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Government defends  'reverse graduation for limited period'

14 Oct 2022

  • Ex-CBSL Dep. Governor warns of long-term impacts including door being closed to commercial markets
BY Safrah Fazal The “reverse graduation” policy that the Government is pursuing for a “limited period of time” will rebuild confidence in the country in the commercial markets, although it may not be conditional for the country to receive further funding from bilateral and multilateral donors, Government sources told The Morning. With commercial markets closed to the country due it defaulting on its debt in April this year, sources claimed that concessional funding will build confidence in Sri Lanka, thus enabling the country to receive further financing through commercial markets.  “We don’t have access to commercial markets at the moment. But concessional financing will build confidence, because once we gain access to concessionary financing, new financing will begin entering the country. At the moment, we are not receiving any new funding. With the new funding, the implementation of the proposed programme by the International Monetary Fund (IMF) could hopefully begin by next year, and we will have a good foundation to start with. So, when we are in a position to manage our essentials, and if new financing starts entering the country, that will build our confidence level in the commercial market.” When The Morning queried as to whether bilateral and multilateral donors will accept the “reverse graduation” policy and extend loans or funding to Sri Lanka, sources said: “No. I don’t think so. Bilateral and multilateral donors have their own guidelines. The lending guidelines are different across country to country and administration to administration. The World Bank guidelines don’t apply to any other institution.” When The Morning also queried if the type of loans offered through concessional financing are project loans, and when we may receive the said loans, sources said: “It depends. We have to discuss our requirements with the World Bank. The World Bank concessionary funding may come soon after the IMF programme is concluded.” When The Morning contacted former Central Bank of Sri Lanka (CBSL) Deputy Governor Dr. W.A. Wijewardena with regard to the repercussions of the said “reverse graduation” policy pursued by the Government, he stated that the move could have long-term implications for the country.  “It will have serious implications on other factors for Sri Lanka. When we get concessional funding, we will not be able to tap the commercial markets, and they will be completely closed to Sri Lanka. Once we start receiving concessional loans, they will increase the premium. Presently, the market is closed to us, and let’s say the yield rate is 30% – even at 30%, we won’t be able to obtain funding from commercial markets because, according to them, this is a very serious instance of default in the loans in the future as we are poor, and because poor people can’t repay.” He also stated that it is uncertain if bilateral donors will extend concessional funding following the World Bank’s special concession, saying: “Also, we don’t know if the bilateral donors will follow the special concession and also extend concessional funding to the country.” Speaking further, Wijewardena stated that the loans offered will be project loans.  “All these are project loans, so there should be potential projects being plotted by the country, which have to be approved by the World Bank and the Asian Development Bank. It will take a long period of time. They will have to field a project mission, and the mission will have to come up with a technical report. This may take about one to two years for Sri Lanka to receive the loan, so it’s not immediate.” On Tuesday (11), the Government stated that it was pursuing a “reverse graduation” policy for a limited period of time whilst remaining as a middle-income country on the World Bank list. A statement issued by the President’s Media Division (PMD) noted that the approval of the Cabinet was received on Monday (10) to request the World Bank to grant the country eligibility to obtain loans offered by the International Development Association (IDA), which the country no longer qualifies for.  “Sri Lanka no longer qualifies for International Bank for Reconstruction and Development (IBRD) loans due to a downgrade of the country's credit rating. Therefore, the Cabinet approved a proposal to request the World Bank to grant the country eligibility to obtain loans offered by the IDA. This is with the aim of obtaining concessionary funding from the IDA,” the President’s Media Division (PMD) stated. The IDA is an arm of the World Bank that helps the world’s vulnerable countries. The PMD also noted that 12 countries including Indonesia have availed themselves of this facility when they were facing economic downturns similar to Sri Lanka and that the facility is known as the “Gap”. However, prior to the PMD’s statement on Tuesday, at the weekly press briefing, Cabinet Spokesman Dr. Bandula Gunawardana provided a contradictory remark on Sri Lanka’s categorisation. Gunawardana stated that in a bid to receive concessionary loans, the Cabinet had granted approval to downgrade the country from a middle income to low income country on the World Bank list.  “Amidst the economic crisis that the country is facing, as a relief measure, representatives of international organisations had informed the Finance Minister that if Sri Lanka was categorised as a low-income country, access to funding would be easier,” he said.


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