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The Game of Loans

03 Apr 2022

  • Is borrowing from the same lender to pay off a loan they lent previously a good strategy?
The debt-ridden, foreign-exchange-deprived Government of Sri Lanka (GoSL) has been desperately requesting financial assistance from bilateral and multilateral lenders left and right, while negotiations with the International Monetary Fund (IMF) are all set to begin this month.  The past week has been full of developments on the economic front, not second to any of the previous weeks – with Sri Lanka borrowing from a lender to pay off previous loans borrowed from the same lender, the Central Bank of Sri Lanka (CBSL) still being hesitant to admit that it understands the need to seek IMF assistance, and the Sri Lankan Government requesting financial assistance from India, China, Bangladesh and you name it.  With a mere $ 2.3 billion left in the gross official foreign exchange reserves as of the end of February, along with an untainted country record of not defaulting on a single external financial obligation, the Sri Lankan Government last week borrowed $ 1 billion from China to pay off previous loans it borrowed from Chinese banks. Neither the Central Bank nor the Treasury issued any statement on this loan, thereby not publicising the conditions of this new loan.  The loan also came at a time Sri Lanka requested the Chinese Government to consider a restructuring of the loan it owes, in what has been fondly identified by Western countries as ‘debt-trap diplomacy’.  Sri Lanka also has a $ 1 billion International Sovereign Bond (ISB) payment that is due in July, this year. According to certain recent Indian media reports, the question now is whether Sri Lanka will default by July or before that.     Sri Lanka’s loan requests   It is learnt that the Ministry of Trade has requested a $ 200 million credit line from Australia to import essential items such as lentils and milk powder. However, the Australian Government is yet to provide a response to this request.  Prior to this, the Sri Lankan Government requested its go-to lender China a combined total of $ 2.5 billion worth of financial assistance, out of which $ 1 billion is a loan and the remainder is a credit line. The $ 1 billion was received and paid back to the lender itself to finance previous loans Sri Lanka had borrowed from China. The $ 1.5 billion credit line was pending as of Friday (1).  While Sri Lanka is yet to repay the $ 200 million currency swap it obtained from the Bangladeshi Central Bank, it has requested another currency swap of $ 250 million. The request for the loan by the Sri Lankan Government was revealed by Bangladesh Foreign Minister Dr. A.K. Abdul Momen who was in Sri Lanka for the Bengal Initiative for the Multi-Sectoral Technical and Economic Corporation (BIMSTEC) meeting. It is learnt that Bangladesh is currently considering the request while monitoring local developments.  Meanwhile, citing two unnamed sources, the Times of India on Monday (28 March) reported that Sri Lanka has sought an additional credit line of $ 1 billion from India to import essentials amid the worsening economic crisis, as India’s Foreign Minister held talks with the Sri Lankan counterpart.    Are loans on top of loans the solution?    Borrowing more to merely finance upcoming loans and bridge the trade deficit and budget deficit is indeed a short-term solution, as economists point out.  Speaking to The Sunday Morning Business, Advocata Institute Chief Operating Officer Dhananath Fernando stated that at this point of the economic crisis, Sri Lanka has very few options left, namely, borrowing more to meet the external debt obligations and restructuring the debt.  However, Fernando notes that both are painful approaches. Similar thoughts were also shared by University of Colombo Faculty of Arts Department of Economics Senior Lecturer Grade II Dr. Shanuka Senarath.  Senarath noted that Sri Lanka should now seek debt restructuring instead of seeking more loans to repay the loans it had taken previously. Senarath stated that these loans could be paid later using inflows the country would receive when the macroeconomic situation normalises.  Similar suggestions were shared by the IMF in its Article IV report on Sri Lanka, which was followed by a statement from Citigroup Global Markets.  As Bloomberg quoted, Sri Lanka will have to undergo debt restructuring as strongly suggested by the IMF in order to secure financing from creditors, according to Citigroup Global Markets. The prescription follows the IMF’s observation that fiscal consolidation efforts alone to pare debt to safe levels would be too large to be economically and politically feasible. While the IMF didn’t specify what a safe level is, Citi sees reduction to a 79.7% public debt ratio witnessed between 2010-’18 as a good benchmark from the 119% level last year. However, Sri Lanka is yet to make any visible progress towards debt restructuring.  The Wall Street Journal in February claimed that the GoSL had carried out discussions with bankers from Rothschild & Co. and Lazard Ltd. regarding plans to address the debt and foreign exchange crisis of the country. According to The Wall Street Journal, such discussions included potential proposals to help the country raise cash, which include the sale of assets and securitisation of debt facilities. However, The Central Bank stated that the GoSL did not seek assistance from any bankers or financial advisors in the restructuring of its debt and that any discussions carried out were only limited to offers of new financing. As Fitch Ratings points out, the Government faces foreign currency debt service payments, including principal and interest, of $ 6.9 billion in 2022, equivalent to nearly 430% of official gross international reserves as of November 2021. These payments include the $ 500 million ISB payment the Government made in January. Cumulative foreign currency debt service, including interest and principal, amounts to about $ 26 billion from 2022 through 2026.  


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