Committee for the Abolition of Illegitimate Debt

Technicalities and mechanisms:

1. Yields of total outstanding Treasury bonds held outside the public’s Employment Provident Fund (EPF) and Employment Trust Fund (ETF) managed by the Central Bank Central Bank The establishment which in a given State is in charge of issuing bank notes and controlling the volume of currency and credit. In France, it is the Banque de France which assumes this role under the auspices of the European Central Bank (see ECB) while in the UK it is the Bank of England.

ECB : http://www.bankofengland.co.uk/Pages/home.aspx of Sri Lanka (CBSL) and the Ministry of Finance, respectively, can be capped at the current policy interest Interest An amount paid in remuneration of an investment or received by a lender. Interest is calculated on the amount of the capital invested or borrowed, the duration of the operation and the rate that has been set. rate of 8% plus 50 basis points (8.5%). Maturity periods and face values can remain unchanged while the coupon rates are adjusted so that the interest yield Yield The income return on an investment. This refers to the interest or dividends received from a security and is usually expressed annually as a percentage based on the investment’s cost, its current market value or its face value. is capped at 8.5%.

2. The average coupon rate for outstanding treasury bonds and bills (T-bills include the coupon rate plus the price discount) stands high at circa 15.9% in 2023 while Banks’ cost of interest was 7.3% in 2024 (computed using CBSL data), which is less than half of the former. This means that the average weighted interest yield on outstanding Treasury Bonds, including the coupon rate plus the rate of discount on bond Bond A bond is a stake in a debt issued by a company or governmental body. The holder of the bond, the creditor, is entitled to interest and reimbursement of the principal. If the company is listed, the holder can also sell the bond on a stock-exchange. prices, is considerably higher, driven by higher discounts and lower T-bill rates. (a)

Source: Computed using CBSL data

3. Under recently concluded foreign debt restructuring 25% of the domestically held International Sovereign Bonds (ISBs) were converted to Sri Lanka rupee-denominated Treasury Bonds yielding a current policy interest rate (floating) of 8% plus 50 basis points. This demonstrates precedence and consensus among major domestic bondholders, including commercial banks, nonbank financial institutions, conglomerates and individuals to accept such terms. Extending this principle to bonds held outside the public’s EPF and ETF can reduce the excessive burden of the government’s domestic interest payments, which consume the largest proportion of government revenue (World Bank World Bank
WB The World Bank was founded as part of the new international monetary system set up at Bretton Woods in 1944. Its capital is provided by member states’ contributions and loans on the international money markets. It financed public and private projects in Third World and East European countries.

It consists of several closely associated institutions, among which :

1. The International Bank for Reconstruction and Development (IBRD, 189 members in 2017), which provides loans in productive sectors such as farming or energy ;

2. The International Development Association (IDA, 159 members in 1997), which provides less advanced countries with long-term loans (35-40 years) at very low interest (1%) ;

3. The International Finance Corporation (IFC), which provides both loan and equity finance for business ventures in developing countries.

As Third World Debt gets worse, the World Bank (along with the IMF) tends to adopt a macro-economic perspective. For instance, it enforces adjustment policies that are intended to balance heavily indebted countries’ payments. The World Bank advises those countries that have to undergo the IMF’s therapy on such matters as how to reduce budget deficits, round up savings, enduce foreign investors to settle within their borders, or free prices and exchange rates.

2024 data).

4. A consequence of the deflationary environment is the sharp decline in market interest rates Interest rates When A lends money to B, B repays the amount lent by A (the capital) as well as a supplementary sum known as interest, so that A has an interest in agreeing to this financial operation. The interest is determined by the interest rate, which may be high or low. To take a very simple example: if A borrows 100 million dollars for 10 years at a fixed interest rate of 5%, the first year he will repay a tenth of the capital initially borrowed (10 million dollars) plus 5% of the capital owed, i.e. 5 million dollars, that is a total of 15 million dollars. In the second year, he will again repay 10% of the capital borrowed, but the 5% now only applies to the remaining 90 million dollars still due, i.e. 4.5 million dollars, or a total of 14.5 million dollars. And so on, until the tenth year when he will repay the last 10 million dollars, plus 5% of that remaining 10 million dollars, i.e. 0.5 million dollars, giving a total of 10.5 million dollars. Over 10 years, the total amount repaid will come to 127.5 million dollars. The repayment of the capital is not usually made in equal instalments. In the initial years, the repayment concerns mainly the interest, and the proportion of capital repaid increases over the years. In this case, if repayments are stopped, the capital still due is higher…

The nominal interest rate is the rate at which the loan is contracted. The real interest rate is the nominal rate reduced by the rate of inflation. observed in 2024, providing strong support for this proposition. The government must prioritise sustained reductions in domestic prices to enhance the economy’s external competitiveness, which is critical for industrialisation and export expansion. This policy would also lead to increased real wages and higher profits for the productive sector.

5. Within a deflationary environment, a fixed 8.5% yield on outstanding Treasury bonds would effectively grant bondholders a real interest rate exceeding that figure. Concurrently, the government’s interest burden would continue to diminish with interest rates declining. This fiscal relief would enable the government to:

• Address the pressing social priorities of the public, including the escalating cost of living and the deteriorating state of healthcare and education.
• Create fiscal space for long-term industrialisation goals, facilitating a shift of resources from unproductive to productive sectors.

6. The proposed reduction in Treasury bond yields would not have any adverse impact on the banking sector. Since mid-2023 the sector’s interest cost declined sharply compared to government rates. More importantly, the banking sector enjoys a remarkably high net interest margin (NIM) of 4% as of September 2024 (CBSL data), while deposit rates remain below 4%. Notably, the generally accepted healthy NIM level is around 2% (b). Furthermore, as of December 2024, with an average weighted deposit rate (including fixed deposits) of 7.5%, lending rates significantly exceed deposit rates, providing ample buffer for the sector to adjust to a lower yield environment.

7. These steps will help slash high-interest payments to local financiers and CBSL, which collectively hold 70.8% or Rs. 8.2 trillion of the total treasury bonds, excluding public’s EPF and ETF, which received interest payments of circa Rs. 400 billion out of circa Rs. 1,700 billion paid for bonds in 2023.(c) The proposed reduction in yields will hence reduce interest payments of approximately Rs. 1,300 billion on Treasury Bonds held outside the public’s EPF and ETF to a more manageable Rs. 700 billion (the public’s EPF and ETF holds approximately Rs. 3.8 trillion in bonds in 2023).

8. The saving of Rs. 600 billion, equivalent to 2.2% of 2023 GDP GDP
Gross Domestic Product Gross Domestic Product is an aggregate measure of total production within a given territory equal to the sum of the gross values added. The measure is notoriously incomplete; for example it does not take into account any activity that does not enter into a commercial exchange. The GDP takes into account both the production of goods and the production of services. Economic growth is defined as the variation of the GDP from one period to another. , is comparable to the total additional income of Rs. 720 billion expected by increasing Value Added Tax (VAT), a regressive form of taxation, to 18% by the former government, which encompassed essentials, like food, medical and education supplies.

9. The licensed commercial banking sector’s interest income in 2024 is projected to reach a substantial Rs. 2.2 trillion, with net interest income reaching Rs. 821.9 billion during the year (annualised CBSL data, Sep 2024). Considering that commercial banks, including state-owned entities, hold a significant 46.7% (Rs. 5.6 trillion) of outstanding Treasury bonds (CBSL 2023), the proposed yield adjustment will modestly reduce their interest income by approximately Rs. 280 billion.

10. Despite this adjustment, the sector’s net interest income is expected to remain highly attractive at around Rs. 542.7 billion while profit Profit The positive gain yielded from a company’s activity. Net profit is profit after tax. Distributable profit is the part of the net profit which can be distributed to the shareholders. before VAT and taxes will remain over Rs. 100 billion. Furthermore, achieving consensus on this measure may be facilitated by the fact that private banks hold only 11.9% of outstanding Treasury bonds, while state banks hold a substantial 32.5% by 2022 (Ministry of Finance 2025).

Optimal policy solutions: Redistributive Fairness

1. Sri Lanka pays the highest percentage of government revenue as domestic interest globally – a staggering 80% in 2023 (World Bank 2024). This figure dwarfs Ghana, which ranks second at 44%. This reveals that 80% of the tax burden that has plunged 25% of our population into poverty was enriching the financial elite.

2. Breaking up this vicious cycle will not only curb the brutal tax burden on the people but also contribute to a much-needed reduction in the fiscal deficit. It will also help avoid Sri Lanka’s debt burden on its populace in inequitable ways, as is the case currently, and put the country’s policy framework on an equitable path.

(a) Interest paid on bonds and bills are not presented separately by CBSL and are provided together
(b) For reference, the average NIM of European banks in Q2 2024 was only 1.68% (European Banking Authority EBA
European Banking Authority The body charged with supervising the European banking system and, along with two other authorities, the European Securities and Markets Authority (ESMA) and the European Insurance and Occupational Pensions Authority (EIOPA), form part of the European System of Financial Supervision.

EBA : https://www.esma.europa.eu/ )
(c) This is the minimum possible interest on bonds as interest yields on bills are lower. Bonds account of 70.6% of total domestic debt while total domestic interest cost was Rs. 2.4 trillion).

Source : Daily FT