For Sri Lanka, a Governance-Linked Bond Might Just Be the Ticket

Abstract

It is a truth universally acknowledged that if Sri Lanka under-performs on its governance corrections, it will underperform on its economic recovery also (with apologies to Jane Austen), the first provides the foundation for the second. Sri Lanka secured IMF board approval for the second tranche of the current IMF programme exactly 102 days after the scheduled date for the first review. It is not normal for a second tranche to be so delayed, and it is a red flag for Sri Lanka’s creditors. But there is something that current bond-holders can do to help Sri Lanka reduce the risk that is being flagged. It is a novel debt restructuring instrument that Verité Research has termed as a “Governance-Linked Bond”. It has great potential to be a win-win solution. Clarifying the problem will help to understand the benefit of the solution. This article looks at the problem of Sri Lankas performance and possible solutions.