Sri Lanka declares 5-day bank holiday

In a bid to tackle its severe economic crisis, Sri Lanka has implemented a five-day bank holiday to facilitate the restructuring of its domestic debt, amounting to $42 billion (£33.2 billion). This marks the country’s worst economic turmoil since gaining independence from Britain in 1948, raising concerns about potential financial market volatility resulting from the government’s restructuring plan. Debt restructuring involves extending the loan repayment period. The decision to declare an extended public holiday indicates the government’s awareness of the risk of bank runs, according to Alex Holmes, a senior economist at Oxford Economics.

President Ranil Wickremesinghe assured the public that the restructuring would not lead to a collapse of the banking system. The government’s approved restructuring proposal by the central bank will now be submitted to parliament for approval over the weekend. Nandalal Weerasinghe, the head of the central bank, stated that the entire process is expected to conclude during the five-day closure of the markets, ensuring the safety of local depositors’ funds and interests.

Sri Lanka’s economic crisis has been exacerbated by the COVID-19 pandemic, surging energy prices, inflation of over 50%, and populist tax cuts. The shortage of essential goods, including medicine and fuel, has driven the cost of living to record highs, leading to widespread protests and the ousting of the ruling government in 2022. To support the country, the World Bank has recently granted $700 million, following a $3 billion bailout package from the International Monetary Fund (IMF). The World Bank aims to provide phased support, allocating $500 million for budgetary assistance and $200 million to enhance income and livelihood opportunities for the impoverished.

The IMF’s bailout, which was finalised after nearly a year of negotiations, provided crucial support to Sri Lanka. However, it came with conditions, including the requirement to make swift progress in debt restructuring. Sri Lanka received financing assurances from major creditors, including China and India, paving the way for the IMF bailout. So far, the IMF has disbursed approximately $330 million to Sri Lanka, with the remaining funds to be released over a four-year period. Sri Lanka’s central bank predicts a 2% contraction in the country’s economy this year but expects a 3.3% expansion in 2024, while the IMF projects a more conservative economic growth rate of 1.5% for next year.