Sri Lanka’s Central Bank has proposed restructuring the country's debt by recasting the outgo on the nation's pension funds and extending a repayment plan to international bondholders that includes a 30% haircut. The domestic debt restructuring plan, recently approved by the Cabinet, will be debated in Parliament this weekend before a vote.

The government hopes to restructure $17 billion of its foreign debt in five years, and reduce public debt to GDP ratio from 128% to 95% by 2032. The decision to exclude local banks from the restructuring plan seeks to protect deposits, while effectively transferring the burden to superannuation funds, including the Employees’ Provident Fund.

The Central Bank will convert treasury bills and exchange superannuation funds' treasury bonds to longer-term maturity treasury bonds at a lower interest rate. Key bilateral creditors, including India, Japan and the Paris Club group, have set up a common platform to jointly evolve a debt restructuring plan for Sri Lanka, based on the principle of creditor parity.

Sri Lanka will also ask its private creditors, holding international sovereign bonds, to take a 30% haircut. There's been criticism of the decision to have pensioners bear the cost of the country’s domestic debt restructuring, particularly during a persisting crisis. Sri Lanka’s economy has contracted by 11.5% in the first quarter of 2023, and people's retirement funds have already seen a huge fall in real value.

Further cuts to the interest earnings from the superannuation funds, of about 0.5% of the GDP each year over the next 15 years, could be a massive blow to the retirement funds of formal sector workers. The Inter Company Employees Union, affiliated to the leftist Janatha Vimukthi Peramuna, recently filed a Fundamental Rights petition at the Supreme Court challenging any attempt to restructure superannuation funds. The case is yet to be taken up.