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Sri Lanka’s Debt Restructuring Roadmap: Following the Evidence

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By Dr Dushni Weerakoon

Debt restructuring is fundamentally about allocating the associated economic costs to someone. The onus is typically on the debtor country to secure participation from its creditors, applying comparable treatment to all. As with all negotiations, the level and modalities of relief will always be subject to some degree of controversy. Sri Lanka’s recently gazetted domestic debt restructuring (DDR) exercise too has drawn expressions of both support and criticism. Overall though, negotiations have to be framed within certain desired outcomes to minimize costs to the economy. To this end, Sri Lanka’s negotiating stance dovetails neatly with crucial research evidence.

A restructuring process, whether pre-emptive or post-default, imposes significant output costs. For a debtor country to minimize these, some notable findings are:

Output losses are higher in post-default restructuring.When defaults are accompanied by a banking crisis, the fall in output is particularly large.

Even in a post-default setting, output costs can be reduced the quicker the debtor country is able to reach an agreement with its creditors.The size of creditor losses (haircuts) is among the best predictors of participation rates on bond restructuring.

To begin with, there was no real appetite to include a DDR in Sri Lanka’s case, especially in view of the substantial real erosion in value to debt holders as inflation spiraled. But, as opening gambits commenced with external creditors, the bondholder group’s request that ‘domestic debt is reorganized in a manner that both ensures debt sustainability and safeguards financial stability’ could not be ignored if only to avoid an impasse. Sri Lanka has limited room to circumvent a DDR altogether. As a middle-income country, the inclusion of domestic debt optimization is implicitly encouraged in the IMF’s debt sustainability framework (DSF) for market-access countries. It focuses on the total stock of public debt but is avoided by low-income countries where the applicable DSF focuses only on external public debt.

Having opened the door to a DDR, there would have been very real concerns that the combination of skyrocketing inflation and financial fragility would test the banking sector’s resilience to deal with a DDR. Figures on capital adequacy and asset quality (with the non-performing loan ratio on stage three loans rising from 5.2% in 2020 to 11.3% in 2022) and exposure to restructuring the country’s international sovereign bonds (ISBs) meant the stakes were high. When times are uncertain, a herd mentality will rule, and this is to be avoided at all costs.

Another element in a DDR is that there are negative externalities that need to be internalised – i.e. there may be direct costs to a country’s financial sector from a DDR, such as recapitalization and these have to be taken on board. This is particularly so where there is a strong link between the sovereign and its financial system. In setting aside resources to ensure financial system stability, the anticipated fiscal benefits of a DDR can potentially reduce. Thus, on both counts, ring-fencing the banking sector to avert a far more damaging economic crisis and deeper output losses has been the first step in Sri Lanka’s approach.

Having left out the banking sector, the economic cost appears to have been disproportionately directed at the savings of workers contributing to pension funds. Private bondholders have been exempted denying ‘comparable treatment’ while the captive nature of the Employees Provident Fund (EPF), managed by the Central Bank of Sri Lanka (CBSL), means there has been no attempt to ‘secure participation’.

Sri Lanka’s DDR treatment in effect is an example of the considerable degree of influence that a sovereign can exert over domestic legal and regulatory frameworks, unlike that of an external debt restructuring (EDR). Under the terms, pension funds are required to opt for a 30% haircut or be liable for higher taxation at 30% instead of the prevailing 14%. For EPF savers, there is the only assurance of receiving a 9% return in the long-term for a fund that has often performed below par even against the simplest alternative instrument that an average saver may look at, such as one-year fixed deposits (Figure 1a). Where there has been a substantial erosion of real savings from a crisis-induced economic environment, this is scant consolation for workers. The premise of a return to single-digit inflation merely means that price increases have slowed from the previous exorbitant high levels, but the erosion of the value of savings remains very real.

The second step of the negotiating process is to bring as many of Sri Lanka’s external creditors on board as quickly as possible. Having complied with the bondholder group’s request on including a DDR, comparable treatment is being offered by way of a 30% haircut on EDR too. As a bilateral creditor, China’s preference globally is for deferral rather than reduction. But merely pushing repayments down the line with maturity extensions (and some coupon adjustments) still leaves Sri Lanka at the risk of being permanently illiquid and, therefore, vulnerable to repeat short-term crises. Clearly, the deeper the haircut, the more sustainable the debt becomes, but negotiations will likely drag on. A complex creditor group and geo-political wrangling add to these risks. Ecuador, a middle-income country, came to an agreement with its bondholders to a haircut of 9% on USD 17.4 billion in 2020, with a high 98% of bondholders agreeing to the deal. China persisted with maturity extensions and coupon adjustments.

Corralling in the bilateral creditors will require more diplomatic persuasion than economic analysis. China’s recently concluded deal with Zambia to restructure USD 4.2 billion of loans under an initiative driven by the G20 Framework for low-income countries pushed back repayments and accommodated interest rate cuts. This follows on from its deal with Ecuador a year earlier that included maturity extensions and interest rate adjustments on debts worth USD 4.4 billion. There are two key arguments put forward by China for not taking losses in debt restructurings: first, that its loans are development-oriented, tied to projects that generate revenues for the recipients, and second, that multilateral banks should also participate, instead of the current preferred status of having their loans repaid in full. In many ways, Sri Lanka will be a test case on these issues.

The expected deceleration in the contraction of Sri Lanka’s economic output in the coming months is only the start to claw back lost output. This too is under threat. As domestic consumption faltered, net exports were the only positive driver of growth in recent quarters, but there are concerning signs of a slowdown (Figure 1b). In the event, it is even more probable that the allocation of costs associated with debt negotiations will be weighed and measured against the need to get an overall deal done as quickly as possible to support Sri Lanka’s slow-burn economic recovery.

Link to blog: https://www.ips.lk/talkingeconomics/2023/07/18/sri-lankas-debt-restructuring-roadmap-following-the-evidence/

About the Author:

Dushni Weerakoon is IPS’ Executive Director and Head of its Macroeconomic Policy research. She has nearly three decades of experience at IPS and functioned as its Deputy Director from 2005 to 2017. Since joining IPS in 1994, her research and publications have covered areas related to regional trade integration, macroeconomic policy and international economics. She has extensive experience working in policy development committees and official delegations of the Government of Sri Lanka. She holds a PhD in Economics from the University of Manchester.



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Humanitarian leadership in a time of war

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Sri Lanka Navy rescuing survivors of the US torpedo attack on IRIS Dena last week

There has been a rare consensus of opinion in the country that the government’s humanitarian response to the sinking of Iran’s naval ship IRIS Dena was the correct one. The support has spanned the party political spectrum and different sections of society. Social media commentary, statements by political parties and discussion in mainstream media have all largely taken the position that Sri Lanka acted in accordance with humanitarian principles and international law. In a period when public debate in Sri Lanka is often sharply divided, the sense of agreement on this issue is noteworthy and reflects positively on the ethos and culture of a society that cares for those in distress. A similar phenomenon was to be witnessed in the rallying of people of all ethnicities and backgrounds to help those affected by the Ditwah Cyclone in December last year.

The events that led to this situation unfolded with dramatic speed. In the early hours before sunrise the Dina made a distress call. The ship was one of three Iranian naval vessels that had taken part in a naval gathering organised by India in which more than 70 countries had participated, including Sri Lanka. Naval gatherings of this nature are intended to foster professional exchange, confidence building and goodwill between navies. They are also governed by strict protocols regarding armaments and conduct.

When the exhibition ended open war between the United States and Iran had not yet broken out. The three Iranian ships that participated in the exhibition left the Indian port and headed into international waters on their journey back home. Under the protocol governing such gatherings ships may not be equipped with offensive armaments. This left them particularly vulnerable once the regional situation changed dramatically, though the US Indo-Pacific Command insists the ship was armed. The sudden outbreak of war between the United States and Iran would have alerted the Iranian ships that they were sailing into danger. According to reports, they sought safe harbour and requested docking in Sri Lanka’s ports but before the Sri Lankan government could respond the Dena was fatally hit by a torpedo.

International Law

The sinking of the Dena occurred just outside Sri Lanka’s territorial waters. Whatever decision the Sri Lankan government made at this time was bound to be fraught with consequence. The war that is currently being fought in the Middle East is a no-holds-barred one in which more than 15 countries have come under attack. Now the sinking of the Dena so close to Sri Lanka’s maritime boundary has meant that the war has come to the very shores of the country. In times of war emotions run high on all sides and perceptions of friend and enemy can easily become distorted. Parties involved in the conflict tend to gravitate to the position that “those who are not with us are against us.” Such a mindset leaves little room for neutrality or humanitarian discretion.

In such situations countries that are not directly involved in the conflict may wish to remain outside it by avoiding engagement. Foreign Minister Vijitha Herath informed the international media that Sri Lanka’s response to the present crisis was rooted in humanitarian principles, international law and the United Nations. The Convention on the Law of the Sea (UNCLOS) which was adopted 1982 provides the legal framework governing maritime conduct and obliges states to render assistance to persons in distress at sea. In terms of UNCLOS, countries are required to render help to anyone facing danger in maritime waters regardless of nationality or the circumstances that led to the emergency. Sri Lanka’s response to the distress call therefore reflects both humanitarianism and adherence to international law.

Within a short period of receiving the distress message from the stricken Iranian warship the Sri Lankan government sent its navy to the rescue. They rescued more than thirty Iranian sailors who had survived the attack and were struggling in the water. The rescue operation also brought to Sri Lanka the bodies of those who had perished when their ship sank. The scale of the humanitarian challenge is significant. Sri Lanka now has custody of more than eighty bodies of sailors who lost their lives in the sinking of the Dena. In addition, a second Iranian naval ship IRINS Bushehr with more than two hundred sailors has come under Sri Lanka’s protection. The government therefore finds itself responsible for survivors but also for the dignified treatment of the bodies of the dead Iranian sailors.

Sri Lanka’s decision to render aid based on humanitarian principles, not political allegiance, reinforces the importance of a rules-based international order for all countries. Reliance on international law is particularly important for small countries like Sri Lanka that lack the power to defend themselves against larger actors. For such countries a rules-based international order provides at least a measure of protection by ensuring that all states operate within a framework of agreed norms. Sri Lanka itself has played a notable role in promoting such norms. In 1971 the United Nations General Assembly adopted a resolution declaring the Indian Ocean a Zone of Peace. The initiative for this proposal came from Sri Lanka, which argued that the Indian Ocean should be protected from great power rivalry and militarisation.

Moral Beacon

Unfortunately, the current global climate suggests that the rules-based order is barely operative. Conflicts in different parts of the world have increasingly shown disregard for the norms and institutions that were created in the aftermath of the Second World War to regulate international behaviour. In such circumstances it becomes even more important for smaller countries to demonstrate their commitment to international law and to convert the bigger countries to adopt more humane and universal thinking. The humanitarian response to the Iranian sailors therefore needs to be seen in this wider context. By acting swiftly to rescue those in distress and by affirming that its actions are guided by international law, Sri Lanka has enhanced its reputation as a small country that values peace, humane values, cooperation and the rule of law. It would be a relief to the Sri Lankan government that earlier communications that the US government was urging Sri Lanka not to repatriate the Iranian sailors has been modified to the US publicly acknowledging the applicability of international law to what Sri Lanka does.

The country’s own experience of internal conflict has shaped public consciousness in important ways. Sri Lanka endured a violent internal war that lasted nearly three decades. During that period questions relating to the treatment of combatants, the protection of civilians, missing persons and accountability became central issues. As a result, Sri Lankans today are familiar with the provisions of international law that deal with war crimes, the treatment of wounded or disabled combatants and the fate of those who go missing in conflict. The country continues to host an international presence in the form of UN agencies and the ICRC that work with the government on humanitarian and post conflict issues. The government needs to apply the same principled commitment of humanitarianism and the rule of law to the unresolved issues from Sri Lanka’s own civil war, including accountability and reconciliation.

By affirming humanitarian principles and acting accordingly towards the Iranian sailors and their ship Sri Lanka has become a moral beacon for peace and goodwill in a world that often appears to be moving in the opposite direction. At a time when geopolitical rivalries are intensifying and humanitarian norms are frequently ignored, such actions carry symbolic significance. The credibility of Sri Lanka’s moral stance abroad will be further enhanced by its ability to uphold similar principles at home. Sri Lanka continues to grapple with unresolved issues arising from its own internal conflict including questions of accountability, justice, reparations and reconciliation. It has a duty not only to its own citizens, but also to suffering humanity everywhere. Addressing its own internal issues sincerely will strengthen Sri Lanka’s moral standing in the international community and help it to be a force for a new and better world.

BY Jehan Perera

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Language: The symbolic expression of thought

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It was Henry Sweet, the English phonetician and language scholar, who said, “Language may be defined as the expression of thought by means of speech sounds“. In today’s context, where language extends beyond spoken sounds to written text, and even into signs, it is best to generalise more and express that language is the “symbolic expression of thought“. The opposite is also true: without the ability to think, there will not be a proper development of the ability to express in a language, as seen in individuals with intellectual disability.

Viewing language as the symbolic expression of thought is a philosophical way to look at early childhood education. It suggests that language is not just about learning words; it is about a child learning that one thing, be it a sound, a scribble, or a gesture, can represent something else, such as an object, a feeling, or an idea. It facilitates the ever-so-important understanding of the given occurrence rather than committing it purely to memory. In the world of a 0–5-year-old, this “symbolic leap” of understanding is the single most important cognitive milestone.

Of course, learning a language or even more than one language is absolutely crucial for education. Here is how that viewpoint fits into early life education:

1. From Concrete to Abstract

Infants live in a “concrete” world: if they cannot see it or touch it, it does not exist. Early education helps them to move toward symbolic thought. When a toddler realises that the sound “ball” stands for that round, bouncy thing in the corner, they have decoded a symbol. Teachers and parents need to facilitate this by connecting physical objects to labels constantly. This is why “Show and Tell” is a staple of early education, as it gently compels the child to use symbols, words or actions to describe a tangible object to others, who might not even see it clearly.

2. The Multi-Modal Nature of Symbols

Because language is “symbolic,” it does not matter how exactly it is expressed. The human brain treats spoken words, written text, and sign language with similar neural machinery.

Many educators advocate the use of “Baby Signs” (simple gestures) before a child can speak. This is powerful because it proves the child has the thought (e.g., “I am hungry”) and can use a symbol like putting the hand to the mouth, before their vocal cords are physically ready to produce the word denoting hunger.

Writing is the most abstract symbol of all: it is a squiggle written on a page, representing a sound, which represents an idea or a thought. Early childhood education prepares children for this by encouraging “emergent writing” (scribbling), even where a child proudly points to a messy circle that the child has drawn and says, “This says ‘I love Mommy’.”

3. Symbolic Play (The Dress Rehearsal)

As recognised in many quarters, play is where this theory comes to life. Between ages 2 and 3, children enter the Symbolic Play stage. Often, there is object substitution, as when a child picks up a banana and holds it to his or her ear like a telephone. In effect, this is a massive intellectual achievement. The child is mentally “decoupling” the object from its physical reality and assigning it a symbolic meaning. In early education, we need to encourage this because if a child can use a block as a “car,” they are developing the mental flexibility required to later understand that the letter “C” stands for the sound of “K” as well.

4. Language as a Tool for “Internal Thought”

Perhaps the most fascinating fit is the work of psychologist Lev Vygotsky, who argued that language eventually turns inward to become private speech. Have you ever seen a 4-year-old talking to himself or herself while building a toy tower? “No, the big one goes here….. the red one goes here…. steady… there.” That is a form of self-regulation. Educators encourage this “thinking out loudly.” It is the way children use the symbol system of language to organise their own thoughts and solve problems. Eventually, this speech becomes silent as “inner thought.”

Finally, there is the charming thought of the feasibility of conversing with very young children in two or even three or more languages. In Sri Lanka, the three main languages are Sinhala, Tamil and English. There are questions asked as to whether it is OK to talk to little ones in all three languages or even in two, so that they would learn?

According to scientific authorities, the short, clear and unequivocal answer to that query is that not only is it “OK”, it is also a significant cognitive gift to a child.

In a trilingual environment like Sri Lanka, many parents worry that multiple languages will “confuse” a child or cause a “speech delay.” However, modern neuroscience has debunked these myths. The infant brain is perfectly capable of building three or even more separate “lexicons” (vocabularies) simultaneously.

Here is how the “symbolic expression of thought” works in a multilingual brain and how we can manage it effectively.

a). The “Multiple Labels” Phenomenon

In a monolingual home, a child learns one symbol for an object. For example, take the word “Apple.” In a Sri Lankan trilingual home, the child learns three symbols for that same thought:

* Apple (English)

* Apal

(Sinhala – ඇපල්)

* Appil

(Tamil – ஆப்பிள்)

Because the trilingual child learns that one “thought” can be expressed by multiple “symbols,” the child’s brain becomes more flexible. This is why bilingual and trilingual children often score higher on tasks involving “executive function”, meaning the ability to switch focus and solve complex problems.

b). Is there a “Delay”?

(The Common Myth)

One might notice that a child in a trilingual home may start to speak slightly later than a monolingual peer, or they might have a smaller vocabulary in each language at age two.

However, if one adds up the total number of words they know across all three languages, they are usually ahead of monolingual children. By age five, they typically catch up in all languages and possess a much more “plastic” and adaptable brain.

c). Strategies for Success: How to Do It?

To help the child’s brain organise these three symbol systems, it helps to have some “consistency.” Here are the two most effective methods:

* One Person, One Language (OPOL), the so-called “gold standard” for multilingual families.

Amma

speaks only Sinhala, while the Father speaks only English, and the Grandparents or Nanny speak only Tamil. The child learns to associate a specific language with a specific person. Their brain creates a “map”: “When I talk to Amma, I use these sounds; when I talk to Thaththa, I use those,” etc.

*

Situational/Contextual Learning. If the parents speak all three, one could divide languages by “environment”: English at the dinner table, Sinhala during play and bath time and Tamil when visiting relatives or at the market.

These, of course, need NOT be very rigid rules, but general guidance, applied judiciously and ever-so-kindly.

d). “Code-Mixing” is Normal

We need not be alarmed if a 3-year-old says something like: “Ammi, I want that palam (fruit).” This is called Code-Mixing. It is NOT a sign of confusion; it is a sign of efficiency. The child’s brain is searching for the quickest way to express a thought and grabs the most “available” word from their three language cupboards. As they get older, perhaps around age 4 or 5, they will naturally learn to separate them perfectly.

e). The “Sri Lankan Advantage”

Growing up trilingual in Sri Lanka provides a massive social and cognitive advantage.

For a start, there will be Cultural Empathy. Language actually carries culture. A child who speaks Sinhala, Tamil, and English can navigate all social spheres of the country quite effortlessly.

In addition, there are the benefits of a Phonetic Range. Sinhala and Tamil have many sounds that do not exist in English (and even vice versa). Learning these as a child wires the ears to hear and reproduce almost any human sound, making it much easier to learn more languages (like French or Japanese) later in life.

As an abiding thought, it is the considered opinion of the author that a trilingual Sri Lanka will go a long way towards the goals and display of racial harmony, respect for different ethnic groups, and unrivalled national coordination in our beautiful Motherland. Then it would become a utopian heaven, where all people, as just Sri Lankans, can live in admirable concordant synchrony, rather than as splintered clusters divided by ethnicity, language and culture.

A Helpful Summary Checklist for Parents

* Do Not Drop a Language:

If you stop speaking Tamil because you are worried about English, the child loses that “neural real estate.” Keep all three languages going.

* High-Quality Input:

Do not just use “commands” (Eat! Sleep!). Use the Parentese and Serve and Return methods (mentioned in an earlier article) in all the languages.

* Employ Patience:

If the little one mixes up some words, just model the right words and gently correct the sentence and present it to the child like a suggestion, without scolding or finding fault with him or her. The child will then learn effortlessly and without resentment or shame.

by Dr b. J. C. Perera

MBBS(Cey), DCH(Cey), DCH(Eng), MD(Paediatrics), MRCP(UK), FRCP(Edin), FRCP(Lond), FRCPCH(UK), FSLCPaed, FCCP, Hony.
FRCPCH(UK), Hony. FCGP(SL)

Specialist Consultant Paediatrician and Honorary Senior Fellow, Postgraduate Institute of Medicine, University of Colombo, Sri Lanka

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SIMPSON’S … set to carve a distinct sonic identity

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SIMPSON’S: Quite active in the scene here

It is, indeed, encouraging to see our local artistes working on new formats, where their music is concerned.

Variety is the spice of life, they say, and I do agree, especially when it comes to music.

Blending modern synth textures, ambient layers and soulful undertones, the group SIMPSON’S is set to carve a distinct sonic identity within Sri Lanka’s contemporary music landscape.

Their vision, they say, is not simply to produce songs, but to create emotional atmospheres – experiences that elevate, energise and resonate, both locally and beyond.

This four-piece outfit came into the scene, less than two years ago, and they are already making waves with their debut single ‘Balaporottuwak’ (Hope).

The song, I’m told, marks the beginning of a new sound, and at the forefront of ‘Balaporottuwak’ is the group’s lead vocalist and guitarist, Ryo Hera, who brings a rich cultural heritage to the stage.

As a professional Kandyan Wes dancer, Ryo’s commanding presence and textured vocals bring a distinct energy to the band’s sound.

‘Balaporottuwak’

Ryo Hera: Vocals for ‘Balaporottuwak’

is more than just a debut single – it’s a declaration of intent. The band is merging tradition and modernity, power and subtlety, to create a sound that’s both authentic and innovative.

With this song, SIMPSON’S is inviting listeners to join them on an evolving musical journey, one that’s built on vision and creativity.

The recording process for ‘Balaporottuwak’ was organic and instinctive, with the band shaping the song through live studio sessions.

Dileepa Liyanage, the keyboardist and composer, is the principal sound mind behind SIMPSON’S.

With experience spanning background scores, commercial projects, cinematic themes and jingles across multiple genres, Dileepa brings structural finesse and atmospheric depth to the band’s arrangements.

He described the recording process of ‘Balaporottuwak’ as organic and instinctive: “When Ryo Hera opens his voice, it becomes effortless to shape it into any musical colour. The tone naturally adapts.”

The band’s lineup includes Buddhima Chalanu on bass, and Savidya Yasaru on drums, and, together, they create a sound that’s not just a reflection of their individual talents, but a collective vision.

Dileepa Liyanage: Brings
structural finesse and
atmospheric depth to the
band’s arrangements

What sets SIMPSON’S apart is their decision to keep the production in-house – mixing and mastering the song themselves. This allows them to maintain their unique sound and artistic autonomy.

“We work as a family and each member is given the freedom to work out his music on the instruments he handles and then, in the studio, we put everything together,” said Dileepa, adding that their goal is to release an album, made up of Sinhala and English songs.

Steering this creative core is manager Mangala Samarajeewa, whose early career included managing various international artistes. His guidance has positioned SIMPSON’S not merely as a performing unit, but as a carefully envisioned project – one aimed at expanding Sri Lanka’s contemporary music vocabulary.

SIMPSON’S are quite active in the scene here, performing, on a regular basis, at popular venues in Colombo, and down south, as well.

They are also seen, and heard, on Spotify, TikTok, Apple Music, iTunes, and Deezer.

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