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Foreign credit lines: Stopgap measure to an evolving issue

05 Feb 2022

  • Short-term measures delay much-needed policy changes for recovery: W.A. Wijewardena
  • Repeated use of credit lines will make friends reluctant to lend
  • Repayment of credit lines will weaken efforts to build forex reserves 
  • SL must stop spending more than it earns: Dr. Gunaruwan
By Skandha Gunasekara Sri Lanka needs long-term economic solutions, not stopgap measures, experts told The Sunday Morning, pointing out that obtaining credit lines from foreign nations to get by was not helping solve the current economic crisis. At present, Sri Lanka is in negotiations or has agreed upon financial assistance in the form of credit lines, currency swaps, and dollar swaps from several countries, including India, China, and Bangladesh. Economists have pointed out that these credit lines are only temporary measures and may push back reforms needed for a more permanent solution.  Firefighting exercises “These are just firefighting exercises. It doesn’t help Sri Lanka in the long run, because when you extinguish one fire there’ll be another fire somewhere else, and you’ll need to find another fire extinguisher for that. Instead, it has actually prevented Sri Lanka from moving towards a long-term economic policy strategy to extricate the country from the present economic crisis,” former Central Bank of Sri Lanka (CBSL) Deputy Governor and Senior Economist W.A. Wijewardena told The Sunday Morning He also pointed out that friendly nations would be reluctant to help further in the future if Sri Lanka’s foreign exchange crisis was not resolved. He then pointed out that at a time when Sri Lanka was in need of forex, a $ 550 million credit line repayment to India for border trade was expected at the end of this month, asserting that a long-term solution must be sought urgently.  “These are short-term debts. Credit lines are usually for less than one year, which we’ll have to meet within the next one-year period. Specifically, the debt owed to the Asian Clearing Union – these are the countries in South Asia plus Myanmar and Iran. We have imported goods from these countries without making payments – we must settle payments every three months. So there is a credit balance amounting to $ 550 million, owed mainly to India, which we have to pay to the Asian Clearing Union. Fortunately, India has agreed to postpone it for two months – which means by the end of February we have to pay the $ 550 million. In addition, we’ll have to pay whatever we have accumulated so far within the first quarter of 2022 to the rest of the Asian Clearing Union. These are all short-term credit lines, but to pay the short-term credit lines we’ll need to have foreign exchange facilities available. They will not actually resolve Sri Lanka’s acute and chronic foreign exchange crisis. They will help us put down the fire on one end, but when another fire starts elsewhere we’ll have to find another fire extinguisher to put it out.”  Referring to recent statements by Finance Minister Basil Rajapaksa regarding obtaining foreign exchange from the black market, Dr. Wijewardena stressed that Sri Lanka should let the rupee fall to its actual value against the dollar as an initial remedy. “Minister Basil Rajapaksa himself has said that there is a black market where the dollar is traded at an exchange rate of Rs. 240-250. This means that Minister Rajapaksa officially admitted that the black market is rendering a great service. What Sri Lanka should do now is emulate the black market and allow the rupee to fall.” Living on credit Meanwhile, University of Colombo Professor of Economics Dr. Lalithasiri Gunaruwan said that credit lines were worsening Sri Lanka’s economic issues – particularly in the long-term. “A country which is living on credit will have no future. Why would you want to live on credit? Ask a similar question from a household – if a household lives on credit every day, do you think that household will have any future economic stability, sovereignty, or progress? The only outcome will be to have your assets pulled. There is no possible short-term fix. The problem is long-term. So if you ask me what might happen to the people’s consumption in the country, I would say that the people are also at fault in this case. The problem is that people also refuse to see the reality and they have been living beyond their means for at least 35-40 years, ever since 1977. The last year we had a positive foreign account was in 1977. Since 1978 we have been importing more than we can finance from our export earnings, every day.” Dr. Gunaruwan stressed that Sri Lanka should immediately curtail its import expenditures until it was able to increase its export earnings.  “There is no point talking about a short-term issue without having a sustainable solution for the long-term, since this issue will recur unless you solve the underlying structural issues in the economy. We need to import less than we export. That is all. Either we have to increase our export earnings or we have to cut down on our imports.”  He added that the masses too had a role to play in shaping Sri Lanka’s economic future: “The people should learn to live within their means. That is what is taught in Buddhist economics. Buddhist economics teaches one to live within one’s means and to live a humble life. That’s the only prescription I can give for our economy.”  Long-term solutions needed Meanwhile, Advocata Institute Chief Executive Officer (COO) Dhananath Fernando pointed out that credit lines could also come along with geopolitical conditions from countries with vested interests.  Noting that the Government was banking on an uptick in tourism to finance the credit line repayments, Fernando pointed out that long-term solutions were needed as tourism could not be depended on under the current economic conditions.  “I think the Government’s strategy is based on its belief that it can emerge from this crisis with tourism picking up and the dollars coming in. However, tourists also need to come and sell the dollars to the Central Bank. I believe this is not taking place at present in the manner expected by the Government, because tourists also know that we are paying a very minimal amount for dollars – around 20% less than the actual amount – because in the modern day you can get to know what is happening around the world. So they do know that the dollar rate paid outside is much higher so they are not converting it through the official banking system. That’s what we have to think about. Having said that, we need to move to a more long-term solution as these credit lines are not a long-term solution since we have to pay them back, most likely at a higher interest rate. While I cannot comment on the interest rates since the data is unavailable, generally these swap agreements are for a short-term period of three or six months, or they can last for perhaps nine months or one year, depending on the relationship with the relevant country. So of course, it helps in the short run, but I think we need to think of a proper solution for the long term.” Credit lines India has agreed upon a $ 1 billion credit facility for food imports and a $ 500 million credit line for fuel imports, while the Reserve Bank of India has already released $ 400 million for a swap facility. In December, India deferred $ 512.5 million in cross border trade payments for two months. An agreement was also reached with Bangladesh in June last year for a $ 200 million currency swap – where the Bangladesh Bank provided the loan in US Dollars and Sri Lanka would have to repay that loan with interest in Sri Lankan Rupees. In December 2021, Bangladesh agreed to extend the loan facility by three months. Meanwhile, during Chinese Foreign Minister Wang Yi’s visit in January, a concessionary trade credit line was also discussed between Sri Lanka and China. This came after China had already granted a 10 billion yuan (equivalent to $ 1.5 billion) swap.  

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