Sri Lanka’s race to meet ISB obligations 

By Imesh Ranasinghe

When President Gotabaya Rajapaksa took office in November 2019, Sri Lanka had to pay $ 1.5 billion in International Sovereign Bonds (ISBs) for the upcoming year. With $ 7.5 billion in foreign reserves at the time, the Government did not have any problem meeting these obligations 

However, the Covid-19 pandemic that hit the country in March 2020 started draining the reserves slowly even after the Government imposed an import ban for the first time in 40 years.

The Sri Lankan Government had already paid $ 2 billion in ISBs since the start of the pandemic. The next $ 0.5 billion is due in January 2022 while another $ 1 billion in bonds will be maturing in July. The total debt repayment of about $ 4.2 billion is due in 2022.

Sri Lanka had successfully issued its fifth ISB of $ 1 billion in July 2012, with a comparatively lower yield of 5.875% per annum and a maturity of 10 years. Most of this inflow was directed to the continuation of major infrastructure projects which commenced in 2010 and 2011. This bond reaches maturity in July 2022.

The country pays 6.8% on average as interest on borrowing through ISBs, while earning a return of 1.4% reinvesting such earnings in Western countries.

The CBSL roadmap 

The Central Bank of Sri Lanka (CBSL) launched a six month roadmap which stated that the rationale for the short-term focus is to provide clarity and restore certainty through the proper management of this period, which will enable the economy to rebound against the forex challenge and debt servicing concerns.

The CBSL mentioned several ways the Government planned to acquire foreign exchange to meet its debt obligation in the short run, including tourism cash flows, increase in FDI pipeline with the Port City and industrial zones taking off, exports earning above $ 1 billion per month, government-to-government financing with $ 1 billion expected by end of 2021, and monetising selected non-strategic and under-utilised assets to gain $ 1 billion.

Other measures include facilitating inflows from the implementation of the Tax Amnesty through the Finance Act to gain $ 100 million, continuing the scheme to pay an extra Rs. 2 per US dollar (USD) remitted and converted by workers abroad, negotiating short-term currency swaps with international counterparts to acquire $ 1.5 billion, and pursuing efforts to attract foreign investments into government securities targeting $ 1 billion.

The roadmap also plans to gradually reduce ISB exposures towards 10% of the GDP by 2024 and maintain that ratio thereafter, from around 18% of the GDP by the end of 2019, around 17% of the GDP by the end of 2020, and to around 16% of the GDP by the end 2021.

Further, the roadmap mentioned concerted efforts will be made to engage domestic and international financial intermediaries to tap potential investments for Treasury bills/bonds, while attractive returns and opportunity to swap forex with the Central Bank will remove the forex risk (zero cost swaps) and will facilitate new investments in the short term.

“Access for subscriptions either in the secondary market and/or through direct issuances at prevailing rates for sizable volumes will be made available,” it noted.

However, the roadmap faced criticism for lacking precision. Fitch Ratings stated that the roadmap has not indicated details regarding the sources as well as the timeline for the financial rollouts referenced. 

During the commentary that was made on Sri Lanka as a part of the “What investors want to know: Emerging market sovereigns – 4Q21” report, Fitch Ratings Director – Sovereigns Sagarika Chandra said: “In a six-month roadmap published in October by the Central Bank of Sri Lanka, the authorities have outlined plans to secure funds through bilateral, multilateral, and other syndicated loans for 1Q22. However, the financing plans contain limited details, including the sources and timelines of financing arrangements.”

She further mentioned: “As positive rating sensitivities, we have flagged the need for more enduring improvements in the external and public finances.”

Less than a week after Fitch Ratings stated that the CBSL’s much-touted six month roadmap lacks precision about the sources and timelines for the inflows it has targeted, the CBSL has issued a statement specifying several sources of inflows and related timelines.

The statement announced that the CBSL and the Government of Sri Lanka are in the process of securing over $ 1 billion in inflows before the end of the year, which is the first half of the period covered by the roadmap.

Titled “Progress of securing foreign exchange inflows as announced in the six month roadmap for ensuring macroeconomic and financial system stability”, the statement added that following the engagement with certain governments, central banks, financial institutions, as well as investors, they have entered into several Memoranda of Understanding (MoUs).

This includes the two transactions involving the Chalmers Granaries land as well as the property behind One Galle Face, which alone amounts to around $ 200 million. Thus, the CBSL said that an advance payment is expected within a shorter period. 

Additionally, an investment of $ 650 million has been finalised regarding the West Container Terminal (WCT) by the Adani Group of India with John Keells Holdings as the Sri Lankan counterpart, and the Sri Lanka Ports Authority (SLPA), the CBSL pointed out. 

Furthermore, a foreign inflow of $ 250 million is expected to be secured in terms of a partial divestment of the West Coast Power Plant to the US company New Fortress Energy Inc. Accordingly, the first tranche of the investment is anticipated to be made in December 2021.

“Currently, ongoing discussions are taking place with the Reserve Bank of India, the People’s Bank of China, and several Middle Eastern central banks with the anticipation of expediting the finalisation of foreign currency swap arrangements,” the CBSL noted.

Moreover, the CBSL stated that there was a notable increase in labour migration to the Middle East and recovery in tourism with a month-on-month increase in arrivals. Furthermore, the exports sector surpassed $ 1 billion of monthly earnings during the period from June to September this year, along with the repatriation and conversion of export proceeds during October. 

Will the roadmap allow obligations to be met? 

Speaking to us, Open University of Sri Lanka Emeritus Professor of Economics and a former Central Banker Prof. Sirimevan Colombage said that the CBSL roadmap has not addressed the fundamental problems pertaining to the foreign exchange crisis.

Instead, he said it had envisaged easing the balance of payments (BOP) problems mainly through the so-called non-debt forex inflows such as swaps, government-to-government borrowings, monetisation of underutilised assets, export proceeds conversion rules, monitoring forex inflows, attracting foreign investment to Sri Lanka Development Bonds (SLDBs), and maintaining a fixed exchange rate system at Rs. 199-203 against the USD.  

Moreover, he said that non-debt inflows quoted in the roadmap are mostly debt-based inflows such as swaps and government-to-government borrowings, which will aggravate the debt crisis.

“Such narrow policy measures fail to address the severe BOP problem and the debt crisis. They are mostly short-term solutions that have an anti-export bias,” he said.

Further, he said since the announcement of the roadmap, the foreign payments situation has worsened resulting in a severe forex shortage, thus reflecting policy ineffectiveness.

Speaking to us, Samagi Jana Balawegaya (SJB) MP Eran Wickramaratne said that the CBSL should stick to central banking and not try to do the work of the Government.

He added that it’s not even worthwhile commenting on the roadmap presented by the CBSL. Former State Minister of Finance Wickramaratne said that so far, the current Government has been meeting its debt obligations through foreign reserves, which has caused the reserves to shrink from about $ 7 billion in 2019 to about $ 2 billion now, according to the latest report released by the CBSL.

On Monday (November 29), the MP raised the question in Parliament seeking an official statement from the governing party on the status of the reserves.

He asserted that the same question which he had raised a year ago remained unanswered as the governing party had requested additional time to provide a response.

“It is clear that the Government doesn’t want to make the data and the information available,” he added.

Further, he noted that a year ago about 80 countries in the world secured an emergency funding called the Rapid Financing Instrument (RFI) from the International Monetary Fund (IMF).

He pointed out that Asian countries like Nepal, Bangladesh, Myanmar, and the Maldives secured the fund while Sri Lanka did not.

“We found that we have requested (the fund) from the IMF but Sri Lanka hasn’t received the assistance. The conclusion that we come to is that the RFI is basically not available to us. We are unable to service debts and the sustainability of our debts is in question,” Wickramaratne said.

The RFI provides rapid and low-access financial assistance to member countries facing an urgent balance of payments need, without needing to have a full-fledged programme in place.

It can provide support to meet a broad range of urgent needs, including those arising from commodity price shocks, natural disasters, conflict and post-conflict situations, and emergencies resulting from fragility. 

As a single flexible mechanism with broad coverage, the RFI replaced the IMF’s previous policy that covered Emergency Natural Disaster Assistance (ENDA) and Emergency Post-Conflict Assistance (EPCA).

Moreover, Wickramaratne said that when the issue of reserves being at $ 1.5 billion was brought up in Parliament this past week, the Government did not refute it.

“Basically since the Government did not refute it, we can conclude that the reserves are probably about $ 1.5 billion. Maybe the cash reserves are lower because there is gold worth $ 300 million,” he said.

The MP said since Sri Lanka had been using reserves to meet the debt obligations, the payment of the ISB is in a grave situation.

He noted that although various people in the Government had been discussing the deals and swaps they had arranged with other countries, the Finance Minister should instead make a statement regarding all this in Parliament since it is his responsibility.

Mismanagement, the main problem

The former State Minister said that the main problem with the Government is the mismanagement of resources: “They are now talking about restructuring debt, but they should have discussed this long before,” he said.

Regarding the IMF bailout, Wickramaratne said that it is not too late to approach the IMF. However, he said the solutions given at this moment would prove to be more difficult than if Sri Lanka had approached the IMF much earlier.

“It is like having a disease, if you treat it at stage one it will be easier, but if you delay it and treat it at stage three, it’s far more difficult. It’s the same with the economy,” he added.

Moreover, he said that the Opposition has not asked the Government or the CBSL to go anywhere to solve the debt crisis, adding: “All we have been telling them is that they are ruining the economy through their wrong policies.”  

Wickramaratne said that defaulting on an ISB is only one part of the issue, as the consequence of defaulting will be unthinkable.

“We will basically become a bankrupt country, the ratings will go further down, and the investors won’t approach us either,” he added.

He pointed out that the former Yahapalana Government had a Medium-Term Debt Management Strategy (MTDS) which was formulated by CBSL and the Ministry of Finance.

“If that had been followed we wouldn’t be in this mess,” he said. 

The MTDS which was introduced in 2019, aimed to improve the quality of foreign financing by switching instruments from short-term to medium and long-term, with plans to reduce the foreign debt as a share of the GDP to 38.5% by 2023, from 45.1% at the end of 2018.

A coherent medium-term macroeconomic framework

Instead of harping on a fragile home-grown solution, Colombage said that the CBSL should have formulated its monetary policy based on a coherent medium-term macroeconomic policy framework with consistent fiscal and monetary policies targeting price stability and BOP equilibrium. 

The former Central Banker said that the CBSL should adopt a flexible exchange rate system instead of its present artificial fixed exchange rate system that discourages exports and encourages imports.

“There is a need to allow interest rates to be determined through market forces, instead of interest rate caps that are enforced by the CBSL at present,” he added.

He pointed out that it is the responsibility of the CBSL to urge the Government to approach the IMF and adopt a strict macroeconomic policy framework targeting fiscal deficit reduction and debt sustainability. 

He noted that assistance from the IMF would not only enable the Government to reschedule the present unmanageable external debt commitments, but also to win foreign investor confidence.

Most importantly, he pointed out that the CBSL must be independent of political pressures.

According to him, the Central Bank Bill which was drafted three years ago to replace the present Monetary Law Act, would have been a launching pad to evolve an “inflation-targeting monetary policy” coupled with strict fiscal discipline under the Fiscal Responsibility Act (FRA). 

“Following the recent postponement of fiscal targets stipulated in the FRA until 2030, economic revival backed by strong macroeconomic fundamentals seems to be a distant reality,” Colombage said.