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The inclusion of Governance Linked Bonds in the bondholder deal is worthwhile as governance directly influences debt sustainability, Bloomberg said. According to the report, one aspect of governance directly impacts the pile of dollars available to repay liabilities. "There is no reason why the Government should pay an extractive coupon, instead of sharing the fruits of a lower debt burden with citizens who have suffered crushing inflation and shortages,” Bloomberg stated. The report also noted that the misrule of former President Gotabaya Rajapaksa and his brothers caused the crisis in the first place, and if governance is not improved, it will affect debt sustainability in the future as well, according to Verité Research.
In addition to the GDP-linked bonds agreed upon between the bondholders and the authorities, features of a so-called ‘governance-linked bond’ will be incorporated into the portion of the debt that won’t be tied to GDP. While the specific metrics for measuring governance haven't been disclosed, Colombo-based Verité Research, which proposed the idea, suggested steps to curb corruption, strengthen banks, and improve tax collection. If the nation of 22 million meets these goals, creditors should accept a discounted coupon even on vanilla bonds, which are currently designed to offer a higher rate every few years, rising to 9.25% by 2033. Bloomberg also noted that, as with the GDP-linked bond, pegging debt servicing to output measured in dollars is problematic due to potential boosts from steeper prices or currency appreciation. Therefore, the Government has persuaded lenders to accept a second test, linking creditor upside to cumulative real GDP growth between 2024 and 2027, which must exceed the IMF's projection of 11% for creditors to benefit. Conversely, Sri Lanka will receive downside protection if growth falls below 11%.
