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Domestic Debt Restructuring – An Alternate View

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by Romesh Bandaranaike, Ph.D.

There have been substantial and wide spread criticisms of the recently instituted Domestic Debt Restructuring (DDR) scheme carried out by Central Bank of Sri Lanka (CBSL), to reduce the Sri Lanka Government’s requirements for funding. In this article I argue that the scheme, as structured and carried out by CBSL, is appropriate, given the ground realities in the country, and that the critics have ignored a number of factors which forced CBSL to design the scheme as it did. I then suggest additional steps the Government could take to further improve its financial position in connection with past Bond issues.

The DDR Scheme

Faced with massive shortfalls in revenue, the Government recently carried out a “restructuring” of the debts it owed on Sri Lanka Rupee denominated Treasury Bills and Bonds in an effort to substantially improve Government finances, including the funds needed to service these Bills/Bonds. The two key elements of the DDR are a) Converting all Treasury Bills presently owned by CBSL to longer term Treasury Bonds, thereby substantially delaying the payment dates on these Bills; and b) Effectively “forcing” the Employees Provident Fund (EPF) and other superannuation funds to exchange most of the Bonds they hold for 12 year Bonds with somewhat lower interest payments.

They did this by threatening to increase the tax rates that EPF pays on its annual income to 30% from the present 14%, if they did not accept the Bond exchange. Since such an increase was financially worse for EPF compared with the Bond exchange, EPF opted for the latter.

CBSL estimates that the scheme would reduce the Gross Financing Needs (GFN) of the Government by 1.5%, 1% by the CBSL Bill-Bond exchange and 0.5% by the EPF Bond exchange.

The Criticisms

The principal criticisms of the DDR, from the public, Trade Unions, Economic Think Tanks, and numerous “Experts,” is that the entire burden of the DDR is being placed on the backs of the retirement savings of “poor workers” who are the members of EPF.

CBSL has justified the proposed increase in the tax rates for EPF and other superannuation funds to 30% from the present 14% on the basis that the banks have to pay the higher tax rate of 30% plus VAT. Dr. Wijewardena, a former CBSL Deputy Governor, has written several articles criticizing CBSL for not presenting the correct picture in this regard and not disclosing full information on the impacts of the restructuring on EPF members’ returns. Dr. W’s main argument is that, in the case of the banks, the tax rate applies to “net interest”, whereas, in the case of the EPF, it applies to “gross interest.” For the banks, net interest is interest earnings on its loans less the interest it pays to depositors.

In the case of EPF, Dr. W points out that EPF is not allowed to subtract the interest it pays to EPF account holders to determine its income and tax liability, and that CBSL comparison of bank and EPF tax rates is therefore misleading. In a subsequent article by Dr. W, he criticizes CBSL/EPF for not fully disclosing the cost to EPF holders of accepting the proposed DDR compared with an increase in EPF’s tax rate to 30% and the justification for accepting the Bond exchange rather than the tax increase to 30%. He goes on to add that CBSL has a conflict of interest as both the developer of Government policy and as the administrator of EPF.

My Responses to the Criticisms

The criticism that the entire burden of the DDR is on the backs of workers is factually incorrect. As stated above, two-third of the 1.5% reduction in GFN (1%) is being achieved by exchanging the Treasury Bills held by CBSL for long term Bonds. Only 0.5% of the reduction is from the exchange of Bonds held by the EPF and other superannuation funds. In other words, 67% of the restructuring cost is borne by CBSL (in effect by all citizens), while only 33% is borne by EPF account holders. Furthermore, only workers in the formal private sector contribute to the EPF/ETF, while workers in the informal private sector (e.g. farmers, fishermen, small transporters, traders and construction workers) and Government employees do not.

As a result, only about 25-30% of the workers in the country have EPF accounts. Therefore, 70-75% of workers in the country will not suffer any burden due to the EPF bond restructuring. Finally, the workers with EPF accounts also include middle and senior management of companies who cannot be called “poor workers” as referred to in the various criticisms of the present DDR scheme. It is true that this category may only be a very small percentage of those holding EPF accounts. However, their account balances are likely to be very much higher than other EPF members and the impact of the restructuring on them will be proportional to these balances.

It would be ideal if the EPF could release statistics in this regard which will allow an assessment of this element. For example, the fraction of the total EPF funds held by those with EPF balances of over Rs 5 million (say), since such persons cannot be classified as “poor workers.” Workers who have balances in EPF/ETF, built up as a result of deductions from their salaries and additional higher contributions from their employers, at least have a retirement fund they can turn to, even if it is somewhat less because of the DDR. It could conceivably be argued that the 70-75% of workers who do not have such balances, mostly working in the informal sector, are worse off or poorer than those with EPF balances. This would be a justification for placing the burden of part of the DDR on EPF account holders rather than on other, even “poorer”, workers.

In response to Dr. W’s criticisms that EPF and bank tax rates are not comparable the way CBSL has done; each year, EPF determines a percentage it will pay/accrue to the account of each EPF account holder based on the earnings by the EPF that year. This percentage is not an interest similar to that paid by banks to its depositors and is not a cost that is deductible by EPF to calculate its tax liability each year. It is simply a percentage decided by the EPF administrators to allocate the profits after tax earned by the EPF during the year. Calling this percentage an “interest” is a misnomer. Account holders in EPF are akin to shareholders in banks and not depositors.

The amounts credited by EPF to a member’s account each year, based on EPF’s earnings during the year, is not a cost incurred by EPF in generating these earnings. It is something closer to a dividend paid by a bank to its shareholders in the form of additional shares. If EPF is allowed to determine its tax liabilities by subtracting these accrued amounts, banks should be able to deduct dividend costs in determining their tax liabilities. Dr. W’s criticism of the non-comparability of bank and EPF tax rates cannot be sustained.

Dr. W uses CBSL/EPF’s own numbers on the differences in returns under the two scenarios EPF has been offered and simply multiplies it by the total EPF Bond holding value to arrive at the cost to EPF of accepting the Bond exchange. This is something that could have readily been done by anyone and Dr. W’s implication that CBSL/EPF is hiding/not fully disclosing something in its statement cannot be sustained.

The CBSL/EPF analysis is simply to show that the return to EPF is better under the scenario where it accepts the DDR option, compared to rejecting the DDR option and being subject to a 30% tax rate. This information is more than sufficient for EPF to recommend to its Board that it should accept the DDR. Dr. W than goes into the past history of taxation rates applicable to the EPF and points out that as originally envisaged EPF earnings were to be tax exempt.

He shows calculations of the losses to EPF holders of the present DDR, compared with a situation if EPF earnings were tax exempt. This is a straw man put up by Dr. W to be knocked down as part of his criticism of CBSL/EPF. It is the tax rates that are applicable to EPF today, before the DDR, that are relevant and it would have been nonsensical for CBSL to show calculations based on what if the tax rates were those that existed many years ago.

With respect to the criticism that CBSL has a conflict of interest in both being the administrator of EPF and the policy advisor recommending the DDR, I do not see any conflict. CBSL, as advisor to the Government, has made the DDR proposal which allows EPF to choose between two options, accept the proposed DDR Bond exchange or reject it and be subject to a 30% tax rate. As the administrator of the EPF, CBSL has simply analysed these two options and clearly shown that the EPF is better off accepting the Bond exchange compared with rejecting it and being subject to a 30% tax rate.

Other Relevant Issues

It is telling that none of those criticizing the present process have offered any viable alternative DDR arrangement to achieve the same objectives as the present exercise. In saying this, I am ignoring the suggestions by some parties who say there would be no need for the exercise if “The money stolen by the Rajapaksa’s is recovered” or “The large corruption in Government is reduced,” and so on. Such actions, even if they were possible, are not alternatives, because they cannot be achieved in the short or medium term, which is one of the key objectives of the DDR. Verite Research did, some time ago before the announcement of the present DDR, present some analysis on a possible DDR which included sharing the cut across all Bond holders, but, for the reasons I refer to below, this is not a viable arrangement.

CBSL in its original presentation to the Cabinet, and subsequently to the public, argued that it would be prudent to exclude the Banks from the DDR exercise, because these institutions were already under stress as a result of COVID related business failures and because the banks would also be taking a hit from the future restructuring of USD Bonds, some of which are held by them.

CBSL was of the view that such an exclusion was essential to ensure financial system stability. None of those criticizing the present DDR arrangements have objected to this and I concur with that view. Even if the banks are able to bear the burden of some restructuring of the domestic bonds they hold, bank stability is also dependent on public perception, and excluding them from the DDR has certainly had a positive impact on such perception.

There are two unstated conditions applicable to the DDR exercise which have received no mention in the ongoing discussions. First, the DDR should be concluded in a short time frame since it will be a pre-condition to the restructuring of foreign currency debt. Second, it must be carried out in a legally valid manner. A Government Bond is a legal contract between the Government and the holder of the Bond.

The Government is legally obligated to pay the interest coupon and the principal of the Bond on specified dates according to this legal contract. The Government has no legal authority to change the conditions of this Bond. It could, of course, pass a new law in Parliament giving itself the authority to make changes to existing Bonds. In doing so, however, if all Bond holders are not treated equally (in particular, if the bank holdings of Bonds are excluded), there are bound to be legal challenges in the Courts to any such changes, and the changes may well be struck down by the Courts.

Even if such changes are not struck down, this process can take considerable time to be determined and would not be achievable in the time frame required for the DDR process to be concluded as discussed previously. The present DDR has finessed the issue of different treatments of Bond holders by making it “voluntary”, albeit by holding a gun to the head of the EPF and superannuation funds in the manner detailed earlier. This is draconian, but effective.

As per CBSL statistics presented in connection with the original DDR proposal, the total outstanding amount of Treasury Bonds at that time was Rs. 8,700 billion. Of this amount Rs 1,644 billion is held by “Others”, after excluding the banks and EPF and superannuation funds being subject to the DDR. Even if the banks are excluded from the DDR to ensure “financial system stability” reasons mentioned previously, it would have been ideal if the “Others” holding the Rs 1,644 billion in outstanding Bonds were subject to some “restructuring”, in the form of cuts in coupon rates and/or face value, or an extension of the tenor of these Bonds.

If this was done, the benefit of these cuts could have been passed on in the form of a reduction in the burden passed onto EPF and superannuation funds. However, such an unequal treatment where some Bond holders (the banks) are excluded, even if the necessary legislation is passed, would certainly have resulted in legal challenges which would, at the least, have delayed the process as I have pointed out earlier, or even been found unconstitutional by the Courts.

Further Actions in Respect of Bonds

Very high yield rate Bonds (over 20% yield) were issued by the Government during the period prior to the announcement of the DDR (April 8, 2022 to March 13, 2023) as a consequence of severe financial shortages faced by the Government. Bidders for these Bonds added a premium to the bid yield rates, expecting a future restructuring of these Bonds as part of the DDR they knew was coming. By being excluded from the DDR, these Bond holders have enjoyed a “windfall profit.” It is not possible to specifically target these Bonds for a cut in coupons or face value, because many of the original holders may have sold some of these Bonds and have already earned the windfall profits.

[The buyers of the Bonds would only receive a “normal” profit in the form of coupon payments and final redemption.] Furthermore, in the case of individual Bond holders, their windfall profit would be in the form of a capital gain, which only attracts a tax rate of 10%. Corporates/ banks in the same situation would be paying a tax of 30% on their capital gains. I propose that the Government should “claw back” some of these profits by imposing a special windfall tax rate of 50% applicable to all profits derived from these Bonds. If the original purchaser has not sold the Bonds, the coupon interest and the capital gains on final face value redemption should also be taxed at 50%.

There would be some complications in structuring this tax, since some high yield Bonds may have changed hands within the period that high yield Bonds were still being issued, which means that the initial purchaser would only have made a small capital gain and the next buyer would still be enjoying the high coupon rate or subsequently selling the Bond for a large capital gain. A proper structuring of the 50% windfall tax can ensure that the taxes fall on those making the windfall profits. A tax of the type proposed will clearly be borne by the wealthy, who would have been the purchasers of these Bonds, and go some way towards balancing the burden imposed on less wealthy parties as a result of the DDR.

To place this suggestion in perspective, between April 8, 2022 and March 13, 2023 all Bonds issued by CBSL had yield rates in excess of 20%. The total face value of such Bonds was Rs 1,233 billion. The weighted average yield on these Bonds was 27.89% and the weighted average coupons in these Bonds was 19.09%. The latest four-year Bond yield rate is approximately 15% and this is likely to drop further.

As a result, any seller today of an average high yield Bond would make a significant capital gain on the sale and would need to pay substantial taxes to the Government at the proposed 50% windfall tax rate. As per CBSL statistics in the original CBSL presentation to the Cabinet, approximately 63.5% of all Bonds at that time were held by the banks and the “Other” category. If this percentage is also applicable to the high yield Bonds referred to above, the banks and the “Other” category would be holding Rs 777 billion of these Bonds.

Advocata has recently analysed EPF’s Bond portfolio prior to the DDR Bond exchange and concluded that EPF’s share of high yield Bonds was proportionately much less than for other Bond holders. Therefore, banks and “Others” would probably be holding even more than the above mentioned Rs 777 billion in such high yield Bonds which, in turn, will mean that a 50% windfall tax on the profits from these Bonds will result in substantial tax revenues for the Government.

An aside at this point is that for some unclear reason there is no withholding tax (WHT) applied to the interest earnings on Bonds as in the case of interest earnings from deposits in banks and finance companies. I have made inquiries as to why this is so from several senior Government officials and have not received any explanation for the practice.

It may well be that some Bond holders do not even have income tax files and that they are evading all taxes payable on Bond interest. Since Bond holders are all likely to be at the highest tax bracket given the minimum sizes of Bond investments, I suggest that a WHT of 30% be applied to all Bond interest payments. Holders are free to file tax returns and seek a refund if they have been taxed in excess of their liability due to such a WHT. I have been told there is some complication in applying WHT to Bond interest held by foreigners. If that is indeed the case, foreign holdings of Bonds could be excluded.

Conclusions

The economy of the country is in dire straits as a result primarily of bad/foolish policies of recent past Governments (including those by CBSL under its previous two Governors and Monetary Boards at that time) coupled with the endemic corruption inherent in the system. The present Governor of CBSL and his professional colleagues are facing very difficult conditions and are striving to get the country’s finances back on track.

I can understand trade unions, workers and other similar entities objecting to the implementation of policies which directly impact them, irrespective of whether such policies are needed to solve the country’s issues. But, why is it that so called “experts” and think tanks do not recognize the ground realities of what is practically achievable and support the efforts of CBSL rather than criticizing these efforts in print and at discussion forums?

(The author is an economist with wide experience in policy formulation and implementation in the Ministry of Finance and has worked at CEO level in both public and private sectors.



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Features

Hanoi’s most popular street could kill you

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By

[pic BBC]

Train Street started life as a razor-thin alley with a train rushing through it. Now, it’s swarmed with Instagrammable cafes and tourists who can’t stay away, despite the risks.

A train chugs through Hanoi, approaching a narrow passageway festooned with Chinese-style lanterns. Just as it screams into the station, a tourist jumps onto the tracks, attempting her most social-media friendly pose. Moments before the train strikes, its horn blaring into the humid air, she recoils to safety. Click, post.

It’s just an ordinary day on Hanoi’s Train Street, a 400m stretch of railway flanked by cafes where tourists nurse beers and watch, mesmerised, as trains roar past them at dangerously close proximity: sometimes crashing into tables and chairs.

Fun? Evidently – in a few short years, Train Street has entered Vietnam’s pantheon of “must-see” attractions, along with Ha Long Bay and the Cu Chi Tunnels. But the Vietnamese government is less impressed; since the site went viral in 2017, it has attempted various shutdowns, first in 2019, then 2022 and most recently further investigations and crackdowns in 2025 after an incident where a selfie-snapping tourist was nearly dragged under an oncoming train’s wheels. Police barricades go up between train arrivals; edicts are issued to tour operators and bar owners.

The tourists come anyway.

Alamy The Vietnamese government has attempted numerous shutdowns of the area (Credit: Alamy)
The Vietnamese government has attempted numerous shutdowns of the area (BBC)

How did an ordinary street become one of Vietnam’s hottest tourist attractions? It started innocently enough.

The North-South Railway was built by colonialist French forces in 1902, connecting Hanoi to Ho Chi Minh City. Fifty-four years later, the General Department of Railway erected a series of squat buildings straddling a stretch in central Hanoi to house employees. By the 1970s, the area was considered a slum; residents regularly roused out of their sleep by trains rumbling through, their houses quaking.

“It was just an ordinary street with train tracks running through it,” said Minh Anh, a lifelong Hanoi local who works at local whisky distillery,

Alamy The Vietnamese government has attempted numerous shutdowns of the area (Credit: Alamy)Alamy
The Vietnamese government has attempted numerous shutdowns of the area (Credit: Alamy)
From ordinary to unmissable

How did an ordinary street become one of Vietnam’s hottest tourist attractions? It started innocently enough.

The North-South Railway was built by colonialist French forces in 1902, connecting Hanoi to Ho Chi Minh City. Fifty-four years later, the General Department of Railway erected a series of squat buildings straddling a stretch in central Hanoi to house employees. By the 1970s, the area was considered a slum; residents regularly roused out of their sleep by trains rumbling through, their houses quaking.

“It was just an ordinary street with train tracks running through it,” said Minh Anh, a lifelong Hanoi local who works at local whisky distillery, Về Để Đi’. “When it started popping up all over social media, I was honestly surprised.”

Nhi Nguyn, a tour guide for A Taste of Hanoi, used to walk tourists through, just before it exploded in popularity. “People were still living ordinary lives there back then and there weren’t so many cafes next to the tracks,” she said. “It had a much more authentic feel: scooters were locked up just meters from the tracks, laundered clothes hung outside, and people were cooking outside on small gas stoves.”

. “When it started popping up all over social media, I was honestly surprised.”

Nhi Nguyn, a tour guide for

Alamy The Vietnamese government has attempted numerous shutdowns of the area (Credit: Alamy)Alamy
The Vietnamese government has attempted numerous shutdowns of the area (Credit: Alamy)
From ordinary to unmissable

How did an ordinary street become one of Vietnam’s hottest tourist attractions? It started innocently enough.

The North-South Railway was built by colonialist French forces in 1902, connecting Hanoi to Ho Chi Minh City. Fifty-four years later, the General Department of Railway erected a series of squat buildings straddling a stretch in central Hanoi to house employees. By the 1970s, the area was considered a slum; residents regularly roused out of their sleep by trains rumbling through, their houses quaking.

“It was just an ordinary street with train tracks running through it,” said Minh Anh, a lifelong Hanoi local who works at local whisky distillery, Về Để Đi’. “When it started popping up all over social media, I was honestly surprised.”

Nhi Nguyn, a tour guide for A Taste of Hanoi, used to walk tourists through, just before it exploded in popularity. “People were still living ordinary lives there back then and there weren’t so many cafes next to the tracks,” she said. “It had a much more authentic feel: scooters were locked up just meters from the tracks, laundered clothes hung outside, and people were cooking outside on small gas stoves.”

, used to walk tourists through, just before it exploded in popularity. “People were still living ordinary lives there back then and there weren’t so many cafes next to the tracks,” she said. “It had a much more authentic feel: scooters were locked up just meters from the tracks, laundered clothes hung outside, and people were cooking outside on small gas stoves.”

Alamy The rushing of the trains paired with the atmospheric setting are irresistible to tourists (Credit: Alamy)
The rushing of the trains paired with the atmospheric setting are irresistible to tourists (BBC)

In early 2013, Colm Pierce and Alex Sheal, co-founders of Hanoi-based photography tours Vietnam in Focus, launched a Hanoi on the Tracks tour to show visitors how local residents had adopted to the locomotive-sized challenge of living on railway tracks. Serendipitously, in June 2013, Instagram launched its new video-sharing feature. A year later, the Travel Channel show “Tough Trains”  featured Pierce walking down Train Street with a camera crew, further enticing travellers.

In 2017, an enterprising resident started selling beer and coffee, inviting curious tourists to stay to watch the train go by. Neighbours noticed the economic opportunity and cafes and bars rapidly spread. Soon, the formerly derelict alley, now dubbed Phố Đường Tàu (literally: “Train Street”) became bedecked with colourful lanterns and Christmas lights. Visitors learned to time their arrival for 30 minutes before a scheduled train and the “classic” Train Street experience was cemented: upon entering the tracks, tourists were shepherded into rail-side bars by local merchants and plied with beers and coffee, until the train shrieked through, rattling plates and causing hearts to pound.

Julia Husum, a university student from Norway, visited Train Street in February 2026, and “loved” the experience. “We put our beer caps on the railway, and the train flattened it, creating souvenirs for us,” she said. “I’d go back again.”

Without the advent of social media, would Train Street have become popular? As a travel writer, I’ve witnessed dozens of would-be influencers’ death-defying acts, like scaling down a rocky cliff above Dubrovnik and standing atop the side wall of 14th-Century Charles Bridge in Prague; wistfully looking off into the distance as the camera flashes. I’ve come to conclude that Train Street is no different; here, too, visitors risk their own safety for a picture-perfect opportunity.

Ivana Larrosa Once a derelict alley, Train Street has become one of Hanoi's most atmospheric lanes (Credit: Ivana Larrosa)
Once a derelict alley, Train Street has become one of Hanoi’s most atmospheric lanes (BBC)

“Essentially social media has fuelled Train Street into what it is today, [where] tourists flock in droves to the area to feel the adrenaline of the passing train while sipping local coffee,” echoed Michael Stanbury, the creative director for Vietnam in Focus. “Even without the train, the Instagrammable decorated street holds a very Hanoian charm.”

Local debate; the government proposes halting passenger trains for good. And each attempted shutdown, tourists climb past the barricades. There are, to date, more than 100,000 posts tagging Train Street on Instagram. Men’s grooming blogger Adam Hurly visited because a friend had hyped it. “It felt more like an Instagram attraction rather than a neighbourhood street,” he admitted, noting that once the crowds arrive, it becomes congested and less enjoyable, “Especially if you’re just standing on the main sidewalk trying to get a picture.”

He added: “It’s one of those places that looks better in photos than it feels in reality.”

But Matthew Tran, an artisanal footwear designer who visits Hanoi regularly, loves the pull of Train Street.

“The coffees were absurdly overpriced, yet I paid for them every time because I couldn’t stop marvelling at how the place worked; how an entire economy could thrive in such an improbable space,” he said. “These vendors built something real out of something most people would call chaos – that, to me, is worth coming back for.”

Ivana Larrosa Despite its tourist appeal, Train Street is full of residents who see it as part of their daily reality (Credit: Ivana Larrosa)
Despite its tourist appeal, Train Street is full of residents who see it as part of their daily reality (BBC)

He offers advice for future visitors: “It’s a unique experience you won’t get anywhere else. Although I wish more visitors would stop for a moment and remember that while it’s a tourist attraction to them, living beside those train tracks is someone else’s daily reality.”

Under more superficial reasons, visiting Train Street is similar to the appeal of visiting the Eiffel Tower during someone’s first visit to Paris, said Charlotte Russell, founder of  The Travel Psychologist.

“Humans are a social species and if we perceive that other people are enjoying an experience, it is natural for us to want to do it too,” she said. “This goes back to our evolution, when we lived in small groups and it would be advantageous for us to emulate other people in this way. So the sense of fear of missing out that we experience when seeing other people visiting places like Train Street is part of being human.”

Bearix Stewart-Frommer, an American pre-med student, validates Russell’s theory: “I found out about Train Street from my mum,” she said. “I didn’t have some deep motivation to see it, but I was curious because it’s one of those quirky, very photogenic spots that people talk about on social media.”

But there may be a more deep-seated reason why we’re lured to such places, Russell notes: “With Train Street specifically, the risk element is part of what makes it so novel, especially those of us from countries like the UK… We are used to regulation and precaution, railings, barriers and painted lines that we must stand behind. In contrast, Train Street can feel unbelievable to see and experience… [it helps] us reflect on our own norms and realise that other perspectives do exist.”

Ivana Larrosa Risks aside, the street's fame has given locals unique business opportunities (Credit: Ivana Larrosa)
Risks aside, the street’s fame has given locals unique business opportunities (BBC)

Local tour guide Phuong Loan Ngo offers one such alternative perspective: “The economic boost is undeniable, giving families who live along Train Street financial opportunities,” she said. “On the other hand, there are cultural challenges too. When an area becomes a ‘spotlight’ for social media, a place’s historical and cultural heritage can get lost. Instead of learning about how this railway has functioned since the colonial era, people often leave with only a photo, missing the true soul of the neighbourhood.”

The irony is that Vietnam in Focus has now moved their photography tours to another, far-less trammelled part of the railway, so they can show visitors that old, track-side way of life.

“As with all good things, the popularity of Train Street and the crowds it attracts are spreading,” said Sheal. “Thankfully, we have scoured Hanoi and found a fantastic local market that runs along the Hanoian railway further out in the suburbs – a new attraction.”

That is, until the social-media-obsessed travel masses find out about it. For better or worse, the unbearable lightness of Train Street is a permanent, but moveable feast.

[BBC]

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An innocent bystander or a passive onlooker?

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Indian Prime Minister Narendra Modi (C) meeting President of the European Council, Antonio Luis Santos da Costa and the President of the European Commission, Ursula von der Leyen ahead of the Exchange of MoUs between India and EU, in Hyderabad House, New Delhi, India, on 27 January, 2026.

After nearly two decades of on-and-off negotiations that began in 2007, India and the European Union formally finally concluded a comprehensive free trade agreement on 27 January 2026. This agreement, the India–European Union Free Trade Agreement (IEUFTA), was hailed by political leaders from both sides as the “mother of all deals,” because it would create a massive economic partnership and greatly increase the current bilateral trade, which was over US$ 136 billion in 2024. The agreement still requires ratification by the European Parliament, approval by EU member states, and completion of domestic approval processes in India. Therefore, it is only likely to come into force by early 2027.

An Innocent Bystander

When negotiations for a Free Trade Agreement between India and the European Union were formally launched in June 2007, anticipating far-reaching consequences of such an agreement on other developing countries, the Commonwealth Secretariat, in London, requested the Centre for Analysis of Regional Integration at the University of Sussex to undertake a study on a possible implication of such an agreement on other low-income developing countries. Thus, a group of academics, led by Professor Alan Winters, undertook a study, and it was published by the Commonwealth Secretariat in 2009 (“Innocent Bystanders—Implications of the EU-India Free Trade Agreement for Excluded Countries”). The authors of the study had considered the impact of an EU–India Free Trade Agreement for the trade of excluded countries and had underlined, “The SAARC countries are, by a long way, the most vulnerable to negative impacts from the FTA. Their exports are more similar to India’s…. Bangladesh is most exposed in the EU market, followed by Pakistan and Sri Lanka.”

Trade Preferences and Export Growth

Normally, reduction of price through preferential market access leads to export growth and trade diversification. During the last 19-year period (2015–2024), SAARC countries enjoyed varying degrees of preferences, under the EU’s Generalised Scheme of Preferences (GSP). But, the level of preferential access extended to India, through the GSP (general) arrangement, only provided a limited amount of duty reduction as against other SAARC countries, which were eligible for duty-free access into the EU market for most of their exports, via their LDC status or GSP+ route.

However, having preferential market access to the EU is worthless if those preferences cannot be utilised. Sri Lanka’s preference utilisation rate, which specifies the ratio of eligible to preferential imports, is significantly below the average for the EU GSP receiving countries. It was only 59% in 2023 and 69% in 2024. Comparative percentages in 2024 were, for Bangladesh, 96%; Pakistan, 95%; and India, 88%.

As illustrated in the table above, between 2015 and 2024, the EU’s imports from SAARC countries had increased twofold, from US$ 63 billion in 2015 to US$ 129 billion by 2024. Most of this growth had come from India. The imports from Pakistan and Bangladesh also increased significantly. The increase of imports from Sri Lanka, when compared to other South Asian countries, was limited. Exports from other SAARC countries—Afghanistan, Bhutan, Nepal, and the Maldives—are very small and, therefore, not included in this analysis.

Why the EU – India FTA?

With the best export performance in the region, why does India need an FTA with the EU?

Because even with very impressive overall export growth, in certain areas, India has performed very poorly in the EU market due to tariff disadvantages. In addition to that, from January 2026, the EU has withdrawn GSP benefits from most of India’s industrial exports. The FTA clearly addresses these challenges, and India will improve her competitiveness significantly once the FTA becomes operational.

Then the question is, what will be its impact on those “innocent bystanders” in South Asia and, more particularly, on Sri Lanka?

To provide a reasonable answer to this question, one has to undertake an in-depth product-by-product analysis of all major exports. Due to time and resource constraints, for the purpose of this article, I took a brief look at Sri Lanka’s two largest exports to the EU, viz., the apparels and rubber-based products.

Fortunately, Sri Lanka’s exports of rubber products will be only nominally impacted by the FTA due to the low MFN duty rate. For example, solid tyres and rubber gloves are charged very low (around 3%) MFN duty and the exports of these products from Sri Lanka and India are eligible for 0% GSP duty at present. With an equal market access, Sri Lanka has done much better than India in the EU market. Sri Lanka is the largest exporter of solid tyres to the EU and during 2024 our exports were valued at US$180 million.

On the other hand, Tariffs MFN tariffs on Apparel at 12% are relatively high and play a big role in apparel sourcing. Even a small difference in landed cost can shift entire sourcing to another supplier country. Indian apparel exports to the EU faced relatively high duties (8.5% – 12%), while competitors, such as Bangladesh, Pakistan, and Sri Lanka, are eligible for preferential access. In addition to that, Bangladesh enjoys highly favourable Rules of Origin in the EU market. The impact of these different trade rules, on the EU’s imports, is clearly visible in the trade data.

During the last 10 years (2015-2024), the EU’s apparel imports from Bangladesh nearly doubled, from US$15.1 billion, in 2015, to US$29.1 billion by 2024, and apparel imports from Pakistan more than doubled, from US$2.3 billion to US$5.5 billion. However, apparel imports from Sri Lanka increased only from US$1.3 billion in 2015 to US$2.2 billion by 2024. The impressive export growth from Pakistan and Bangladesh is mostly related to GSP preferences, while the lackluster growth of Sri Lankan exports was largely due to low preference utilisation. Nearly half of Sri Lanka’s apparel exports faced a 12% tariff due to strict Rules of Origin requirements to qualify for GSP.

During the same period, the EU’s apparel imports from India only showed very modest growth, from US$ 5.3 billion, in 2015, to US$ 6.3 billion in 2024. The main reason for this was the very significant tariff disadvantage India faced in the EU market. However, once the FTA eliminates this gap, apparel imports from India are expected to grow rapidly.

According to available information, Indian industry bodies expect US$ 5-7 billion growth of textiles and apparel exports during the first three years of the FTA. This will create a significant trade diversion, resulting in a decline in exports from China and other countries that do not enjoy preferential market access. As almost half of Sri Lanka’s apparel exports are not eligible for GSP, the impact on our exports will also be fierce. Even in the areas where Sri Lanka receives preferential duty-free access, the arrival of another large player will change the market dynamics greatly.

A Passive Onlooker?

Since the commencement of the negotiations on the EU–India FTA, Bangladesh and Pakistan have significantly enhanced the level of market access through proactive diplomatic interventions. As a result, they have substantially increased competitiveness and the market share within the EU. This would help them to minimize the adverse implications of the India–EU FTA on their exports. Sri Lanka’s exports to the EU market have not performed that well. The challenges in that market will intensify after 2027.

As we can clearly anticipate a significant adverse impact from the EU-India FTA, we should start to engage immediately with the European Commission on these issues without being passive onlookers. For example, the impact of the EU-India FTA should have been a main agenda item in the recently concluded joint commission meeting between the European Commission and Sri Lanka in Colombo.

Need of the Hour – Proactive Commercial Diplomacy

In the area of international trade, it is a time of turbulence. After the US Supreme Court judgement on President Trump’s “reciprocal tariffs,” the only prediction we can make about the market in the United States market is its continued unpredictability. India concluded an FTA with the UK last May and now the EU-India FTA. These are Sri Lanka’s largest markets. Now to navigate through these volatile, complex, and rapidly changing markets, we need to move away from reactive crisis management mode to anticipatory action. Hence, proactive commercial diplomacy is the need of the hour.

(The writer can be reached at senadhiragomi@gmail.com)

By Gomi Senadhira

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Educational reforms: A perspective

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Dr. B.J.C. Perera (Dr. BJCP) in his article ‘The Education cross roads: Liberating Sri Lankan classroom and moving ahead’ asks the critical question that should be the bedrock of any attempt at education reform – ‘Do we truly and clearly understand how a human being learns? (The Island, 16.02.2026)

Dr. BJCP describes the foundation of a cognitive architecture taking place with over a million neural connections occurring in a second. This in fact is the result of language learning and not the process. How do we ‘actually’ learn and communicate with one another? Is a question that was originally asked by Galileo Galilei (1564 -1642) to which scientists have still not found a definitive answer. Naom Chomsky (1928-) one of the foremost intellectuals of our time, known as the father of modern linguistics; when once asked in an interview, if there was any ‘burning question’ in his life that he would have liked to find an answer for; commented that this was one of the questions to which he would have liked to find the answer. Apart from knowing that this communication takes place through language, little else is known about the subject. In this process of learning we learn in our mother tongue and it is estimated that almost 80% of our learning is completed by the time we are 5 years old. It is critical to grasp that this is the actual process of learning and not ‘knowledge’ which tends to get confused as ‘learning’. i.e. what have you learnt?

The term mother tongue is used here as many of us later on in life do learn other languages. However, there is a fundamental difference between these languages and one’s mother tongue; in that one learns the mother tongue- and how that happens is the ‘burning question’ as opposed to a second language which is taught. The fact that the mother tongue is also formally taught later on, does not distract from this thesis.

Almost all of us take the learning of a mother tongue for granted, as much as one would take standing and walking for granted. However, learning the mother tongue is a much more complex process. Every infant learns to stand and walk the same way, but every infant depending on where they are born (and brought up) will learn a different mother tongue. The words that are learnt are concepts that would be influenced by the prevalent culture, religion, beliefs, etc. in that environment of the child. Take for example the term father. In our culture (Sinhala/Buddhist) the father is an entity that belongs to himself as well as to us -the rest of the family. We refer to him as ape thaththa. In the English speaking (Judaeo-Christian) culture he is ‘my father’. ‘Our father’ is a very different concept. ‘Our father who art in heaven….

All over the world education is done in one’s mother tongue. The only exception to this, as far as I know, are the countries that have been colonised by the British. There is a vast amount of research that re-validates education /learning in the mother tongue. And more to the point, when it comes to the comparability of learning in one’s own mother tongue as opposed to learning in English, English fails miserably.

Education /learning is best done in one’s mother tongue.

This is a fact. not an opinion. Elegantly stated in the words of Prof. Tove Skutnabb-Kangas-“Mother tongue medium education is controversial, but ‘only’ politically. Research evidence about it is not controversial.”

The tragedy is that we are discussing this fundamental principle that is taken for granted in the rest of the world. It would not be not even considered worthy of a school debate in any other country. The irony of course is, that it is being done in English!

At school we learnt all of our subjects in Sinhala (or Tamil) right up to University entrance. Across the three streams of Maths, Bio and Commerce, be it applied or pure mathematics, physics, chemistry, zoology, botany economics, business, etc. Everything from the simplest to the most complicated concept was learnt in our mother tongue. An uninterrupted process of learning that started from infancy.

All of this changed at university. We had to learn something new that had a greater depth and width than anything we had encountered before in a language -except for a very select minority – we were not at all familiar with. There were students in my university intake that had put aside reading and writing, not even spoken English outside a classroom context. This I have been reliably informed is the prevalent situation in most of the SAARC countries.

The SAARC nations that comprise eight countries (Sri Lanka, Maldives, India, Pakistan Afghanistan, Bangladesh, Nepal and Bhutan) have 21% of the world population confined to just 3% of the earth’s land mass making it probably one of the most densely populated areas in the world. One would assume that this degree of ‘clinical density’ would lead to a plethora of research publications. However, the reality is that for 25 years from 1996 to 2021 the contribution by the SAARC nations to peer reviewed research in the field of Orthopaedics and Sports medicine- my profession – was only 1.45%! Regardless of each country having different mother tongues and vastly differing socio-economic structures, the common denominator to all these countries is that medical education in each country is done in a foreign language (English).

The impact of not learning in one’s mother tongue can be illustrated at a global level. This can be easily seen when observing the research output of different countries. For example, if one looks at orthopaedics and sports medicine (once again my given profession for simplicity); Table 1. shows the cumulative research that has been published in peer review journals. Despite now having the highest population in the world, India comes in at number 16! It has been outranked by countries that have a population less than one of their states. Pundits might argue giving various reasons for this phenomenon. But the inconvertible fact remains that all other countries, other than India, learn medicine in their mother tongue.

(See Table 1) Mother tongue, medium of education in country rank order according to the volume of publications of orthopaedics and sports medicine in peer reviewed journals 1996 to 2024. Source: Scimago SCImago journal (https://www.scimagojr.com/) has collated peer review journal publications of the world. The publications are categorized into 27 categories. According to the available data from 1996 to 2024, China is ranked the second across all categories with India at the 6th position. China is first in chemical engineering, chemistry, computer science, decision sciences, energy, engineering, environmental science, material sciences, mathematics, physics and astronomy. There is no subject category that India is the first in the world. China ranks higher than India in all categories except dentistry.

The reason for this difference is obvious when one looks at how learning is done in China and India.

The Chinese learn in their mother tongue. From primary to undergraduate and postgraduate levels, it is all done in Chinese. Therefore, they have an enormous capacity to understand their subject matter just not itself, but also as to how it relates to all other subjects/ themes that surround it. It is a continuous process of learning that evolves from infancy onwards, that seamlessly passes through, primary, secondary, undergraduate and post graduate education, research, innovation, application etc. Their social language is their official language. The language they use at home is the language they use at their workplaces, clubs, research facilities and so on.

In India higher education/learning is done in a foreign language. Each state of India has its own mother tongue. Be it Hindi, Tamil, Urdu, Telagu, etc. Infancy, childhood and school education to varying degrees is carried out in each state according to their mother tongue. Then, when it comes to university education and especially the ‘science subjects’ it takes place in a foreign tongue- (English). English remains only as their ‘research’ language. All other social interactions are done in their mother tongue.

India and China have been used as examples to illustrate the point between learning in the mother tongue and a foreign tongue, as they are in population terms comparable countries. The unpalatable truth is that – though individuals might have a different grasp of English- as countries, the ability of SAARC countries to learn and understand a subject in a foreign language is inferior to the rest of the world that is learning the same subject in its mother tongue. Imagine the disadvantage we face at a global level, when our entire learning process across almost all disciplines has been in a foreign tongue with comparison to the rest of the world that has learnt all these disciplines in their mother tongue. And one by-product of this is the subsequent research, innovation that flows from this learning will also be inferior to the rest of the world.

All this only confirms what we already know. Learning is best done in one’s mother tongue! .

What needs to be realised is that there is a critical difference between ‘learning English’ and ‘learning in English’. The primary-or some may argue secondary- purpose of a university education is to learn a particular discipline, be it medicine, engineering, etc. The students- have been learning everything up to that point in Sinhala or Tamil. Learning their discipline in their mother tongue will be the easiest thing for them. The solution to this is to teach in Sinhala or Tamil, so it can be learnt in the most efficient manner. Not to lament that the university entrant’s English is poor and therefore we need to start teaching English earlier on.

We are surviving because at least up to the university level we are learning in the best possible way i.e. in our mother tongue. Can our methods be changed to be more efficient? definitely. If, however, one thinks that the answer to this efficient change in the learning process is to substitute English for the mother tongue, it will defeat the very purpose it is trying to overcome. According to Dr. BJCP as he states in his article; the current reforms of 2026 for the learning process for the primary years, centre on the ‘ABCDE’ framework: Attendance, Belongingness, Cleanliness, Discipline and English. Very briefly, as can be seen from the above discussion, if this is the framework that is to be instituted, we should modify it to ABCDEF by adding a F for Failure, for completeness!

(See Figure 1) The components and evolution of learning: Data, information, knowledge, insight, wisdom, foresight As can be seen from figure 1. data and information remain as discrete points. They do not have interconnections between them. It is these subsequent interconnections that constitute learning. And these happen best through the mother tongue. Once again, this is a fact. Not an opinion. We -all countries- need to learn a second language (foreign tongue) in order to gather information and data from the rest of the world. However, once this data/ information is gathered, the learning needs to happen in our own mother tongue.

Without a doubt English is the most universally spoken language. It is estimated that almost a quarter of the world speaks English as its mother tongue or as a second language. I am not advocating to stop teaching English. Please, teach English as a second language to give a window to the rest of the world. Just do not use it as the mode of learning. Learn English but do not learn in English. All that we will be achieving by learning in English, is to create a nation of professionals that neither know English well nor their subject matter well.

If we are to have any worthwhile educational reforms this should be the starting pivotal point. An education that takes place in one’s mother tongue. Not instituting this and discussing theories of education and learning and proposing reforms, is akin to ‘rearranging the deck chairs on the Titanic’. Sadly, this is not some stupendous, revolutionary insight into education /learning. It is what the rest of the world has been doing and what we did till we came under British rule.

Those who were with me in the medical faculty may remember that I asked this question then: Why can’t we be taught in Sinhala? Today, with AI, this should be much easier than what it was 40 years ago.

The editorial of this newspaper has many a time criticised the present government for its lackadaisical attitude towards bringing in the promised ‘system change’. Do this––make mother tongue the medium of education /learning––and the entire system will change.

by Dr. Sumedha S. Amarasekara

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