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Options for Foreign Debt Management in Sri Lanka: Can we escape from IMF/ISB Debt Trap?

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by Luxman Siriwardena,
Managing Director,
Veemansa Innitiative,
Think Tank and Advocacy Group

 

The setback due to the pandemic has aggravated some of the perennial macro-economic and sectoral problems in Sri Lanka. For example, borrowing and accumulating external debts has been a practice of successive governments since 1978, which was the year of partial liberalization of the economy. During the early periods, when Sri Lanka was considered a low-income country, we were entitled to substantial grant aid as well as concessionary finances.

This relatively low interest facilities and lenient conditionalities provided incentives for the governments to keep borrowing for many development projects, from bi-lateral and multi-lateral lending agencies, irrespective of inflated costs of many of these projects. In most of these cases, financial benefits also have spilled over to Sri Lankan politicians, bureaucrats, and technocrats. Notwithstanding such leakages, these foreign funded projects increased the availability of more sophisticated infrastructure and utilities in sectors such as, electricity, highways, drinking and irrigation water, as well as the Colombo port and airports. In addition, education, agriculture and health were the prime targets of both Sri Lankan policy makers and donors/lenders.

There was a period when Sri Lanka was termed as “a Donor Darling” (see figure).

Sri Lanka became a darling of the Western donors primarily due its subservience to the West under Jayawardena-Premadasa regime). However, since we attained lower-middle income country status, concessionary funding has not been available and therefore, most borrowings have been at commercial or near commercial lending rates. In this context, the country has accumulated over US$ 34.7bn debt1 up to 2019. These borrowings have been for development projects, import of consumption items and direct budgetary support to meet current expenditure, including debt servicing. The current debt situation.

At the moment, one of the most critical challenges for the Rajapaksa administration is managing or preferably reducing Sri Lanka’s debt while meeting the current level of foreign exchange requirements and hopefully implementing necessary development projects.

While the selected development projects are generally presented to the multilateral donors; World Bank and ADB as well as bilateral lending institutions such as JICA, US-AID and similar institutions in China and European countries, seeking loan financing, the rates of lending are equal or closer to the market rates. Since 2007, borrowing through International Sovereign Bonds (ISBs), which became a common practice, has now emerged as the most serious challenge for the current government to ensure sustainability or reduction foreign debt.

The focus of this article is to discuss alternative methods of managing the debt in spite of the COVID-19 pandemic that has pushed almost the entire world (other than China) into a recession.

In this context, conventional economic policy pandits, academics and consultants recommend that the emerging economies such as Sri Lanka should seek the refuge in International Monetary Fund (IMF) Programmes. Based on the IMF guarantees the countries in foreign debt crisis will be eligible for further assistance from other multilateral and bilateral lenders, while qualifying for accessing the International Sovereign Bond Market. According to this prescription, without the support and blessing of the IMF, we have no way of securing sufficient funding for re-payment of maturing debt, balance of payment requirements or development programmes.

Since the election of the new government all our well-known economists, and many so-called experts have been promoting the above policy prescription as Sri Lanka is, according their assessment, at the verge of a default and economic collapse. Most if not, all these pandits were expecting the government will continue to proceed with the borrowing from the international markets subscribing to Samurai or Panda bonds. Surprisingly our conventional economic advisors are increasingly becoming impatient and critical of the Government for not negotiating with the IMF to enter into a programme which will be entitled and receive loan facility and more importantly in turn qualify for raising finance through ISBs. Does this process lead to a reduction of debt or payback of loans? Of course not, nor reduction of debt burden or the severity of the debt problem.

As an IMF programme is likely to impose conditionalities to meet the Fund’s debt sustainability parameters, the readers may perhaps understand that, this approach is not even to reduce the severity of the debt problem but for reducing the burden over the next few years by extending maturities probably through some form of ‘Grace Period’. The bottom line will be that Sri Lanka will continue to have challenging debt dynamics which I would like to call it as ‘IMF/ISB DEBT TRAP’ as long as we fail to achieve substantial increase of exports and FDI. In other words, we will merely be postponing and aggravating the debt problem unless we can accelerate growth by increasing production of tradable goods and services which will earn or save foreign exchange.

Cost of raising funds through International Sovereign Bonds

A sovereign bond is defined as a debt instrument issued by a national government to raise generally foreign currency requirements in case of countries such as Sri Lanka. Sovereign bonds are denominated in foreign currencies such as USD, the Euro, Japanese Yen and Chinese Yuan. The successful issue of ISBs require several steps engaging highly professional individuals and institutions including global banking giants. Under each of these steps many upfront costs are to be incurred by the government. A typical bond issue involves, fees (commissions) and other expenses. Three large components of the fees, according to a World Bank document are for the lead-managers, rating costs and legal expenses. Interestingly those transaction costs are paid at time of issuance (upfront). In spite of the competition among the banks there is little transparency specially with regard to bond issues of countries like Sri Lanka. Another major expense is often for obtaining a rating for each bond which is generally similar to the fee for the lead-managers. There are also expenses for legal counsel, marketing especially road shows, fiscal and paying agents and advisors. Cost will also depend on which markets are targeted for the road shows undertaken in major cities in developed market economies.

Throughout the Sri Lankan history of issuing ISBs people have only learned about the total value of the bond issues and subscribed but not the direct and indirect costs that have been incurred in the process, for example, officials of the Central Bank, Ministry of Finance, etc. will be travelling to several capitals in the world for negotiations, road shows and other associated events etc. incurring scarce foreign exchange of Sri Lanka. Of course it should have provided very tempting incentive for this approach

Some economists who are faithful followers of IMF policy prescriptions prefers to identify the IMF/ISB Debt Trap as the symptom not the cause of the problem. According to them the debt trap was caused by poor fiscal outcomes over many years and IMF/ISB debt was incurred to meet deficit financing.

In this article, the most pertinent and decisive issue to raise is, what should be the alternative policy recommendations of our learned economists. As we all are well aware if Sri Lanka qualifies to receive assistance from the IMF, such funding will be for as balance of payment support subject to certain conditionality which are likely to include; removal or reduction of subsidies, removal of import controls, non-strategic assets privatization, etc. and many such measures of government interventions.

Many, if not all these adjustments will be painful to the ordinary citizens and therefore, make it difficult to sell politically. If Sri Lanka for that matter, any other country in our predicament is not willing to go through an IMF austerity programme with its stringent conditionalities, what options are available for them. Let’s discuss what appears to be the economic management strategy of the current government. With the lockdown of the world economies and disruption of global value-chains, Sri Lankan government was compelled to ‘Close the Economy’ to some degree. Subsequently, the government policy makers seem to be implementing a fairly well-managed import administration scheme and associated measures to ensure enhanced foreign exchange savings. Current import management scheme has selectively targeted non-essential ‘big-ticket’ items.

In order to prevent further deterioration of the debt situation the government seems to be minimizing new borrowings for implementation of numerous development projects with commercial characteristics. Both acceding to IMF austerity programme, as well as, controls imposed by the government will have contractionary impact on the local economy. Of course, second option will reduce the confidence of capital markets, foreign equity investors and even some local enterprises. Generally, IMF programs are sold to a government in-need of balance of payment support on the basis that agreement with the Fund would pave way for the country to achieve a higher sovereign rating and confidence of the investors in ISBs.

Pertinent question here is, as learned economists, professionals and advisors, are they in a position to develop an alternative development strategy for Sri Lanka in order to overcome the current difficulties reducing the severity of the debt burden created primarily through borrowings from ISBs. It appears that the, current administration is developing a strategy that will cause less pain to the people than under an IMF program and have more positive outcomes in terms of output, employment and incomes.

Unfortunately, however, in the past, we have rarely seen Sri Lankan policy makers or even academics develop alternative concepts or strategies instead of repeating what they have learned as classical, neo-classical or Keynesian schools and reinforced by the training programs conducted by multilateral or bilateral lending agencies.

In conclusion, let me quote once again from my recently published article;

“Whatever the reasons are, instead of thinking independently on their own most of our economists parrot their mentors in the west for short-term gains like easy recognition and self-fulfillment PROMOTING THE SAME FORMULA AGRAVATING the vicious circle and perpetuating the misery of our people. Irony is that when a solution is needed the only thing some of our experts are capable of recommending is to seek refuge in borrowing from multilateral or bilateral lending agencies. Most Sri Lankans need to be reminded that, Sri Lanka has already gone under 16-IMF Programs and have reached the current predicament. This reminds us the famous saying attributed to Einstein that “insanity is doing the same thing over and over again and expecting different outcomes’’.

Signs are that the current administration is deviating from the orthodoxy and searching for innovative and pragmatic development path.

(Article is based on a key-note address delivered by the writer at the 08th International Research Conference conducted by the department of Economics and Statistics, University of Peradeniya)

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SLAF on hazardous wall, Sri Lanka Air Force has sent us the following statement……

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Sri Lanka Air Force has sent us the following statement in response to an article (That hazardous Ratmalana Wall) published on 21 Jan.

It is with regret that I would like to inform you that the newspaper article titled “That Hazardous Ratmalana Wall” published in The “Island” newspaper of 21 January 2021 contains false information which has not been clarified from the Air Force Director Media nor any other official channel of the Sri Lanka Air Force (SLAF).

It should also be highlighted that the Sri Lanka Air Force does not wish to challenge the freedom of reporting information by journalists. However, news articles of this nature published with the use of unsubstantiated information tarnishes the image of Sri Lanka Air Force.

The newspaper article in concern has caught the attention of the Commander of the Sri Lanka Air Force. As alleged in the article, the Commander has not declared on behalf of the SLAF that there is no objection for the removal of the wall and replacing it with a fence. On the contrary he had in fact stated that a collapsible wall could be put in place of the permanent wall which should have a solid finish obstructing the view from outside due to security reasons.

In addition, to date there has been no incident/accident reported at the Ratmalana Airfield related to the wall along the Galle Road. Further, vehicles such as passenger coach/container etc; travelling on the main road would be taller than the wall in concern and according to the article, the main road would also have to be closed each and every time when an aircraft approaching of taking off from that end of the runway. International runway due to limitations which is also can be considered as hazardous to flight safety, SLAF consider Flight Safety is a paramount important factor as an organization which operates different types of aircraft over the years from this airfield.

It is pertinent to mention the wall in concern was erected by the SLAF before year 2009 with the consent of the Airport and Aviation Sri Lanka (AASL) to address the security concerns at that time and maintained to date. The outer perimeter security of the Colombo International Airport at Ratmalana is being provided by the SLAF free of charge over years. As a measure of gratitude, with the consent of AASL and the approval of the Ministry of Defence (MOD), SLAF authorized to erect hoardings along this wall and to utilize the funds generated for welfare measures of airmen.

Further, publishing of an article which has an author with a fictional name will have serious and adverse effects on the newspaper as well as the goodwill which prevails between SLAF and AASL. The goodwill which prevails between the SLAF and your esteemed Organization will also be adversely effected by articles of this nature. SLAF Directorate of Media always provide accurate and precise information to media institutions which has an impact on general public as well as to other organizations. Undersigned is contactable any time of the day through mobile (0772229270) to clarify ambiguities of SLAF related information.

In conclusion, I would like to express our displeasure regarding the newspaper article in concern and the damage which has been done to the good name of the Sri Lanka Air Force and in particular to the Commander of Air Force.

 

WADC WIJESINGHE

Group Captain

DIRECTOR MEDIA

for COMMANDER OF THE AIR FORCEs

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Dog-eat-dog culture

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By Rajitha Ratwatte

There is an old joke that goes around regularly about Sri Lankans’ in hell. How absolutely no guards are needed to keep Lankans in hell because they do a very good job of pulling each other down into hell when anyone even looks like they will escape. When you extrapolate that into real life in the Pearl, the examples are plenty. All of us have personal experiences of neighbours, peers, relations and even our bosses “cutting us” as the popular phrase goes. It is mostly those who either realise and watch out for these pitfalls or those who clearly identify a powerful figure to “bum suck” for want of a better word that display pure unadulterated sycophancy to, that “progress” to propagate these trends in the future. This I believe is something that is triggered by the basest of all human emotions, jealousy, and probably egged on by a sense of insecurity as well.

One would expect that in a nation of devout Buddhists such reprehensible behaviour would be addressed and controlled. Alas it is not to be and looks like it never will be.

It is rather disconcerting to observe that this behaviour is ‘going strong’ among the Lankan community in this the land of the “long White Cloud” as well. The more I live here and mix with the community, the more I hear about people who try to start new projects or give fruition to new and possibly brilliant schemes who have been stymied by fellow citizens born in the Pearl. They indulge in the anonymous letter method (that dates back from time immemorial) made even easier by using false identities, and “one-off” e mail addresses on the web. They inform all government authorities of what they believe are attempts to break the law of their adopted country. If there are bilateral trade agreements, they diligently contact the other parties and try to cast aspersions on the people concerned. They even inform the management of any company that these people with the new ideas may be working at, that their employee may be breaking a sub clause in his contract and thinking of doing some other business while working for them. All triggered by a wonderful sense of self-righteousness from people who don’t think twice about breaking the law when it concerns their own affairs!

As a result, those who have had a measure of success, guard their positions very carefully and a few who have tried to include other Lankans in their operations have learned hard lessons from those who stole their trade secrets and started rival businesses on their own. I daresay this happens in other communities too, but among the Chinese and Indian communities that form similar minorities in Aotearoa, there are official networks formed to help new immigrants. There are schemes and methods in place to help their people do business, especially in the field of imports, to try and reach some sort of equilibrium with regard to the balance of trade between Aotearoa and their home countries. Sri Lanka imports so much milk from New Zealand but almost nothing of our spices, gems and jewellery, tourism products or even our tea that used to have a much larger share of the market, are imported.

In these desperate economic times, shouldn’t the government be looking at ways to improve our export trade? There are so many pockets and communities of Lankans in so many different countries who are doing well enough to be able to afford some luxuries from their home countries but have to pay exorbitant prices or do without. A recent import of ‘sweet meats’ for Sinhala New Year saw such a massive offtake that great plans for expansion were disrupted by Covid-19, before the Lankan rivals could put paid to it. Although such plans were in place!

Something that is rather obvious to those observing the antics in the Pearl from outside is that there seems to be no plan. Innovative thinking, especially in the field of ‘non-traditional’ exports does not exist. We have all seen how fickle tourism is. Using our fertile soil and the artistic skills of our people to build a reputation for quality exports has been totally neglected in recent times. I daresay the relevant ministries and export bodies exist, but it is a well-known fact that they simply serve as JOBS for political catchers, who do nothing except enjoy a foreign junket or two every year on account of the taxpayer.

That brilliant marketing idea of the Ceylon Tea Centers was so far ahead of its time that no one really understood it. We had the best retail locations in some of the greatest cities in Europe and the UK and were building up a great reputation for serving quality tea and promoting our cuisine. It should have been expanded to handle handicraft products on the lines of Laksala and even spices. Of course, promoting our culture, hospitality and tourism would have followed. There are two ways to handle a crisis. We can either put up our shutters and slide deeper and deeper into the mire of debt and economic ruin, or take some bold steps, make innovative investments and take a gamble on products and ideas that are endemic to our country.

 

Even if the latter method fails the end result couldn’t be much worse! Go down fighting I say! Rather than ask expatriates to come back and try to work in a totally corrupt and politician dominated society, approach expatriates with ideas in other countries and back them to promote those ideas if they show real economic benefits to our land. Not everything will work but even a 5% success rate is better than nothing at all.

It is also acknowledged that RANIL has been reappointed as leader of the UNP. Now then, what does this mean? Is it that the Uncle-Nephew party has stuck to tradition or does it mean that at least some people have realized that an experienced politician with world recognition and a certain amount of credibility in the first world, is useful to have around? Search your minds all you critics who blamed absolutely everything on Ranil. Have a dispassionate look at the Muppets in parliament and think for yourself what sort of account they would give of themselves on the world stage. After you do this, place Ranil on the world stage next to those morons and realize for yourself the DIFFERENCE!

 

fromoutsidethepearl@gmail.com

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Lenin comes to town (again)

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By Gwynne Dyer

When Russian opposition leader Alexei Navalny returned to Moscow on Sunday after convalescing in Germany from an attempted poisoning by the FSB domestic spy agency, the regime-friendly media loyally failed to mention his arrival. With one striking exception: Vremya, the flagship news show of Russian state television.

Presumably, somebody there was hoping to win favour with the Kremlin, because they briefly mentioned Navalny three-quarters of the way through Sunday’s two-hour programme. In fact, they compared Navalny’s trip home to Vladimir Lenin’s famous return to Russia in 1917, and suggested that he was as great a danger to Russia as Lenin had been.

As every Russian knows, the Germans plucked Lenin from exile in Switzerland in the middle of the First World War. He was sent across Germany in a ‘sealed train’ (so he wouldn’t spread the infection of Communism there) to St. Petersburg, then in the throes of Russia’s first democratic revolution – and he did just what the Germans had hoped he would.

Lenin overthrew the fumbling democratic ‘Provisional Government’ in a military coup, took Russia out of the First World War – and launched a 73-year totalitarian Communist regime that cost at least 20 million Russian lives in purges, famines and lesser acts of repression. Is Navalny really that great a danger?

The ambitious presenter at Vremya probably won’t get the job he wanted, because President Vladimir Putin really won’t have liked seeing his noisiest critic compared in stature to Lenin, a genuine world-historical figure. Putin himself never mentions Navalny’s name at all.

Russians cannot even put a name to the system they live under, as the poor Vremya presenter’s confusion illustrates. It’s certainly not a democracy, although there are regular elections. It’s definitely not Communist, although most of the regime’s senior figures were Communists before they discovered a better route to power and wealth.

It’s not a monarchy, although Putin has been in power for twenty years and is surrounded by a court of extremely rich allies and cronies. And ‘kleptocracy’ is just a pejorative term used mostly by foreigners, although Navalny does habitually refer to Putin and his cronies as “crooks and thieves”.

In fact, Putin’s regime is not a system at all. Its only ideology is a traditional Russian nationalism that is lightweight compared to blood-and-soil religious and racist movements like Trump’s in the United States and Modi’s in India. It’s a purely personal regime, and it is very unlikely to survive his dethronement or demise.

Putin has been in power for twenty years, and he has just changed the constitution with a referendum that lets him stay in power until 2036. But that seems unlikely, partly because he is already 68 and partly because the younger generation of Russians is getting restless and bored.

Navalny is a brave man who has gone home voluntarily to face a spell in Putin’s jails. (He missed two parole appointments for a suspended sentence on trumped-up embezzlement charges because he was in Germany recovering from the FSB assassination attempt.) But his role in Russian politics so far had been more gadfly than revolutionary.

His supporters do their homework and make clever, witty videos detailing the scandalous financial abuses of the regime (the latest is a virtual tour of Putin’s new $1 billion seaside palace on the Black Sea near Novorossiysk), but he is probably not the man who will finally take Putin down. What he is doing to great effect is mobilising the tech-savvy young.

Since 2018 the average age of protesters at anti-Putin demos, mostly linked to Navalny one way or another, has dropped by a decade, and their boldness has risen in proportion. Moreover, their attitude to the regime now verges on contempt. Rightly so: consider, for example, the last two assassination attempts by regime operatives.

In 2018, the GRU, the Russian military intelligence agency, sent two agents to England to kill defector Sergei Skripov and his daughter Yulia. The agents made two trips to Salisbury because they couldn’t find the right house, they were tracked by CCTV every step of the way, and in the end, they left too little novichok (nerve poison) on the doorknob to kill the targets.

Equally crude and bumbling was the FSB’s attack on Navalny in Tomsk, where the novichok was put on his underpants. Once again, the target survived, and afterwards the investigative site Bellingcat was able to trace FSB agents tracking Navalny on forty flights over several years before the murder was attempted.

Neither agency is fit for 21st-century service, nor is the regime they both serve. Russians have put up with it for a long time because they were exhausted and shamed by the wild political banditry of the 1990s, but Putin’s credit for having put an end to that has been exhausted. He may still be in power for years, but this is a regime on the skids.

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