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Pulling back from the precipice: A Pathfinder perspective



The way out of Sri Lanka’s most challenging external financing crisis is to negotiate an arrangement with the IMF and agree on a preemptive debt restructuring, Pathfinder Foundation has said in a media statement.

An IMF programme could include strengthening the government’s revenue base (widening the tax base and improving tax administration); improving the primary balance in the budget (revenue – (expenditure-interest payments)); proactive, data-driven and non-interventionist monetary policy; a flexible and realistic exchange rate policy to assist in building up external reserves; commercialisation of SOE operations, including full cost-recovery in the pricing of electricity and fuel, restructuring of the CEB and the CPC, the implementation of the Statements of Intent and addressing the losses being incurred by SriLankan Airlines, the Foundation said.

Pathfinder Foundation said that the Gross Official Reserves have declined to USD 1.6 bn as at end-November. Repayments over the subsequent 12 months amount to about USD 7 billion.

“The authorities have responded with import and capital controls as well as a fixed exchange rate based on moral suasion by the CBSL and rationing of foreign exchange by the commercial banks. This has resulted in a scarring of the economy which will inevitably have an adverse impact on growth, employment and incomes. Inflation is rising and is on the verge of reaching double digits and shortages constantly emerge of essential goods and services,” the Foundation said.

The Pathfinder statement in full: “The Road Map, presented by the CBSL, identified a number of potential sources of debt- and non-debt-creating inflows to fill the external financing gap. The securitisation of remittance flows has been added to the menu of options recently. However, to date there has been an alarming depletion of external reserves and an inexorable increase in the external financing gap.

“If the authorities have clear visibility of sufficient inflows to arrest the steady deterioration in the country’s external position, one can be hopeful of a turnaround to avoid the possibility of a debt default which would greatly amplify problems, such as rising inflation; pressure on exchange and interest rates; losses in the real value of incomes; decline in business confidence; and disruption to the supplies of basic goods and services. If the anticipated inflows are not forthcoming in sufficient quantities to fill the external financing gap, there will be no option but to turn to the IMF to avoid further scarring of the economy and creating greater shortages of essential goods and services.

“It is extremely unlikely that it would be possible to obtain IMF assistance without a debt rescheduling as the Fund does not support countries where the debt is considered unsustainable. Equally, it is not practical to reach agreement on debt restructuring without an IMF programme. So, the twin pillars of the way forward would need to be negotiating an arrangement with the IMF and agreement on a preemptive debt restructuring.

“Attempting to undertake stabilisation of the economy without the cushion of financing that can be mobilised through an IMF programme would be like performing on the high-trapeze without a safety-net. There needs to be a less painful blend of adjustment and financing. However, it must be highlighted that pain cannot be avoided. An IMF programme would impose significant burdens on the people. The main thrust of this article is that this pain would be less than the severe dislocation that is already being caused by squeezing the economy to make up for the dollar illiquidity. The conditionality attached to IMF programmes are intended to stabilise the economy (contain inflation and balance of payment pressure) and improve its creditworthiness.

“An IMF programme could include, inter alia, the following: strengthening the government’s revenue base (widening the tax base and improving tax administration); improving the primary balance in the budget (revenue – (expenditure-interest payments)); proactive, data-driven and non-interventionist monetary policy; a flexible and realistic exchange rate policy to assist in building up external reserves; commercialisation of SOE operations, including full cost-recovery in the pricing of electricity and fuel, restructuring of CEB and CPC, the implementation of the Statements of Intent and addressing the losses being incurred by SriLankan Airlines.

“An IMF Extended Fund Facility can provide balance of payment financing of up to USD 1 bn per year for three years. The amount made available would be calibrated according to the strength of the reforms undertaken. An IMF programme would also unlock direct budgetary support from the World Bank, Asian Development Bank and possibly a few bilateral donors (over and above their usual project loans). Both balance of payments and budgetary support are most urgently required for the twin deficit Sri Lankan economy. Based on indications in 2020, up to USD 2 bn in all can be mobilised through these sources, depending on the strength of the reforms undertaken. Engagement with the IMF will also transmit positive signals to both investors and creditors, both at home and abroad. It can also pave the way for an eventual upgrading of the sovereign rating, which would improve the prospect of attracting foreign investment and credits.

“The second pillar, preemptive restructuring, must also be pursued concurrently with negotiations with the IMF. Not only can this facilitate the obtaining of a Fund programme but it can also create some leeway to stabilise the economy and place it on a path of sustained growth. Debt restructuring can be achieved through: extending maturities; modifying coupon (interest) rates; and hair-cuts on the principal (write-downs). One or more of these modalities can be used to reach an agreement with creditors that places Sri Lanka’s debt servicing on a sustainable path. Ideally, about a 3-year window should be created where debt servicing is suspended. This can release a very substantial amount of scarce foreign exchange to finance imports. The impact on growth, employment and incomes would be materially positive. In considering debt restructuring, it is important to realise that the most significant usual downside is a loss of access to international capital markets. In Sri Lanka’s case, this has already happened with the downgrading of the sovereign rating. So, the most important disadvantage is no longer a factor. Another concern relates to the impact on domestic holders of USD denominated sovereign debt, mainly banks. A mitigating factor is that a significant share of these holdings have been bought at a discount from the secondary markets. In other countries, Central Banks have exercised regulatory forbearance to assist financial institutions which have required such support to repair their balance sheets.

“It must, however, be recognised that it could take 4-6 months to negotiate an IMF programme and a preemptive debt restructuring agreement. The present trends in external reserves on the one hand and net drains on foreign currency on the other indicate that bridging finance is required to meet obligations over the next 6 months to avoid a debt default. The package of assistance offered by India is an encouraging start and needs to be finalised as soon as possible. It has to be supplemented by financing from other friendly countries, like Japan. There is scope for India and Japan to work together to support Sri Lanka at this critical juncture. Their willingness to step forward is likely to be greater, if it is known that Sri Lanka has taken a decision to approach the IMF. While our development partners will be wary of having to make an open-ended commitment, they are likely to find bridging finance more palatable.

Time has almost run out. Urgent, focused and pragmatic attention to these pressing issues is of paramount importance. An IMF programme can be at the heart of a medium-term strategy to overcome the current challenges and give Sri Lankans greater hope about the future prospects of the economy.”

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MPs urged to defeat move to conduct Law College exams only in English medium



Ali Sabry responds to accusations

By Shamindra Ferdinando

Opposition MP Gevindu Cumaratunga yesterday (19) alleged that the Wickremesinghe-Rajapaksa government was going ahead with a project launched by former Justice Minister Ali Sabry with the backing of President Gotabaya Rajapaksa to conduct Law College examinations only in the English medium, much to the disadvantage of Sinhala and Tamil students.

Addressing the media at Sri Sambuddhathwa Jayanthi Mandiraya at Thunmulla, the leader of civil society group Yuthukama urged all political parties, regardless of whatever differences, to vote against extraordinary gazette notification of 2020 Dec 30 No 22018/13 to be submitted to Parliament by Sabry’s successor, Dr. Wijeyadasa Rajapakse, PC, tomorrow (21).

The SLPP National List MP said that those who represented the interests of the South, the North as well as the Upcountry could reach a consensus on the issue at hand quite easily.

Responding to The Island query, lawmaker Cumaratunga said that Uththara Lanka Sabhagaya, consisting of a section of rebel SLPP MPs, backed the campaign to protect the language rights of Sinhala and Tamil communities. The first-time entrant to Parliament said that MPs with a conscience couldn’t back this move, under any circumstances, whichever the party they represented.

At the onset of the media briefing, MP Cumaratunga said that the denial of language rights of current and future students was a grave violation of the Constitution-Article 12 and Article 18. In terms of Article 12, no one should be discriminated against on the basis of language whereas Article 18 recognized Sinhala and Tamil as National Languages with English being the linking language.

Alleging that the previous Gotabaya Rajapaksa goverenment planned to implement the controversial law even without securing parliamentary approval, lawmaker Cumaratunga appreciated Minister Wijeyadasa Rajapakse’s decision to place it before parliament.

The civil society activist said that this despicable move should be examined against the backdrop of growing external interventions as the country struggled to cope up with the developing political-economic-social crisis. The passage of the new law could cause further deterioration of parliament, MP Cumaratunga said, adding that the House faced a serious credibility issue.

“How could elected MPs whichever party they represented back a move that directly affected the concerned communities,”? Lawmaker Cumaratunga asked.

Referring to a recent call by the Justice Minister to discuss the issue at hand, MP Cumaratunga said that among those present on the occasion were Attorney General Sanjay Rajaratnam, PC, and Dr. Athula Pathinayake, Principal of Law College. “Those who opposed this move asked Dr. Athula Pathinayake what he really intended to achieve by conducting Law College examinations in English, only. However, the Law College Principal failed to provide a plausible response,” the MP said.

Responding to strong criticism of their stand, MP Cumaratunga stressed that the importance of English as a language couldn’t be underestimated. But, ongoing efforts to promote English shouldn’t be at the expense of Sinhala and Tamil, MP Cumaratunga said, questioning lawmakers’ right to deprive Sinhala and Tamil communities of basic rights.

Ratnapura District SLPP MP Gamini Waleboda said that an influential section of the Bar Association of Sri Lanka (BASL) was behind this move. In a note dated March 17, addressed to all members of parliament urged them to defeat the contemptible move.

Lawmaker Waleboda said that there was no prohibition for those who wanted to sit law examinations in English. There was absolutely no issue over that but the bid to deny the language rights of those who wanted to sit examinations in Sinhala and Tamil was not acceptable under any circumstances. According to him, the BASL hadn’t consulted its membership regarding this move.

MP Cumaratunga also questioned the failure on the part of the apex court to make available to Parliament its interpretations in Sinhala. The Supreme Court continues to provide such clarifications in English only.

Responding to MP Cumaratunga’s allegation that he with the backing of the then President Gotabaya Rajapaksa resorted to action to make English compulsory for those studying at the Law College, incumbent Foreign Minister Sabry said: “That’s not correct. It is the council of legal education which formulates regulations.  The council consists of CJ, two senior SC judges, AG, SG, Secretary Justice and six senior lawyers of vast knowledge and experience.

 In terms of the constitution all higher education institutions can decide the language of studies and education. That’s how medical faculty, engineering faculty, IT faculty and management faculty conduct studies in English. Already Peradeniya and Jaffna universities do legal studies in English. It is good to do it, that’s how they become competitive. Even in India all legal faculties are in English. “

The President’s Counsel alleged that the kith and kin of certain people articulating this position received their education in English. The minister questioned why politicians get involved in this issue if the council of legal education made the relevant suggestion.

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No power cuts due to N’cholai unit failure – Minister



By Ifham Nizam

The breakdown of the Unit Three of the First Coal Fired Power Plant Complex in Norochcholai 270 MW intake of the 300MW will cost an additional Rs. 20 a unit due to thermal power generation, says the Ceylon Electricity Board (CEB).  “It will cost the CEB Rs. 96 million extra a day while the Norochcholai machine is out of order,” a senior Electrical Engineer told The Island.

Power and Energy Minister Kanchana Wijesekera yesterday said Unit 3 of the Norochcholai Coal Power Plant had failed. He said the CEB had informed him of the breakdown, but he said there would be no power cuts.

“The Unit 3 was due to undergo major overhaul maintenance in April. To ensure an uninterrupted power supply, the CEB-owned Diesel and Fuel Oil Power plants will be used,” the minister said.

The Norochcholai Power Plant has experienced breakdowns several times on previous occasions as well.The first generator at the power plant was shut down on December 23, last year to manage the coal stocks and for maintenance purposes.

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CBSL chief expresses optimism



Central Bank Governor Dr. Nandalal Weerasinghe told the media, on Sunday, that the country’s dollar crisis could be managed as the IMF was set to approve a 2.9 billion-dollar bailout package on Monday. He said that Sri Lanka now had adequate foreign reserves for imports for essential sectors.

Dr. Weerasinghe added that the IMF package would boost investor confidence and enhance the country’s access to more foreign funds and investments.

The IMF package would include budgetary support, which was a new element in IMF lending, he said. Sri Lanka started negotiations with the IMF, in 2022, following the onset of the current economic crisis.

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