G-Bonds: An opportunity to slash debt repayment capacity risks

Sri Lanka’s risk of debt repayment can be reduced through Governance-Linked Sovereign Bonds (GLSB) which will help Sri Lanka to save about US$ 700 million.

If Sri Lanka can assess the growth in governance and meet its goals, the repayment of debt can be slashed by around US$700 million for which everyone is committed, said Dr. Nishan De Mel, Executive Director, Verite Research, which introduced the bond to the country.

He said that the US$ 700 million was not the figure documented but after the Verete clarifying it, the President had presented it properly in the Budget.

“We are the ones who introduced the G-Bond to the country and the world and we thought that it will not be accepted internationally but we have seen it being well accepted. The specialty of the Bond is the capacity of debt repayment risk can be reduced. We have set the parameters for the bond and we see that when we meet the parameters the risks of debt repayment capacity can be reduced. The bond can be traded in the international market at an advantageous price,” Dr. de Mel said.

He said there are E and S (Environment and Social) Bonds but not G-(Governance) Bonds which will be useful in minimising the risk of debt repayment capacity.

The think tank noted that the enumeration of the GLSB shows it will be financially attractive to bondholders, not only in relation to other Environment, Social and Governance (ESG)-related State-Contingent Debt Instruments (SCDIs), but also compared to Plain Vanilla Bonds (PVBs) that are not state contingent.

Governance-Linked Bonds (GLBs) are innovative debt instruments that tie interest payments to a country meeting specific, measurable governance targets, such as revenue-to-GDP ratios or fiscal transparency, to incentivise reforms, as seen with Sri Lanka’s recent debt restructuring where meeting KPIs (Key Performance Indicators) such as publishing a Fiscal Strategy Statement reduces coupon rates, rewarding better economic management and offering bondholders a share of better outcomes while mitigating governance risks for both sides. However, Sri Lanka needs significant governance improvements, focusing on deep anti-corruption measures, strengthening independent institutions (such as the Central Bank and Anti-Corruption Commission), ensuring rule of law, and enhancing fiscal transparency for sustainable economic recovery after its 2022 crisis. Key areas include implementing procurement reforms, protecting Central Bank independence, improving public-spending efficiency, modernising tax administration, and addressing historical accountability for human rights issues to rebuild public trust and attract investment.

Source - Sunday Observer