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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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Features

Credibility in governance through elections and not security forces

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Ranil Wickremesinghe

By Jehan Perera

President Ranil Wickremesinghe’s warning that he is prepared to declare a state of national emergency and use the military to suppress any public protests for change of government would reflect the pressures he is under. The manner in which he has used the security forces to deal with the protest movement has been unexpected. His words and deeds are contradictory to what he has previously stood for as a five-time former prime minister. This is especially true in the case of the ethnic and religious minorities who have consistently voted for him and his party at elections. They have felt safer and more secure under his governments which always sought to reduce the heavy hand of state oppression in which national security is given pride of place. He has always promised them much though he has been unable to deliver on much of what he promised.

Notwithstanding the unfortunate rhetoric and actions of the present time the belief still persists that President Wickremesinghe is the best of the available options. Recent pronouncements of the president have reignited hope that he will address the problems of the religious and ethnic minorities. He has stated that he does not want to leave this problem to the next generation. He has said that he wants to resolve this intractable national problem by the country’s 75th independence anniversary on February 4 next year. The hope that the president will make a fresh effort to resolve their problems has led the main Tamil party, the TNA, to desist from voting against the budget which passed with a relatively small majority. Their spokesperson, M A Sumanthiran said in Parliament that due to the president reaching out to them, stretching out his hand, they did not vote against the budget although they disagreed with it.

It is not only in words that the president has reached out to the ethnic and religious minorities. Reports from the north and east indicate that the Maveer (Heroes) Day commemorations this year took place without incident. During the past two years scores of people were arrested and a massive presence of security forces blocked the people from participating in public events. On this occasion the security forces did not get involved in any attempt to stop the commemorations. University students distributed sweets and even cut a birthday cake to celebrate slain LTTE leader Velupillai Prabhakaran’s birthday. The analogy that the president drew to himself being seen as a Hitler who exterminated ethnic and religious minorities is misplaced. The release of those held under the Prevention of Terrorism Act for engaging in similar acts in the past would further contribute to the reconciliation process.

WORSENING CRISIS

In this context, the president’s use of militaristic rhetoric can only be understood in relation to the growing economic crisis that shows no sign of abating. The anticipated IMF bailout package is at risk of getting indefinitely delayed. It was initially anticipated to come in September then in November but now January is being targeted. Japan’s top brokerage and investment bank, Nomura Holdings Inc, has warned that seven countries – Egypt, Romania, Sri Lanka, Turkey, Czech Republic, Pakistan and Hungary – are now at a high risk of currency crises. Sri Lanka is in third place on the table of risk. The next devaluation of the rupee could see another spike in inflation that will make the cost of living even more unbearable to the masses of people.

The president is on record as having said that the economic crisis will get worse before it improves. Both anecdotal and statistical evidence indicates that it is indeed worsening. University teachers at the University of Sabaragamuwa reported that attendance in their classes was down by at least a quarter. Students who come from other parts of the country are unable to afford the cost of meals and so they stay at home. A study by the Institute of Policy Studies has shown that about four percent of primary, 20 percent of secondary and 26 percent of collegiate students had dropped out of school in the estate sector, which is the worst affected. The future costs to the country of a less well educated population is incalculable and inhumane.

As it is the situation is a dire one for large swathes of the population. Research from the University of Peradeniya has revealed that close to half of Sri Lanka’s population, 42 percent (up from 14 percent in 2019) are living under the poverty line. Professor of Economics Wasantha Athukorala has said there is a dramatic increase in the poverty level of over three-hold across the past three years. In 2019, nearly 3 million people lived below the poverty line, but that number has increased to 9.6 million in October 2022. In these adverse circumstances stability in a polity can be ensured either through legitimacy or through force. It would be tragic if the latter is the choice that is made.

ELECTORAL SOLUTION

President Wickremesinghe has been stressing the importance of political stability to achieve economic development. His recent statement that the security forces will be used to negate any unauthorised protest is a sign that the government expects the conditions of economic hardship to escalate. The general public who are experiencing extreme economic hardship are appalled at the manner in which those who committed acts of corruption and violence in the past are being overlooked because they belong to the ruling party and its cliques. The IMF has made anti-corruption a prerequisite to qualify for a bailout, calling for “Reducing corruption vulnerabilities through improving fiscal transparency and public financial management, introducing a stronger anti-corruption legal framework, and conducting an in-depth governance diagnostic, supported by IMF technical assistance.”

It is morally unacceptable even if politically pragmatic that the president is failing to take action against the wrongdoers because he needs their votes in parliament. As a start, the president needs to appoint a credible and independent national procurement committee to ensure that major economic contracts are undertaken without corruption. Second, the president needs to bite the bullet on elections. The country’s burning issues would be better accepted by the country and world at large if they are being dealt with by a statesman than by a dictator. Government that is based on the people’s consent constitutes the sum and substance of democracy. This consent is manifested through free and fair elections that are regularly held. Local government elections have been postponed for a year and are reaching their legal maximum in terms of postponement. These elections need to be held before March next year.

Elections will enable the people to express their views in a democratic manner to elect their representatives for the present. This would provide the government with guidance in terms of the decisions it is being called to take to revive the economy and place the burden in a manner that will be acceptable to the people. The provincial council elections have been postponed since 2018. Democratically elected provincial councils share in the burdens of governance. The devolution of power that took place under the 13th Amendment was meant to promote ethnic harmony in the country. The president who has taken the position that he is for a solution to the ethnic conflict should seriously consider conducting the provincial council elections together with the local government elections se their financial costs. By doing so he will also gain legitimacy as a democratic statesman and not a dictator.

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WEDNESDAY – Movie Review

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The Addams Family is back with a new tale to tell! Originally created by Charles Addams as a comic strip published in The New Yorker, it offered readers a sarcastic take on the ‘typical nuclear family’ by substituting it with a more macabre bunch of strange and eerie individuals. Since then the titular family has been adapted on to the big screen many times, from live action movies to animated versions, the Addams Family has gained many fans throughout the years. Created by Alfred Gough and Miles Millar, with Tim Burton working on four episodes of the eight-part series, Wednesday is a welcoming tale for young fans, but unfortunately fails to think outside the box and remains anchored to the floor with a messy storyline.

Dead-eyed Wednesday Addams (Jenna Ortega) is a stubborn, independent and intelligent teenager in this new series. Her penchant for attracting trouble wherever she goes alarms her parents, Morticia (Catherine Zeta-Jones) and Gomez (Luis Guzmán). With an already strained relationship with her parents (specifically her mother), Wednesday is enrolled at Nevermore, an academy for outcasts like herself. Having attended the academy themselves, Morticia and Gomez are hopeful that their daughter will ‘fit right in’. Caught between trying to build her own identity and other teenage complexities, Wednesday soon finds herself in the middle of a twisted mystery.

This is the first time audiences are introduced to a teenage Wednesday, which allowed the creators to build a new world on their own terms, but while keeping true to the original nature of the character. The creators do a fair amount of world building by introducing other outcasts like the Fangs (vampires), Stoners (Gorgons), Scales (sirens) and Furs (werewolves), among others. Nevermore Academy itself is beautiful and comes with the classic package of creepy crypts, hidden rooms and secret societies. The series also offers a decent amount of gore, although they could have added more given Wednesday’s proclivity for gore-related activities. The series deals with classic young-adult tropes which includes teenage crushes, bullies, relationships and even prom, among other things. The series navigates through Wednesday’s journey of self-discovery, which is a new avenue for both the character and the fans. From understanding and displaying her emotions to discovering her identity and understanding her peers, the series takes a deep dive into heavy material.

Ortega’s performance as the titular character plays a major role in keeping audiences glued to the screen. This is also the first time viewers are shown a teenage Wednesday Addams, which works to Ortega’s benefit as she depicts more dimensions to the ghoulish, morose character many are associated with based on previous renditions. Her facial expressions and ability to deliver on seriously emotional moments strengthens her role as the lead. The rest of the Addams Family, even with limited screen time, lack the eccentricities their characters should have. Hopeless romantics Morticia and Gomez seem incompatible in this version and Uncle Fester is far less crazy than he ought to be. The only member worth mentioning is the Thing—a severed hand— who brought more character and spirit to the series acting alongside Ortega. With barely any room to develop a majority of the characters are prosaic and tedious, even though they remain vital to the plot.

Apart from Ortega, Gwendoline Christie and Emma Myers deserve honorable mentions for their roles as Nevermore’s head teacher, Larissa Weems and the peppy Enid Sinclair respectively. Enid quickly became a fan favorite as the character was the polar opposite to Wednesday. Her character is vital to Wednesday’s character development and their journey to find common ground as mismatched individuals is amusing.

Christina Ricci who played Wednesday in the 90s returns as ‘normie’ teacher, Miss Thornhill and unfortunately barely stands out and this in large part due to the messy storyline. The series is bogged down with numerous subplots and overlapping tropes and the characters with potential for growth are completely overlooked. With love triangles, bullies and killer monsters on the loose, the series self-destructs and the climax sinks into disappointment.

At the end of the day, Wednesday plays to the beat of the new generation and touches on new themes, which is welcoming seeing as the character should grow up at some point. While not everyone may relate to Wednesday’s teenage perils, it is interesting to witness her growth and her journey as an ‘outcast’ or ‘weirdo’. And while Wednesday doesn’t exactly offer a distinctly unique story, it gives audiences a small taste of what Jenna Ortega’s Wednesday is capable of. Creating a story around a well-established franchise is a difficult task, and in this case the creators fail to add value to their visions. If the series continues, the creators will have the opportunity to think further outside the box and push the limits to Wednesday’s character and give audiences a bone-chilling experience. Wednesday is currently streaming on Netflix.

 

 

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Features

Stage set for… AWESOME FRIDAY

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The past few weeks have been a very busy period for the new-look Mirage outfit…preparing themselves for their big night – Friday, December 2nd – when they would perform, on stage, for the very first time, as Donald Pieries (leader/vocals/drums), Benjy (bass), Niro Wattaladeniya (guitar), Viraj Cooray (guitar/vocals), Asangi Wickramasinghe (keyboard/vocals), along with their two frontline female vocalist, Sharon (Lulu) and Christine.

They have thoroughly immersed themselves in their practice sessions as they are very keen to surprise their fans, music lovers, and well-wishers, on opening night…at the Peacock, Berjaya Hotel, in Mount Lavinia.

Action starts at 8.00 pm and, thereafter, it will be five hours of great music, along with EFFEX DJs Widhara and Damien, interspersed with fun and excitement…for the whole family!

Yes, opening night is for the whole family, so you don’t need to keep some of your family members at home – kids, especially.

Working on their repertoire for Friday, bassist Benjy says “what we will dish out will be extra special, with lots of action on stage.”

It would be interesting to see Sharon (Lulu) doing her thing with Mirage, after her early days with the Gypsies, and, I’m told, a dynamic performance from Sharon is what is in store for all those who make it to the Peacock this Friday

Edward (Eddy) Joseph (centre) with Donald and Benjy

While the band was at one of their practice sessions, last week, they had a surprise visitor – Edward (Eddy) Joseph, a former member of the group Steelers, who is now based in Germany.

Eddy is here on a short visit and is scheduled to return to Germany, tomorrow (30).

He spent an hour with Mirage, at their practice session, and says he is disappointed that he would not be around for the group’s opening night.

However, there is a possibility of several well-known personalities, in the showbiz scene, turning up, on Friday night, to experience the sounds of the new-look Mirage, including Sohan Weerasinghe and Joey Lewis (from London).

Rajiv Sebastian, too, says he is keen to be a part of the fun-filled evening.

You could contact Benjy, on 0777356356, if you need to double check…their plans for AWESOME FRIDAY!

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