A critical component of the financial support to Sri Lanka was the recapitalisation of its Central Bank and major financial institutions said International Monetary Fund (IMF) Deputy Mission Chief for Sri Lanka Katsiaryna Svirydzenka.
She was speaking at a media briefing following the IMF Executive Board Completion of the Second Review.
This move is seen as pivotal to ensuring financial stability in a country grappling with economic challenges.
Svirydzenka outlined the IMF-supported recapitalisation plan, emphasising its significance in safeguarding financial stability. The plan, developed by the Crisis Management Committee, targets the recapitalisation of the five largest banks in Sri Lanka.
It takes into account various factors such as the Asset Quality Review (AQR), future loan performance, the impact of net open positions, and the consequences of restructuring the Ceylon Petroleum Corporation (CPC) and the Industrial Services Bureau (ISB), the largest affected segments of the banking system.
The plan envisages these major banks raising additional capital from the Government, while private banks are expected to raise capital independently. For the smaller banks, the IMF will provide assistance as part of its broader support program for Sri Lanka.
A crucial aspect of the recapitalisation involves valuing bonds according to market interest rates. This valuation is significant because it affects the equity of the central bank. When the assets, such as Government bonds held by the bank, are valued over a longer time horizon, their net present value becomes lower if valued at market interest rates rather than theoretical, lower rates.
This reduction in value impacts the equity of the Central Bank of Sri Lanka, necessitating a recapitalisation through equity injections.
The IMF has allocated space in its program design for this purpose, permitting the government to borrow and make these equity injections.
This approach reflects a strategic response to the complexities of the financial sector in Sri Lanka. By addressing the issues with a multi-faceted plan that includes both government and private banks, the IMF aims to stabilise the banking system, which is a cornerstone for economic recovery and growth.
The IMF’s role in this plan is not just limited to providing direct financing; it also involves creating buffers and providing technical assistance. This comprehensive support is expected to aid Sri Lanka in navigating its current economic challenges, ensuring the stability of its financial sector, and setting a course for sustainable recovery.
The IMF lauded the publication of a Governance Diagnostic Report, the first in Asia, as a commendable step by the Sri Lankan authorities. The report’s recommendations, if implemented timely, could yield significant economic benefits. – TP
