Negative Impacts

1. Creditor Relations

In the economic dynamics of any nation, and Sri Lanka is no exception, the relationship between
creditors is very important. Both good and bad effects on the affluent and disadvantaged portions of
society might result from domestic debt restructuring, which entails renegotiating the terms and
circumstances of outstanding debt. I'll concentrate on how bad creditor relations and domestic debt
restructuring may be for various socioeconomic categories in Sri Lanka.

 Impacts on Rich;

Wealth Erosion If the restructuring results in lower interest rates, longer maturity dates, or partial
write-offs, high-net-worth people, investors, and companies holding sizable amounts of domestic debt
might suffer huge losses. Their riches and stability might be eroded by this. Investor confidence can be
damaged by a controversial or poorly managed debt restructuring procedure, which will result in less
international and local investment. This may limit the capacity of rich people to grow their businesses
and earn profits on their assets.

 Impacts on poor;

Higher inflation may result from the restructuring if there is a considerable monetization of debt (i.e.,
creating money to pay debt obligations). The poor, who have less resources to deal with the growing
costs of necessities like products and services, are disproportionately impacted by this. Lower
Government expenditure on Social Programs, In order to control the debt, the government may need to
lower expenditure on vital programs like those for healthcare, education, and social welfare. The poor,
who rely significantly on these programs, may be directly impacted by this. The austerity measures that
frequently go along with debt restructuring can result in job losses, lower pay, and downsizing in the
public sector. The poor who depend on government employment and may already be dealing with lower
income units. A debt restructuring may result in the government's creditworthiness being lowered,
which might have an impact on the economy as a whole. The impoverished may find it more expensive
and harder to get credit for personal or business needs as a result. A badly handled debt restructuring
can cause general economic instability, which can result in economic contraction and growing poverty
rates. Due to their lack of financial means to resist economic shocks, the poor are more susceptible to
these negative effects.

It's vital to remember that the precise results of restructuring domestic debt rely on a number of
variables, including the government's fiscal policies, the willingness of creditors to bargain, general
economic conditions, and the administration of the restructuring process. The government must engage
in transparent and well-thought-out negotiations with creditors in order to lessen the negative effects
on both the wealthy and the poor. The government must also prioritise protecting the most vulnerable
groups of the population through targeted social safety nets and sustainable economic policies.
2. Market Perceptions

Market views, particularly during periods of domestic debt restructuring, may have a considerable
impact on a nation's economy. In Sri Lanka, these beliefs may have a variety of effects on both the
wealthy and the less fortunate. Let's examine how these two categories are negatively impacted by
market views in the context of domestic debt restructuring:

 Impacts on Rich;

High-net-worth people, rich investors, and companies frequently have sizable financial market holdings.
Their wealth and investment portfolios may be eroded by unfavorable assessments of the efficiency of
domestic debt restructuring, which can result in lower asset valuations. Capital flight, in which rich
people and investors shift their money out of the nation in search of safer investment possibilities
elsewhere, may be sparked by negative market sentiments. This may cause the domestic economy to
lose resources, which would undermine stability and expansion .Both domestic and international
investment may be discouraged by unfavorable market views. Due to the uncertainty surrounding the
restructuring process and the general economic climate, wealthy individuals may be hesitant to engage
in new enterprises or grow their firms.

 Impacts on Poor

Negative market views may cause the national currency to decline in value. Imported commodities,
especially necessities like food and gasoline, may see an increase in price as a result of this. The poor are
disproportionately impacted by increased living costs since they spend a bigger percentage of their
income on essentials. A decline in foreign exchange reserves and an increase in the money supply might
result in increased inflation if market perceptions cause decreased investor confidence and capital flight.
The poor are the most severely affected by inflation since it lowers their purchasing power and makes it
much more challenging for them to acquire necessities. Poor market views can deter investment and
business ventures, which might result in job losses. The poor are particularly vulnerable to
unemployment and underemployment during economic downturns because they frequently depend on
low-skilled and informal sector occupations. Low-income people and small companies rely significantly
on credit for a range of needs, including beginning or growing firms or taking care of crises. Their
capacity to improve their financial conditions may be limited by increased interest rates and restricted
access to borrowing brought on by unfavorable market opinions. Governments may reduce spending on
social programs to solve economic issues brought on by unfavorable market judgements. The poor, who
depend on government assistance for healthcare, education, and other important services, may be
directly impacted by this.

It is crucial that the government maintain open lines of communication with local and foreign parties
throughout the debt restructuring process in order to lessen these adverse effects. Positive market
views in Sri Lanka may have a detrimental impact on both the affluent and the poor; but, by establishing
and maintaining faith in the stability of the economy, putting good economic policies in place, and
placing a high priority on social safety nets, these impacts can be lessened.

3. Future Borrowing Costs

Future borrowing costs must be taken into account when a government restructures its domestic debt.
The management of this restructure might have a number of detrimental effects on Sri Lanka's rich and
poor populations.

 Impacts on Rich

Wealthy people frequently invest in debt securities like government bonds. The rich will get less income
from their assets if the restructuring results in lower interest rates on these bonds, which might have an
impact on their total wealth growth and financial stability. Higher risk premiums may be requested by
investors for retaining Sri Lankan debt as a result of unfavorable perceptions of the restructuring process
or the government's handling of debt. This may result in higher interest rates on new government bonds
and other debt products, which would make them less appealing. In some circumstances, the
restructuring may entail changing current debt into longer-term debt with reduced interest rates. This
can result in a transfer of money from creditors—who are frequently wealthy people and institutions—
to the government, which might have an effect on their financial situation.

 Impacts on Poor

The government may raise taxes to meet the increased costs of debt service if borrowing rates rise as a
result of unfavorable opinions of the debt restructuring. The poor, who already struggle with meagre
income and have less capacity to absorb more taxes, may be burdened by this. As a result of budgetary
limitations brought on by higher borrowing rates, the government may be forced to devote a larger
proportion of its resources to debt payment. This may lead to less money being spent on vital public
services like healthcare, education, and social welfare programs, all of which are largely reliant on by the
poor. As borrowing prices rise, the government is able to absorb a bigger portion of the capital that is
available on the financial markets. Due to their frequent reliance on borrowing to expand and generate
new employment, private sector enterprises and entrepreneurs may find it more difficult to get credit at
reasonable rates. Higher borrowing rates may result in less money being spent by the government on
development projects and infrastructure upgrades. This may impede attempts to reduce poverty, create
jobs, and build the economy, eventually lowering the standard of living for the poor. If the government
turns to central bank borrowing to cover its deficits, this may result in an expansion of the money supply
and inflation. The poor are disproportionately affected by inflation since it raises the price of necessities,
making it harder for them to make ends meet.
It is essential that the government create a clear and comprehensive debt management plan,
communicate openly with investors and the general public, and make sure that fiscal policies are in line
with the nation's economic objectives in order to lessen these negative effects. To lessen reliance on
debt and borrowing in the long run, efforts should also be taken to diversify the economy, draw in
foreign investment, and encourage sustainable fiscal practices.

4. Reputational Risks

Reputational concerns related to domestic debt restructuring may have far-reaching adverse effects on
Sri Lanka's wealthy and underprivileged populations. Reputational hazards relate to the harm to a
nation's reputation that can result from how the debt restructuring process is handled in the view of
foreign markets, investors, and lenders. Here are how various populations may be impacted by these
risks;

 Impacts on Rich

Reputational concerns can make rich people, investors, and companies less confident. They could
believe the nation to be less secure and dependable for investments, which would result in a decline in
FDI inflow and domestic investment activity. Wealthy people and investors may relocate their assets out
of the country to safer havens as a result of worries about a nation's reputation. This exodus of money
may result in less investment capital being accessible domestically, which would be detrimental to
economic expansion. A country's currency may depreciate, and the value of its assets may decrease, as a
result of a tarnished reputation. This implies that for the wealthy, their assets, such as real estate and
stock holdings, may depreciate, diminishing their wealth and capacity to maintain their financial
security.

 Impacts on Poor

The government may incur higher borrowing expenses as a result of a damaged reputation. This implies
that the government must pay higher interest rates when borrowing money, which might take money
away from social expenditures. As funding for important services like healthcare and education becomes
more limited, the poor may suffer. Foreign aid agencies and investors may choose not to work with the
nation due to reputational hazards. The underprivileged frequently gain from humanitarian initiatives
and employment openings brought about by foreign investments. The impoverished may have fewer
prospects for development and employment if these sources of assistance decline. A diminished
reputation may result in currency depreciation, raising the price of imported items. Because they spend
a bigger percentage of their income on essentials, the poor are disproportionately affected by increasing
inflation. Companies may scale down hiring and growth plans if there is a persistent sense that a nation's
economy is unstable. For low-income people who are already susceptible in the job market, this may
result in fewer work possibilities and greater job instability. Economic volatility that persists over time
owing to reputational concerns can fuel unrest and discontent in society. The poor, who are more likely
to be directly impacted by economic difficulties, may be worst hit.

During the restructuring process, the government must place a priority on open communication,
prudent fiscal management, and responsible debt management in order to lessen these negative effects.
Restoring and maintaining the nation's reputation may be achieved through cooperating with foreign
organizations and investors, responding to worries, and displaying a dedication to long-term economic
stability. By encouraging an atmosphere that is favorable for investment, economic growth, and social
development, this will, in turn, benefit both the wealthy and the poor.

5. Unintended Consequences

Restructuring domestic debt may have unintended repercussions that have a severe detrimental impact
on Sri Lanka's affluent and poor populations alike. These effects are frequently caused by how intricately
linked and complicated economic systems are. Here are some examples of how unexpected effects
might impact certain groups:

 Impacts on Rich

High-net-worth individuals who own considerable financial assets, real estate, and investments may see
their wealth eroded as a result of unintended debt restructuring effects such currency depreciation or
asset price variations. Unexpected outcomes can cause economic volatility and uncertainty. Wealthy
people and investors become afraid to make new investments or grow their firms as a result of this
uncertainty, thereby restricting their capacity to create profits. Unexpected outcomes can lead to
market distortions that have an impact on investment choices. This may lead to improper resource
allocation, which might have a bad effect on how profitable wealthy people's investments are.

 Impacts on Poor

Unexpected outcomes, such as currency depreciation, can result in greater inflation rates, which raise
the price of essential products and services. The poor, who spend a bigger percentage of their income
on needs, are disproportionately impacted by this. The government may reduce spending on vital
services like healthcare, education, and social welfare programs that the poor rely on if unforeseen
effects result in income deficits or an increase in debt load. Economic uncertainty brought on by
unforeseen effects may cause businesses to invest less and jobs to be lost. These employment losses are
especially likely to affect the poor, who frequently hold precarious, low-paying positions, worsening
income inequality. Unintended consequences may result in decreased investor trust, which might affect
the stability of the financial industry. The poor, who may require loans for emergencies or to launch
small companies, may experience higher interest rates and decreased access to credit as a result of this
effects can contribute to societal discontent if they cause economic instability and inequality. Being
more susceptible to economic shocks, the poor may be more prone to participate in rallies or
demonstrations to air their frustrations.

During the debt restructuring process, careful thought, planning, and stakeholder participation are
essential to minimizing these negative effects. Consequences that were not planned can be reduced by
open communication, careful observation of economic indicators, and teamwork with specialists. The
implementation of policies that support sustainable economic growth, lessen income disparity, and offer
a safety net for disadvantaged communities to withstand economic shocks should also be a top priority
for governments.