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A chicken and egg situation?

28 Aug 2022

By Tanya Shan   Despite the rosy picture painted a few months back by the Sri Lankan Government of entering into a Staff-Level Agreement (SLA) with the International Monetary Fund (IMF) by July, there has still been no progress apart from the IMF’s ongoing second round of discussions with its counterparts in Colombo.  Some economists are of the view that a proper debt restructuring plan is required for the IMF to arrive at an SLA, while another group – including the Central Bank of Sri Lanka (CBSL) – is of the view that an SLA should be arrived at first for Sri Lanka to commence debt restructuring discussions with its creditors.  However, despite the announcement made by the Ministry of Finance a couple of months back about the appointment of two international firms to restructure the country’s sovereign debt, there has been no public announcement made thereafter in this regard.    Data discrepancies cause delay?   Speaking to The Sunday Morning, Advocata Institute Chief Operating Officer (COO) Dhananath Fernando stated that the IMF required debt restructuring to progress to a decent level for the institution to provide financial assistance, while at the same time Sri Lanka’s creditors were seeking an IMF SLA to move forward with the debt restructuring negotiations, indicating a chicken and egg situation.  “IMF officers are here for the second round of negotiations. We can have productive discussions with the creditors only when we have an SLA with the IMF. We still have not approached the creditors properly. They are waiting for the negotiations,” Fernando added.  Fernando stated that the reasons for the IMF’s arrival in Sri Lanka for the second round of discussions are still not known as both the Government and the IMF had chosen to keep the matters being discussed confidential. Fernando suspects that data discrepancies might have prompted a second round of discussions.  Last week, sources told The Sunday Morning that Sri Lanka’s attempt to reach an IMF SLA was currently being held up due to discrepancies in the calculations of the CBSL and the IMF with regard to certain parameters in the Debt Sustainability Analysis (DSA). A senior banking source from a State bank revealed that Sri Lanka had achieved considerable progress in its current discussions with the IMF in order to reach an SLA. However, he revealed that the talks were currently being held up due to an issue that had arisen regarding discrepancies in the calculations of the IMF and the CBSL on certain parameters in the DSA. “The main structural change the IMF requested was regarding the pricing of public utilities. This was achieved. The only issue in conflict now is these differences between the IMF and the CBSL calculations,” the source explained.    CBSL-IMF disagreement    Speaking to The Sunday Morning, Attorney-at-Law Manjuka Fernandopulle, who specialises in sovereign debt restructuring and complex capital market transactions, stated that currently there was a disagreement between the CBSL and the IMF with regard to future GDP growth projections and that the issue concerned the degree to which the debt overhang would affect GDP growth going forward.  This particular data discrepancy is reportedly delaying the SLA with Sri Lanka.  Fernandopulle stated that Sri Lanka was lagging behind its original plans as authorities initially wanted the SLA signed by or before July, expecting fund disbursement a few months later. Given that the discussions are still progressing, Fernandopulle believes that an SLA even before the end of August will be impossible.  “It is only when the SLA is signed that we will know the exact amount of debt and conditionality for restructuring and it is only then that we can go to creditors and discuss. Creditors want some level of IMF staff level commitment. We have still not moved forward much right now. What we hear is only from the Sri Lankan authorities and we have not heard anything from the IMF,” Fernandopulle stated.  According to him, it is impossible to predict whether Sri Lanka is moving on the right path in terms of debt restructuring and the IMF SLA, given that both parties are keeping the discussions confidential. However, he added that progress has been slower than initially planned.  He also emphasised on the need to publish the country’s reform plan, which would provide a certain degree of understanding for the creditors and the IMF on Sri Lanka’s policy plans.    Dealing with debt   Meanwhile, First Capital Holdings PLC Head of Research for Investments, Fixed Income, and Equity Dimantha Mathew revealed that Sri Lanka needed to complete the DSA and enter into an agreement with the IMF on the debt sustainability level the country would seek to achieve before its financial advisor Lazard presented the possible debt restructuring scenarios to the creditors in order to negotiate and reach an agreement. A recent report published by the Ministry of Finance, Economic Stabilisation, and National Policies revealed that as per the Debt Sustainability Analysis conducted by the IMF, Sri Lanka’s public debt had reached unsustainable levels and stood at 114% of GDP by the end of 2021, of which 47% was denominated in foreign currency.  Speaking to The Sunday Morning, University of Colombo Faculty of Arts Department of Economics Senior Lecturer and Attorney-at-Law Dr. Shanuka Senarath stated that without a debt restructuring plan and Sri Lanka’s compliance with proper policy measures, the IMF may not progress with the SLA right away.  He added that there were certain requirements Sri Lanka would have to fulfil in order to reach an SLA with the IMF and stated the aforementioned two were key requirements.  “For initial discussions to be fruitful, we have to restructure our debt and show our commitment to comply with the policy regulations. The IMF will want us to have a more market-oriented economy and also to squeeze the public sector involvement in the economy while also wanting the overpopulated State sector staff to be cut down,” Dr. Senarath noted.  He noted that whether the SLA would be fruitful or not depended on Sri Lanka’s ability to effectively restructure its debt. He added that even for the IMF to issue funds to Sri Lanka, the country should first have a credible plan indicating its plans to repay the debt, potential inflows, and the timeline of these inflows. According to him, creditors will not be happy to restructure when the country has no plan but is in economic turmoil.  When The Sunday Morning contacted the Treasury to determine the status of the SLA with the IMF and progress on the debt restructuring plan, we were directed to the CBSL. However, the CBSL refused to comment in this regard.   SL yet to officially approach creditors   Meanwhile, in an interview with Bloomberg on Monday (22), CBSL Governor Dr. Nandalal Weerasinghe said that the country could only formally approach its external creditors once the SLA with the IMF was reached. “We have not officially approached the creditors yet. We need an SLA first and only after that will we be reaching out to them formally. However, in the meantime, we have been sharing all our data and information with our creditors for them to facilitate the process.” Dr. Weerasinghe said that once the SLA was reached, Sri Lanka would have to approach its external creditors and start discussions “in good faith, for relief”.  “For that, we need assurance from our external creditors and we think that that would take about three or four months. If all goes well and everybody cooperates with our debt management strategy, then we hope to obtain financial assurance in December, so that the IMF can submit our paper to the external fund and start disbursing the Extended Fund Facility (EFF) towards the end of this year. That is the timeline we would like to implement. That depends on the external creditors and the negotiation process. Hopefully, all relevant parties will support us,” he said. Meanwhile, former Deputy Governor of the CBSL Dr. W.A. Wijewardena said that Sri Lanka needed to show evidence that it would be finalising a debt plan with its creditors to reach an SLA with the IMF, given that the analysis on debt sustainability had been completed. He said it would take another two to three months for Sri Lanka to complete a debt plan, but the country needed to at least show some evidence that it would be finalising such with creditors, as this would prove sufficient for the country to arrive at an SLA with the IMF.  “What is necessary is some evidence that we are moving ahead with the plan with the approval of all the creditors,” he added.  Moreover, Dr. Wijewardena said that the debt plan should be made available by the time Sri Lanka obtained the IMF Executive Board’s approval for the final agreement and disbursement of funds.  


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