By Uditha Jayasinghe

COLOMBO (Reuters) -Sri Lanka will announce a reworking of its domestic debt later this week to meet targets set by the International Monetary Fund (IMF) and aim to turn around its economy, which has been hammered by a financial crisis.

A severe shortage of dollars tipped the island nation of 22 million people into its worst financial crisis since independence from Britain in 1948 last year, triggering its first foreign debt default in May 2022.

WHAT HAS HAPPENED SO FAR?

Pledging to put its mammoth debt burden on a sustainable track Sri Lanka locked down a $2.9 billion bailout from the IMF in March. The domestic debt restructure is needed to help the country reach the IMF programme goal of reducing overall debt to 95% of GDP by 2032.

WHAT WILL THE DOMESTIC DEBT RESTRUCTURE INCLUDE?

The framework to be unveiled will cover part of the country's $46.9 billion domestic debt, of which $27.8 billion is held as treasury bonds, according to latest Finance Ministry data.

"The debt rework may not include principle haircuts. Most likely it will be maturity extensions with a small coupon cut for only a specific pool of investors," said Udeeshan Jonas, chief strategist at equity research firm CAL Group.

WHY IS THE DOMESTIC DEBT REWORK CRITICAL?

The domestic debt rework is also likely to create momentum around foreign debt renegotiations on $36 billion of external debt, including $24 billion held by bondholders and bilateral creditors such as China, Japan and India.

Sri Lanka has set a goal of finalising debt restructuring talks by September to align with the first review of its IMF programme.

WHEN IS THE REWORK LIKELY TO BE ANNOUNCED?

President Ranil Wickremesinghe, who is also finance minister, is expected to present the domestic debt restructuring framework put together by the island's central bank and finance ministry to parliament this weekend, sources at his office told Reuters.

The document will be presented for approval at a special Cabinet meeting on Wednesday, one of the sources added. Earlier finance ministry sources said the document would be presented on Monday.

HOW WILL POTENTIAL FALLOUT BE PREVENTED?

Aiming to contain any potential market volatility Sri Lanka has declared a five-day holiday from June 29 to July 3 and plans to gain Cabinet and parliamentary approval for the restructure plans, central bank Governor P. Nandalal Weerasinghe said on Sunday.

The special bank holidays also allow any losses from bond sales to be recognised in the third quarter of the year, analysts said.

(Reporting by Uditha JayasingheEditing by Swati Bhat, Susan Fenton and Frank Jack Daniel)