BACKGROUND NOTE VERITÉ RESEARCH SRI LANKA POLICY GROUP

A follow-up note will explain a method for the recapitalisation that will sustain the stability of the financial system while maintaining the reduction in the debt liabilities of the government. [...] We analyse the impact on the debt to GDP ratio of the scenario of only restructuring external debt and the alternative scenario where external debt is restructured together with domestic debt. [...] Yield curve We project the path of debt to GDP under two scenarios for the yield curve: 1) Where the yield curve stays at the same values at the end of July 2022 2) Where the yield curve immediately shifts to the yield curve in July 2019 The table gives the yields used in the analysis. [...] Bringing down the path of total debt to GDP—even at high yields—leads to more progress and resilience in the path of reducing government debt and makes the achievement of debt sustainability more durable and credible. [...] Rupee debt exposure of the financial sector In the body of this report, we argue that restructuring of domestic debt can help achieve debt sustainability and improve the resilience of the economy.