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The game of loans

12 Feb 2022

  • Govt. lacks clear and robust plan to manage debt crisis
  • 2022 likely to see budget deficit grow
  • Experts claim Govt. reluctance to seek IMF assistance due to politicisation of national policies
  • Let experts make policy decision: Dr. Senarath
By Vinu Opanayake Sri Lanka is expected to service a $ 7 billion debt repayment this year, as the Central Bank of Sri Lanka (CBSL) continues selling the country’s gold reserves. However, experts warn that the Government has not been transparent about a robust long-term plan to address the debt crisis.     The mammoth task of sourcing the funds for debt payments comes in the wake of official foreign currency reserves dropping to $ 2.3 billion as of end January, from $ 3.1 billion at the end of December last year.    While there has been no visible improvement in the reserves position of the country, including the $ 500 million International Sovereign Bond (ISB) payment the Sri Lankan Government made in January this year, Sri Lanka’s debt obligations for the whole year stand at around $ 7 billion. This also includes the $ 1 billion ISB that is maturing this July. According to the Advocata Institute (see graph), out of the $ 7 billion debt to be repaid in 2022, bilateral loans make up $ 4.4 billion, while the rest comprise multilateral loans, loans with commercial banks, and export credit.  Issuing a statement last week, the CBSL stated that with the repayment of ISBs totalling $ 2.5 billion from January 2020 onwards, the total outstanding ISBs had now been reduced to $ 12.55 billion and would reduce to $ 11.55 billion by July 2022, broadly in line with the Government’s strategy to reduce ISB debt gradually to around 10% of the GDP.  “Towards that objective, the Government and the CBSL have already taken necessary measures to secure alternative forex inflows via several bilateral and multilateral funding arrangements to meet the upcoming debt obligations, including the $ 1 billion ISB maturing in July 2022,” the statement added. Can SL maintain its unblemished track record this year? “Compared to the debt we have, these reserves are nothing. Now the problem is how to pay this debt using the reserves. Reserves are not only to pay the debt as there are other requirements as well importing essential items such as food and medicine. If you look at the numbers, we may need $ 10 billion minimum and even more than that. It is a big deficit, of course,” said University of Colombo Faculty of Arts Department of Economics Senior Lecturer Dr. Shanuka Senarath. He opined that last year, the Sri Lankan Government came up with Selendiva Investments – a special investment vehicle that was to sell some of the properties in Colombo, but it had already become a failure because nobody was going to buy these properties. “The other problem is that according to Bloomberg, the Government is trying to enter into some swaps with China. Swap is not a debt, of course. It is sort of a guarantee. My point of view is that the Government does not have a clear plan. They had a few plans here and there, but nothing worked out. At the moment we are like beggars on a road, pleading with someone for some money,” he added. According to Dr. Senarath, one potential solution is going to the International Monetary Fund (IMF), but again the Government is very hesitant to go to the IMF. He added that the problem with going to the IMF is that there were specific policies a country should follow.  “For example, excessive Government spending. One of the biggest criticisms about the Budget 2022 is that it has allocated Rs. 33 million for each Grama Seva Niladhari division. Imagine how much money that would be when it comes to a whole island? If Sri Lanka goes to the IMF, it will not be easy to come up with such budget proposals. It is going to the IMF but just to get technical support, which means we have not gone to the IMF yet,” he added. On 3 February, CBSL Governor Ajith Nivard Cabraal dismissed speculation that Sri Lanka was seeking to enter an IMF programme and noted that the statement made by the Finance Minister was merely referring to a routine technical assistance programme to be conducted by the IMF for the newly-established Macro-Fiscal Unit of the Ministry of Finance. Dr. Senarath noted that even if the economy returned to being fully functional, there were mainly three ways we get our foreign exchange reserves – one is tourism, the other is exporting, and the last is worker remittances. “Even if these three things work really well – let’s assume tourism is picking up gradually, exports are booming and worker remittances are picking up – it is unlikely that these three will go back to the pre-pandemic situation. The world has changed now. The markets have shifted. Even if a miracle happens and we go back to pre-pandemic earnings, there will still be a problem as it will not be enough. If you look at the current trends, we are losing the tea market for Sri Lankan-grown tea in the world,” he noted. A drop in the quality of Sri Lankan tea and its production may not see Sri Lankan tea brands trending in the market anymore, Dr. Senarath opined. “We will probably lose our market share in exports. Even if the GSP+ works really well, we will still not be able to collect sufficient dollars to pay back the debt,” he added. What can be done? According to Dr. Senarath, one solution is a continued dependence on borrowing, but he warns of high interest rates. “But where are we to borrow from? Fitch Ratings has downgraded us and we are near the default. We are on the verge of bankruptcy. If an individual or a company is near-bankrupt, who would be happy to lend? There are illegitimate lenders of course, lending at a very high level for individuals. Now that is what happens to a country as well. We go for bilateral agreements with India and China and they come up with high costs and high interest rates,” Dr. Senarath warned. He added that the Government did not have clear or consistent policies and was creating confusion through its messaging, which was not helpful to contain and mitigate the crisis.  “They only come up with ad hoc solutions. I heard the Minister of Finance saying that hawala methods of remittances are fine. A few months ago, they were saying that they would arrest anyone sending money through unofficial means. The Government does not have a policy on anything. This is not a game. Dealing with the international economy is such a big deal and you have to have experts to make policy decisions,” he added.  “When Fitch Ratings downgraded the country, one senior official would come and say this is a conspiracy against the country. This type of commentary is not helpful and reflects poorly on Sri Lanka’s credentials.” Dr. Senarath explained that seeking loans and swap agreements were not a sustainable option for Sri Lanka, adding that the Road Map proposed by the CBSL had not delivered the desired outcomes. How can Sri Lanka build up its reserves? Building up reserves or losing them does not happen overnight, according to Dr. Senarath. “When a patient has cancer and you are not treating it but approaching a doctor when he is about to die, you cannot save him. The same can be said about the Sri Lankan economy. There are things though that we can at least start doing now. Look at the macroeconomic policies, what makes us lose reserves? Or why are we not attracting any money?” he questioned. He added that Sri Lanka had been a wonderful tourism destination 20 to 30 years ago as flights were fully booked, but today the world market has completely changed and shifted paradigm. “We still think of Sri Lanka as being the centre of the world and that we will get tourists, but what we are really attracting is backpackers or low spenders.” “The other thing is, why are we focusing purely on tourism? We were focusing on tourism for the last 10 years but we have not seen any big improvement. Thirty years ago, we were talking about tea, rubber, and coconut exports, and unfortunately, we are still talking about these same three crops and our export basket has not changed at all. We have failed to capture the export market as well. We have failed as a country for 50 years,” Dr. Senarath added. In his opinion, Sri Lanka is living at least half a century behind in history. Instead, it should reimplement policies, shrink the domestic economy, and not spend too much on the domestic economy. Treasury and CBSL stance on debt obligations The Sunday Morning contacted the Treasury to get its comments on how it is planning to meet Sri Lanka’s debt obligations for the year with dwindling reserves, increasing expenditure on imports, and lower remittances. We were directed to speak to Treasury Secretary S.R. Attygalle. However, all our attempts to contact Attygalle proved futile. Deputy Treasury Secretary R.M.S. Ratnayake told The Sunday Morning that the Treasury Operations Department was the responsible department for such matters and directed us to Treasury Operations Department Director General H.C.D.L Silva.  Silva said: “It is better to have a discussion with Attygalle. At the moment, I am unable to give you the figures. Debt obligation is mainly with the Central Bank of Sri Lanka. Our department just makes the payment. The Central Bank arranges and manages our debt. The details are with it. We have debt service data only for the first quarter of this year but that is confidential.” Following this, The Sunday Morning contacted CBSL Governor Ajith Nivard Cabraal to obtain his response to the same questions. However, he stated: “I have responded to these questions in the Central Bank of Sri Lanka Six-Month Road Map on 1 October 2021. Please refer.” In its Six-Month Road Map, the CBSL had disclosed that it would be receiving $ 11.45 billion in forex inflows over the period from October to December. From the above-targeted foreign inflows, the Government and the CBSL will negotiate for $ 3.9 billion. Of the remainder, $ 6.95 billion includes forex inflows to the domestic forex market with contributions mainly from merchandise exports ($ 3.3 billion), worker remittance ($ 1.8 billion), and service exports ($ 1 billion).  Despite these forex inflow targets set by the CBSL Road Map, the country’s foreign reserves fell to a 12-year low in November 2021. However, Cabraal has continuously reiterated that he is confident of meeting the targets set out in the Road Map and has promised that the foreign reserves of the country will be strengthened to $ 3 billion by 31 December 2021. Even though as promised December reserves were at $ 3 billion, it included a $ 1.5 billion yuan currency swap from China. Even though Cabraal promised to provide an update on the Road Map by end December, there has been no further discussion in this regard. It should also be noted that the Road Map has clearly failed to bring in the targeted inflows with the country’s reserves still hovering somewhat around $ 3 billion with a debt repayment twice as large. International rating agency Fitch Ratings, in its rating action commentary published on 17 December 2021, stated that it believed it would be difficult for the Government to meet its external debt obligations in 2022 and 2023 in the absence of new external financing sources.  “Obligations include two International Sovereign Bonds of $ 500 million due in January 2022 and $ 1 billion due in July 2022. The Government also 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. Cumulative foreign currency debt service, including interest and principal, amounts to about $ 26 billion from 2022 through to 2026,” Fitch stated.  


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