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Crisis management: Urgent action needed in next 3 weeks: Prof. Shanta Devarajan

27 Mar 2022

  • Quick appointment of financial advisor urged
  • Should not pay creditors while starving people
  • Fiscal adjustments needed to increase State revenue
  • IMF programme will open up new sources of financing
By Uwin Lugoda Sri Lanka’s path to the International Monetary Fund (IMF) and restructuring external debt requires two main steps to be taken quickly within the next three weeks, former Chief Economist of the World Bank for the South Asia region Prof. Shanta Devarajan opined last week. During an interview with Indeewari Amuwatte on Ada Derana English News, Prof. Devarajan stated that while the Government had taken steps towards debt restructurings – such as floating the rupee and raising interest rates – there were still two major tasks that needed to be done. He explained that the appointment of a financial advisor along with fiscal reform were essential when it came to appeasing both the country’s creditors and the IMF, and needed to be done within the next three weeks. He stated that while the Government had begun discussions on appointing a financial advisor, the task must be expedited as it was often the first step many countries took towards debt restructuring.  He explained the reason behind this urgency was a financial advisor’s ability to negotiate postponements with creditors who were due to collect in the next three months. “This can be an enormous release when the country has all these import bills that need to be paid. So instead of paying interest payments to the creditors, the country can pay for essential imports for the population,” said Prof. Devarajan during his interview. The second major task the Professor pointed out was some signal that the country was going to undertake fiscal reform, whether it was simply lowering the threshold of who had to pay things like Value Added Tax (VAT) or who had to pay income tax.  He explained that these steps would give confidence to both the IMF and creditors that Sri Lanka was serious about restructuring its debt. “In order to achieve sustainable debt, Sri Lanka has to undertake more fiscal adjustments, because right now it is collecting little revenue from taxes, which is one of the reasons it cannot pay back its debts. They may have to raise tax revenues and also cut some subsidies and other expenditures that are draining the Treasury.” Prof. Devarajan stated that this debt restructuring was needed to avoid a debt default, which was when a country reached a point where it could not pay back its debts, leading to a drastic drop in its Gross Domestic Product (GDP) and inflation.  He explained that debt restructuring would help negotiate with creditors, both official and private, to either reduce the level of debt to a point where Sri Lanka could pay it back or postpone debt payments.  He further highlighted that the alternative to debt restructuring would have Sri Lanka struggling to pay back its debts, resulting in undue hardships for the public which were currently taking place, such as the shortage of essential items. He opined that the country should not focus on paying back its creditors and starving its people and should instead use debt restructuring to negotiate with its creditors. Prof. Devarajan stated that the IMF would help in this restructuring, due to it doing an objective analysis on what debt was sustainable for the country. He explained that having an agency like the IMF conducting the analysis gave credibility in the eyes of creditors, making it easier to negotiate with them, and eventually get Sri Lanka out of this crisis in a sustainable manner. Moreover, he stated that the IMF programme would also open up new sources of financing for the country. Prof. Devarajan stated that many countries had undertaken similar debt restructuring, the most recent ones being Jamaica and Ecuador and had been able to resume borrowing in capital markets in six to nine months.  “This is the horizon Sri Lanka can look forward to if it starts now and while the Government has commenced certain steps, the two most important steps of appointing a financial advisor and fiscal reform need to happen in the next three weeks.”  

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