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Lankan Economic Outlook 2022: Experts call for bold and radical reforms



Seated (from left): Sathya Karunarathne (moderator), Prof. H.D. Karunaratne, Kasturi Wilson, Deshal de Mel, with Prof. Lee Buchheit (virtually) 

International and local economic experts and corporate leaders have stressed the need for a concrete, long-term and bold reform agenda for the economy as the country braces for a critical year amidst unprecedented socio-economic challenges.

Speaking at the “Sri Lanka Economic Outlook 2022” forum organised by the Friedrich Naumann Foundation for Freedom and NextGenSL, recently, Prof. Lee. C. Buchheit, an international debt restructuring expert, Prof. H.D. Karunaratne, a prominent economist and the newly-appointed Vice Chancellor of the University of Colombo, Kasturi Chellaraja Wilson, Hemas Group CEO and Economist Deshal de Mel spoke at length about Sri Lanka’s economic trajectory for the year and the options available at present.

 “Any fiscal adjustment programme initiated at this stage will be ‘distasteful’ and will involve a degree of pain. Even a home-grown adjustment programme will entail certain political problems due to the nature of reforms. The question here is whether the country’s political leaders will have the political stamina to proceed with them,” Prof. Lee C. Buchheit, an international expert with a 43-year legal career specialising in sovereign debt management, said.

Delivering the keynote speech at the event, Buchheit presented a detailed account of the global debt situation for the year 2022. He has worked on over two dozen sovereign debt restructurings and he led the legal teams advising the sovereign debtors in the two largest sovereign debt workouts in history (Greece in 2012 and Iraq in 2005-08).

 “The problem Sri Lanka must ask itself at the moment is whether there is a plausible fiscal adjustment programme that can be implemented within the next two-three years. It is in this context that the option of seeking the support of the International Monetary Fund (IMF) should be assessed and analysed. The country can also proceed with borrowings from bi-lateral partners as long as the Government has a clear policy and the stamina to implement comprehensive reforms,” he added.

“Sri Lanka’s creditors — be they bilateral or commercial — will be interested in one critical question.  That would be; who are we going to share the pain with? Every sovereign bond restructuring boils down to one decision — how much of the country’s pain should be borne by its citizens, and how much should be borne by the creditors,” the international expert explained.

“Commercial creditors caught up in this issue often ask themselves whether the proposed debt restructuring is necessary and whether the conditions proposed to them are proportionate to what the country actually needs.”

“This could be a challenging process as both the public and the creditors would say that they are disproportionately carrying the burden.”

“Therefore, the only entity in the world with the technical expertise and the political legitimacy to assuage such concerns and handle this process is the International Monetary Fund (IMF)”, Prof. Buchheit said.

“A number of countries in the world have embarked on debt restructuring without the IMF. But, if you ask whether the involvement of the IMF is useful, the answer would be ‘yes’,” he added.

Commenting on international credit rating agencies downgrading Sri Lanka, Prof. Buchheit said it should not be a major concern for Sri Lanka.

“This will only be a big concern if you are trying to re-access the global capital market in the near future. When the country announces the need for debt restructuring, rating agencies will downgrade the country to ‘selective default’ and this rating will remain until the restructuring is completed. Once this is done, they will upgrade the country to higher rating categories.”

“This will only be a major worry if Sri Lanka intends to issue additional International Sovereign bonds in the near future. I don’t think Sri Lanka is in a position to do so,” he said.

Speaking at the discussion, Prof. H.D. Karunaratne said the crisis in Sri Lanka had been brewing for over 70 years and opined that short-term fixes would not resolve a long-term problem.

“Sri Lanka is a country that harbours a lot of dreams. But, we are not working practically, with a rational approach, to achieve our dreams,” he said.

He added that “the large majority of Sri Lankans assume that bringing in more foreign investments alone will resolve our crisis. But, do we at least have consensus across the political spectrum on the nature of foreign investments Sri Lanka wants? The dynamics investors usually see in other countries do not work in Sri Lanka’s context. How are we going to attract high-value investments without addressing these critical issues?” Prof. Karunaratne asked.

The senior Economist also pointed out that the ever-expanding public sector was also another area of concern for Sri Lanka.

“We have nearly 1.4 million workers in the public sector and each government keeps on adding to this number. In addition, so many loss-making institutions in the public sector are being operated without any plan for restructuring. This irrational approach is one of the key contributing factors to the current situation,” he said.

“Another problem Sri Lanka must pay attention to is policy inconsistencies. For instance, in 2016, the Government announced tax concessions for electricity-based vehicles. In 2017, the Government imposed heavy taxes on the same vehicles. This is just one example as to how policy inconsistencies have contributed to the crisis we find ourselves in today,’ Karunaratne said, adding that Sri Lanka is currently paying the price for its over-reliance on gas.

Commenting on the way forward, Prof. Karunaratne said the country’s top priority should be to keep its house in order. “Whatever we do, we cannot expect satisfactory results unless we decide to keep our house in order. We can go on borrowing money from bilateral partners but what’s the point in doing so without any concrete plan to address these key areas for concern?”

The senior economist proposed to set up a Japanese-style “Economic Planning Agency” to ensure stable and consistent policies related to the country’s economy.

Hemas Group CEO, Kasturi Chellaraja Wilson said Sri Lanka should now focus on its approach to overcome the existing difficulties.

“We have faced immense difficulties ranging from accessing foreign exchange to opening Letters of Credit. But we, Sri Lankans, have faced challenges before and I am sure we will see many more challenges in the future. So, the problem is not the challenges, but the approach we adopt to overcome them,” she said opening her remarks.

“We must first come to the realization that short-term, tactical measures will no longer resolve our crisis at this point. We need long-term, concrete planning.”

“Do we have the political will to do what is right? Our politicians must decide whether they are going to play party politics or do what is right by the country. The Government, the Opposition, the public sector and the private sector must come together to lead the country out of the current crisis. That is what we want to see,” she said.

“There is no doubt about the fact that economic reforms are going to be a bitter pill to swallow. But, there is no other way out. The issue, however, is that we do not seem to have a common agenda as a country to navigate the crisis,” Wilson explained.

Economist Deshal de Mel who described this as an opportunity to come together for a bold and drastic reform agenda expressed the same sentiments.

“Whatever we do — be it debt restructuring or seeking support from bilateral or multilateral donors — we will not be able to avoid reforms. We all know that reforms are not going to be easy but I see this crisis as an opening to come together to initiate bold reforms,” de Mel said.

When asked about suggestions made by the business community and some economists to go for debt restructuring, De Mel said it could be deemed as a prudent approach. “The most important thing right now is to find a sustainable solution to the debt issue,” he added.

“Sri Lanka must find a way to build its reserves and to adjust the country’s fiscal trajectory,” De Mel stated adding that it was important to Sri Lanka to have a concrete plan to regain access to the global capital market.

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Weerawansa’s wife sentenced to RI



Lawyers appearing for Shashi Weerawansa, MP Wimal Weerawansa’s wife, yesterday (27) appealed against a Colombo Magistrate’s Court decision to sentence their client to two years rigorous imprisonment.Colombo Chief Magistrate, Buddhika Sri Ragala found her guilty of submitting forged documents to obtain a diplomatic passport circa 2010. The Colombo Magistrate’s Court also imposed a fine of Rs. 100,000 on Mrs. Weerawansa. If the fine is not paid she will have to serve an extra six months.

Additional Magistrate Harshana Kekunawala announced that the appeal would be called for consideration on 30 May.The case against Mrs. Weerawansa was filed by the CID after a complaint was lodged on 23 January 2015 by Chaminda Perera, a resident of Battaramulla.

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Unions predict end of energy sovereignty



By Rathindra Kuruwita

A government decision to allow all privately-owned bunker fuel operators to import and distribute diesel and fuel oil to various industries was a rollback of the nationalisation of the country’s petroleum industry and another severe blow to energy sovereignty of the country, trade union activist of the SJB Ananda Palitha said yesterday.Earlier, Minister of Power and Energy, Kanchana Wijesekera Tweeted that ‘approval was given to all the Private Bunker Fuel Operators to Import and provide Diesel and Fuel Oil requirements of Industries to function their Generators and Machinery. This will ease the burden on CPC and Fuel Stations provided in bulk’.Commenting on the decision, Palitha said that according to the existing law those companies only had the power to import, store and distribute fuel for ships. Those companies did not have the authority to distribute fuel inside the country, Palitha said.

“Only the Ceylon Petroleum Corporation (CPC) and Lanka Indian Oil Corporation (LIOC) can distribute fuel inside the country. There is a controversy about the licence given to the LIOC as well. If the government wants other companies to import fuel, it needs to change the laws. The Minister does not have the power to make these decisions. A few months ago the Gotabaya Rajapaksa administration used to rush Bills that adversely affected the country through Parliament. Now, since they don’t have a majority in parliament, they are using the Cabinet to make decisions that are detrimental to the country’s interests.”

Palitha said that the controversial government move would further weaken the CPC, and that the ultimate aim of the Rajapaksa-Wickremesinghe government was to make the Ceylon Electricity Board (CEB) purchase fuel from private distributors. With a weakened CPC and a CEB under the mercy of private companies, the Sri Lankan state would have little control over the country’s energy sector, he warned.

“The CEB already can’t pay the CPC, and therefore how can it pay private companies? It will have to sell its assets. This is another step in the road to fully privatise the energy sector. When this happens no government will be able to control inflation or strategically drive production through fuel and energy tariffs. The people will be at the mercy of businessmen and the government will only be a bystander,” he said.

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Modi government moves to ‘solve’ Katchatheevu issue



The Narendra Modi government is mulling restoring the traditional rights of Tamil Nadu fishermen in Katchatheevu, an uninhabited island of 285 acres, sandwiched between India and Sri Lanka in the Palk Bay, with the BJP hoping the move could lift its political fortunes in the southern state.The government will push Sri Lanka to implement “in letter and spirit” the 1974 agreement reached between Indira Gandhi and Sirimavo Bandaranaike, then prime ministers of India and Sri Lanka, on the island.This will have to be done by withdrawing the “Executive Instructions” issued in 1976 without questioning Sri Lanka’s “sovereignty” over Katchatheevu, sources aware of the internal discussions in the BJP told the Indian newspaper, Deccan Herald.

Sources added that the discussions were “ongoing” at “various levels” including reaching out to Tamil political parties in Sri Lanka. The recent visit of TN BJP chief K Annamalai to Sri Lanka is also part of the outreach. Many feel the instructions issued in 1976 “superseded the provisions of the legally valid” pact between India and Sri Lanka, thus making Katchatheevu a subject of dispute in the Palk Bay.While the 1974 agreement gave away Katchatheevu, which was part of the territory ruled by the Rajah of Ramanathapuram, to Sri Lanka, the 1976 pact drew the maritime boundary between India and Sri Lanka in the Gulf of Mannar and Bay of Bengal.

“We cannot disturb the agreement signed in 1974. We are now finding ways and means to implement the agreement in letter and spirit. All we plan is to ask Sri Lanka to invoke Article 6 of the Katchatheevu pact. If Sri Lanka agrees, the issue can be sorted through Exchange of Letters between foreign secretaries of both countries,” a source in the know said.Another source said the time is “ripe” to push forward on the issue. “With fast-changing geopolitical situation in the region, we believe Sri Lanka will slowly come around and accept the rights of our fishermen,” the source said.

“The opinion within the party is that time is ripe to push this cause, with Sri Lanka beginning to realise that India can always be relied upon, given PM Ranil (Wickremesinghe) is pro-India.”

Articles 5 and 6 of the 1974 agreement categorically assert the right to access of the Indian fishermen and pilgrims to Katchatheevu and state that the “vessels of Sri Lanka and India will enjoy in each other’s waters such rights as they have traditionally enjoyed therein”.

However, fishermen from India were prohibited from fishing in the Sri Lankan territorial waters around Katchatheevu in 1976 following the signing of an agreement on the maritime boundary. The battle for fish in the Palk Bay has often ended in Indian fishermen being attacked by Sri Lankan Navy for “transgressing” into their waters.The BJP, which is yet to make major inroads in Tamil Nadu, feels a “solution” to the long-standing issue will give the party the much-needed momentum ahead of the 2024 Lok Sabha polls and provide a chance to get into the Tamil psyche. Political analysts feel that it might also allow the BJP to needle the DMK and the Congress by pointing out that it has restored the rights “surrendered by them,” to Tamil fishermen

Senior journalist and Lanka expert R Bhagwan Singh said: “If BJP succeeds in its efforts, it will certainly help the saffron party in the coming elections.”

But a source said the move will “take time”. “We don’t want to rush and create an impression we are forcing Sri Lanka. We will take it slow. We will take every stakeholder into confidence and reach an amicable settlement with Sri Lanka. All we want to do is restore traditional rights of our fishermen,” the source said.CM Stalin also raised the issue at an event on Thursday, telling Modi that this is the “right time” to retrieve Katchatheevu.

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