facility Rate (SLFR)	15.50%	16.50%

Impact on Lending Rates and Cost of Borrowing

The policy interest rate increase will affect lending rates and borrowing costs in Sri Lanka. Higher rates may reduce consumer spending and investment as borrowing becomes pricier.

However, this measure is crucial to control inflation and prevent future economic instability. It’s a necessary step towards long-term financial health.

Reasons Behind the Interest Rate Hike

Sri Lanka raised interest rates to support its IMF-EFF arrangement. This move aims to boost economic stability and attract foreign exchange. It’s part of ongoing talks with the IMF to tackle economic challenges.

The Monetary Board expects this hike to close the gap between policy and market rates. As Sri Lanka restructures its debt, this gap should shrink further. This will create a more stable financial environment for growth.

Negotiations with the International Monetary Fund (IMF)

Sri Lanka is working closely with the IMF for economic recovery. The IMF’s support is crucial for addressing current challenges. Their involvement will guide economic reforms and debt restructuring for long-term stability.

Commitment to the IMF Extended Fund Facility (EFF) Arrangement

The interest rate hike shows Sri Lanka’s dedication to the IMF-EFF plan. This plan outlines steps for economic recovery. Following this arrangement aims to restore confidence and attract foreign investment.

Aim to Lower the Spread Between Policy Interest Rates and High Market Interest Rates

Raising interest rates should help align policy and market rates. This alignment is key for financial stability. As debt restructuring progresses, the rate spread should narrow further.

Conclusion

The Central Bank of Sri Lanka’s interest rate hike aims to ensure price and economic stability. This decision aligns with the IMF Extended Fund Facility (EFF) arrangement. It’s a crucial step towards normalizing the interest rate structure and combating inflation.

The rate increase is expected to quickly slow down inflation. Similar actions by central banks worldwide have shown positive results. The US Federal Reserve and European Central Bank have also raised rates to address rising prices.

Rising rates may challenge emerging economies’ financial stability and capital inflows. However, Sri Lanka remains committed to overcoming these obstacles. The country’s focus on stability aims to create a growth-friendly environment.

The recent surge in Sri Lanka’s agricultural exports shows the nation’s resilience. This growth potential supports the country’s economic recovery efforts.

Sri Lanka’s proactive approach to economic challenges is clear. The Central Bank’s actions and commitment to the IMF arrangement demonstrate this. These efforts position the country well for sustainable growth and a prosperous future.

Sri Lanka has unveiled a domestic debt restructuring plan to tackle its economic crisis. The strategy aims to meet IMF bailout conditions and restore stability. The goal is to reduce overall debt to 95% of GDP by 2032.

Sri Lanka is implementing major economic reforms as part of the IMF program. The plan includes a 30% haircut for local dollar-denominated bonds. These bonds will have a six-year maturity at 4% interest.

Bilateral dollar creditors have a different option. They can choose no principal haircut with a 15-year maturity. This option includes a nine-year grace period at 1.5% interest.

The restructuring also covers local currency bonds held by superannuation funds. These will be swapped for longer maturity bonds with 9% interest. CBSL-held Treasury bills will become bonds maturing between 2029-2038.

Sri Lanka’s economy faces severe challenges. The country’s GDP shrank by 7.8% in 2022 and 11.5% in Q1 2023. Real wages fell by 30-50% in 2022. Nearly 43% of children under five suffer from malnutrition.

The government aims to finalize debt restructuring talks by September. This aligns with the first review of its IMF program. The goal is to address pressing issues and pave the way for economic recovery.

Overview of Sri Lanka’s Domestic Debt Restructuring Plan

Sri Lanka’s Central Bank has unveiled a new debt restructuring strategy. This plan aims to restore economic stability and meet IMF bailout conditions. It’s a vital step towards debt sustainability and improved fiscal policy.

The plan covers part of Sri Lanka’s $42bn domestic debt. It’s crucial for reaching the IMF’s target of reducing overall debt to 95% of GDP by 2032. Local currency bonds will be exchanged for longer-term bonds with 9% interest.

Impact on Retirement Funds

Sri Lanka’s retirement funds, worth Rs 4,354 billion, are greatly affected by this plan. The real value of these funds dropped by over 40% in 2022. This was due to currency depreciation and price increases.

Retirement Fund	Total Asset Value (Rs billion)	Accounts (millions)
Employees’ Provident Fund (EPF)	3,919	19.2
Other Retirement Funds	435	–
Total	4,354	–

The debt restructuring could cause retirement funds to lose 29% of their value over 10 years. By 2038, they might lose 47% of their value. These funds’ value is expected to drop from 17.7% to 9.4% of GDP.

Importance for External Debt Renegotiations

The success of this plan is vital for Sri Lanka’s $36bn external debt talks. This includes $24bn held by bondholders and creditors like China, Japan, and India. By showing commitment to reforms, Sri Lanka can improve its chances for favorable external debt terms.

Government Launches Domestic Debt Restructuring Plan

Sri Lanka’s government has unveiled a domestic debt restructuring plan to address the country’s economic crisis. The plan targets $42.1 billion of Sri Lanka’s $83 billion total debt. It’s supported by 122 lawmakers in the 225-member parliament.

This plan is part of the conditions for the IMF bailout package. It aims to tackle the domestic portion of Sri Lanka’s debt.

Options for Holders of Locally Issued Dollar-Denominated Bonds

The restructuring plan offers three options for holders of locally issued dollar-denominated bonds. These bonds include Sri Lanka Development Bonds (SLDBs).

Option	Principal Haircut	Maturity	Interest Rate
1	30%	6 years	4%
2	–	15 years (9-year grace period)	1.5%
3	Exchange for local currency bonds	10 years	SLFR + 1%

Treatment of Local Currency Bonds Held by Superannuation Funds

Superannuation funds’ local currency bonds will be exchanged for longer maturity bonds. These new bonds will mature between 2027 and 2038 with a 9 percent interest rate.

Funds refusing to participate may face a 30 percent tax penalty. This applies to pension funds and other superannuation funds.

Exclusion of Treasury Bills and Bonds Held by Banking Sector

Central Bank governor Nandalal Weerasinghe proposed converting treasury bills into longer-maturity treasury bonds. However, the banking sector’s treasury bills and bonds are excluded from restructuring.

This exclusion considers the significant stress currently faced by the banking sector.

Importance of Domestic Debt Rework for Foreign Debt Renegotiations

The domestic debt restructuring is expected to boost foreign debt renegotiations. Sri Lanka aims to reduce its $36bn foreign debt by $17 billion through restructuring.

The government is engaging with foreign creditors like the Paris Club, India, and China. They plan to finalize debt restructuring talks by September.

This timeline aligns with the first review of Sri Lanka’s IMF programme. The IMF recently approved a nearly $3 billion bailout package for the country.

Conclusion

Sri Lanka’s domestic debt restructuring plan is a key step towards economic recovery. The Central Bank will present the framework to Parliament for approval. They aim to finalize the bond exchange of superannuated funds by July’s end.

The government declared a five-day holiday from June 29 to July 3. This move will help manage market volatility and allow for loss recognition from bond sales. The plan’s success is crucial for creditor negotiations and regaining financial stability.

The debt agreements will reduce the government’s annual fiscal requirement by over 13%. This reduction will occur between 2027-2032, keeping debt payments below 4.5% of GDP. The government plans to clear bilateral loan installments by 2028 and settle concessional loans by 2043.

The President has outlined a four-step plan to boost the economy. It focuses on securing credit, implementing fiscal discipline, and attracting foreign investment. The goal is to transform Sri Lanka into a developed economy by 2048.

The restructuring plan’s execution within two years shows remarkable progress. Moving from near-bankruptcy to positive outcomes is impressive by global standards. This plan will play a vital role in creating a stable, prosperous future for Sri Lanka.