Features
Sri Lanka’s Debt Restructuring Roadmap: Following the Evidence
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.
Features
The Division Bell Mystery
Tales of Mystery and Suspense 3
The murder, in a private dining room in the house, is of a financier with whom the government was negotiating a loan. When this seemed difficult the Minister of Home Affairs agreed to lead discussions, since he had known Mr Oissel the financier when they were young. Hence the private dinner, but when the Minister stepped out for a vote, Oissel was shot just as the Division Bell rang.
The Brahms and Simon detective novels, the first of which I wrote about last week, were amongst several books by the pair that Robert Scoble gave me when I was in Australia towards the end of last year. Amongst them was another thriller of a very different sort, though that too was written and set between the wars.
Called The Division Bell Mystery, it was set in the House of Commons, the first such book I believe, and was by Ellen Wilkinson, a Labour MP who became Minister of Education in Attlee’s government after the war, having served previously as Parliamentary Private Secretary to several ministers. Her hero Robert West is also a PPS, but a conservative, and his Minister, of Home Affairs, is an old style aristocrat, not much loved by the less orthodox Prime Minister, who nevertheless needs his support on many occasions.
The murder, in a private dining room in the house, is of a financier with whom the government was negotiating a loan. When this seemed difficult the Minister of Home Affairs agreed to lead discussions, since he had known Mr Oissel the financier when they were young. Hence the private dinner, but when the Minister stepped out for a vote, Oissel was shot just as the Division Bell rang.
West was just outside the door when the shot was heard, and when he opened it saw only the dead body with a revolver beside it. The assumption that this was suicide was however challenged by Oissel’s grand-daughter Annette, who was his heir, on the grounds that he would never have killed himself. But her view was given greater credence by the Inspector put in charge of the case who said there were no burn marks on the body which would have been the case had Oissel fired the pistol himself.
Matters are complicated by the fact that Oissel’s flat had been burgled while he was at dinner, and Jenks the policeman allocated to him, who had served the Home Secretary and seemed more acceptable to Oissel than someone from the Security Service, had been killed. Matters get even more complicated when Annette says her grand-father’s notebook in which he wrote his secrets in cipher was missing.
That was found in Jenks’ pocket, and then a photographer came to West to say he had been asked by Jenks to photograph this. More worryingly for West, he finds in the Home Secretary’s drawer a few pages from the notebook with what appears to be an interpretation of the cipher.
Overwhelmed by all this he confides in a recently created peer who knows all about the business world, who insists that they leave the house party at which they had met over dinner and discuss the matter with the Prime Minister who promptly summons the Home Secretary.
But the Home Secretary had gone to Scotland to launch a ship over the weekend, so the meeting could take place only on the morning of the Monday, when difficult questions were expected on the adjournment motion. He admits at the meeting that he had got Jenks to take the notebook, and also that he knew the code since it had been created by him and Oissel when they were young.
He thought he should resign, and even contemplated suicide, but the Prime Minister told him that that would be even worse for the government, and that he should go home to bed. The Prime Minister said that he himself would handle the question, which he did with aplomb, insisting that confidentiality was needed until the inquest. What had happened would be made clear then, he declared, leaving West and Inspector Blackit and Lord Dalbeattie what seemed the impossible task of solving the murder.
Dalbeattie had suggested that West ask a female Labour MP who was very fond of him to get what information she could from the staff. That there was some involvement there had become clear when West, going back late one night to collect a briefcase he had left in a dining room, found someone lurking in the dark in the corridor outside the private rooms. Room J, where the murder had happened, was meant to be guarded throughout by a policeman, but he had left the room having felt dizzy, and it seemed that his coffee had been drugged. West’s sudden appearance however had prevented anyone else getting into the room.
Dalbeattie decides to recreate the scene of the murder and has a dinner party in Room J on the Tuesday night, inviting West and Annette and the society hostess at whose house he had met, and also Patrick Kinnaird, an MP who was engaged to Annette, as well as the Permanent Secretary to the Home Ministry.
After coffee Inspector Blackit comes in with Grace, the Labour MP who had got the confidence of the staff, and a journalist who had also been helpful, and just as they say they think they are on the track the division bell rings. Grace jumps up and tells the Inspector that that provides the solution and they get a ladder, and sure enough find the revolver in the space where the bell is. Directed at the place where Oissel had sat, it had been primed to go off with the ringing of the bell. The waiter who had helped to set things up made clear who the murderer had been.
The reason for the murder and the confused motives of all those involved made for a fascinatingly intricate mix. But also impressive in the book were the descriptions of the isolation possible in the crowded premises of the house, the forceful characterization of the members – Grace based on the writer, the society hostess based on Nancy Astor, the first female MP – and the laid back nature of senior politicians which West realized had to change in the brave new world of high finance.
Features
The challenge of keeping value-based politics alive
The current outbreak of anti-immigrant protests in Durban, South Africa is bound to have taken many a subscriber to value-based politics or political idealism quite by surprise. After all, this is evidence that despite the historic accomplishments of nation-builders of the stature of the late President Nelson Mandela it cannot be taken for granted that identity politics, including racism in its worst forms, is no more in South Africa.
At the time of this writing details are scarce on the substantive root causes of the protests but it could very well be that economic grievances, particularly on the part of the majority community in South Africa, are contributing considerably to the disaffection. Shrinking employment and material prospects are likely to figure majorly among the factors igniting the unrest.
Fortunately, the local authorities in Durban are losing no time in calling for peaceful co-existence among the relevant communities and are pointing to the vital importance of stepping-up national integration processes. Apparently, immigrants in sizable numbers from neighbouring countries are present in Durban. However, international TV footage of the protests quoted some local authorities as saying that the majority of the immigrants in some centres that housed them were not illegal migrants and had the documents that entitle them to be in Durban.
In the Durban protests the world has fresh proof of the socially divisive consequences of the gathering globe-wide economic disaffection, touched off particularly by the continuing crisis in West Asia. Going ahead, the world would need to brace for increasing identity-based unrest of the kind it is just witnessing in South Africa.
Considering that the material lot of ordinary people everywhere could only aggravate progressively, with the US and Iran showing no signs of negotiating an end to their confrontation any time soon, it will be left to the more democratic and progressive sections of the world community to initiate positive measures collectively to bring a measure of relief to the discontented.
The swiftness with which such relief will be provided would depend crucially on the importance those sections taking up these undertakings attach to value-based politics as opposed to Realpolitik of power politics.
Going by these yardsticks, Italy could be considered to be moving in the right direction. Recently Italy came to the fore in initiating the collective named, ‘Rome Coalition for Food Security and Access to Fertilizer’, which has as one of its aims the swift provision of fertilizer to economically weak African countries.
In a recent statement Italian Minister of Foreign Affairs and International Cooperation, Antonio Tajani, said that a principal aim of the project was to ensure that the farmers of Africa gained easy access to fertilizer, considering that food security is a growing concern among some of Africa’s economically vulnerable countries.
The statement went on to mention that some 30 countries hailing from the Mediterranean region, the Middle East, the Balkans as well as the FAO had been invited to join the coalition. The venture is far-seeing in that food security is main among the reasons for social discontent which in turn could degenerate into endemic political turmoil and bloodshed. Separatist violence and geographical fragmentation of countries wouldn’t be too far behind these developments, as Africa itself has often proved.
It is hoped that more G7 countries would take the cue from Italy and do what they could to ease the hardships of economically distressed countries, particularly of the global South. In these efforts they would need to break rank with the US, which is today brutally indifferent to the consequences of its policy of making ‘America First’, come what may.
Going by current developments, the Trump administration seems to be blithely oblivious to the wider, deleterious effects of its policy course in West Asia. Besides rendering Iran militarily and otherwise impotent nothing else seems to matter to Washington, as regards West Asia. This is policy short-sightedness of an extreme kind. After all, right now West Asia could be said to be sitting on the proverbial powder keg.
On the other hand, Iran is not giving the world the impression that it is doing anything constructive to get out of the policy straitjacket that it wove for itself decades ago. Rather than enter into a policy of ‘live and let live’ in relation to Israel in particular and initiate a process of reconciliation with the latter, it has chosen to operate within policy parameters that continue to damn Israel. This has put Israel always on the ‘defensive’ so to speak and prevented the opening up of space for meaningful dialogue.
That said, Israel is obliged to explore the possibilities of entering into a negotiatory process with the Arab-Islamic world that could lead to a de-escalation of tensions and bloodshed. It cannot continue to look at its neighbours through lenses that distort them as archetypal enemies who should be ‘wiped off completely from the face of the earth.’
In other words, the need is urgent for Realpolitik to give way to value-based politicks. Italy is beginning to prove that the latter approach could be pursued with some success. May be the EU and the UK could throw their weight behind these initiatives as well and establish that international politics could be refashioned on the basis of humane, civilized norms. The UN would need to be fully supportive of these moves and prove an organizational nucleus of the operations that follow.
In fact the time is ripe for people of conscience to collectively stand up on the side of peace and say ‘No’ to war and violence. Organizations such as the ICRC, the WHO and Medicines Sans Frontiers have already taken up this call. Referring to the widespread destruction of health facilities and their dehumanizing results these organizations have said, among other things, that ‘This is not a failure of the law. It is a failure of political will.’
True, ‘failure of political will’ among those powers that matter accounts for the runaway, uncontrollable nature of war and destruction in contemporary times, but more fundamentally it is a failure of the human conscience. It could very well be that the phenomenal levels to which violence and war have been unleashed today have had the effect of deadening consciences. This is a matter for urgent study and wide discussion.
Features
Vesak celebrations … with Cuteefly
I would describe Indunil Kaushalya Dissanayaka as innovative and creative, and she operates under the name of Cuteefly.
Indunil always comes up with something novel to celebrate special occasions, and she does it with candles … and that’s her profession.
She was in the spotlight when she created a happening scene, with candles, for Christmas, Sinhala and Tamil New Year, and Valentine’s Day.
As lanterns light up Sri Lanka for Vesak, the Colombo-based candle maker is quietly turning wax and wick into little pieces of the festival.

Candles reflecting Vesak themes
Her candles reflect Vesak themes – light, peace, remembrance, giving, etc., to enable you to fill your Vesak celebration with devotion and beauty.
Among her Vesak creations is a lotus-shaped soy candle, scented with sandalwood, lavender, etc., meant to burn during this Vesak Poya Day.

Indunil Kaushalya Dissanayaka: Customers
praise her for her creativity
These handcrafted Vesak candles are perfect for offering at the temple, she says.
What makes her creations so novel is that they come in different shapes, scents, themes, and all are handmade.
What’s more, her customers have heaped praise on her for her creativity.
According to Indunil, her creations are perfect as a thoughtful gift … to bring beauty, unity, and light into every moment.
Says Indunil: “Our beautifully handcrafted Unity candles are designed with premium detail and love, making them perfect for celebrations, gifts, and meaningful occasions.”
Cuteefly, says Indunil, is available online.
Readers could contact Indunil on 0778506066 for more details.
He Facebook Page is: Cuteefly.

Handmade with love
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