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Pulling back from the precipice: A Pathfinder perspective

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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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Booster shots: Poor public response makes GMOA contemplate legal remedy

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By Rathindra Kuruwita

Lack of enthusiasm among the public to receive the booster dose was disconcerting, given that Sri Lanka had a long-established and highly functional immunisation programme, the Government Medical Officers Association (GMOA) said yesterday.

By 20 January 2022, 64.56% of Sri Lankans had been fully vaccinated, but only 22.47% had received the booster dose, the GMOA said.

“At the early stages of vaccination against Covid-19 the public response was favourable. However, the current waning of interest might be driven by the myths and rumours regarding the vaccines. It is important to take measures to counter such misinformation by raising public awareness of the ongoing vaccination programme.”

“Legal action against those responsible for the spread of communicable diseases can be taken under the Penal Code”, GMOA Secretary Dr. Senal Fernando said. “Provisions of the Quarantine Ordinance can be used against persons who do not comply with directions given by the proper authorities under the Quarantine Ordinance,” he said.

The GMOA said that several countries had made it mandatory to have proof of vaccination for entry into public places. The same thing could be done in Sri Lanka to ensure that more people got vaccinated.

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Govt., SJB haggle over procedure to rescue country

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By Saman Indrajith

The SJB on Sunday said that it was wrong for the President and the government to seek the assistance of the Opposition to steer the country out of the present crises without creating a proper forum to obtain such assistance.

Addressing the media at the Opposition Leader’s Office in Colombo, Chief Opposition Whip and Kandy District MP Lakshman Kiriella said President Gotabaya Rajapaksa delivering the latter’s third Policy Speech in Parliament last week had sought the assistance of the Opposition. “His speech is full of excuses. He sought our assistance but there is no forum to offer our assistance. The government too has asked for the same several times. If the government needs the Opposition’s assistance, what it should do is to declare a state of national disaster situation so that the Opposition could make use of Parliament as the forum for our contributions. That has not been done so far. The President and the government could make use of the provisions of the Disaster Management Act No 53 of 2005 to form a disaster management committee comprising the government and opposition MPs.

The President is the ex-officio Chairman of the committee, the Prime minister and the Opposition leader are there with 24 government ministers and five opposition MPs. In addition to that there are provisions to the involvement of the Chief Ministers of Provinces in the committee. If the government genuinely needs our support it should have started forming that committee. There are laws enabling the formulation of mechanisms to help people the government does not make use of them. We have been repeatedly asking the government to appoint that committee.

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Lord Ahamad plants kumbuk tree sapling during visit to Bellanwila – Attidiya Bird Sanctuary

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By Ifham Nizam

Lord Tariq Ahmad of Wimbledon, Minister for South Asia, the United Nations and the Commonwealth at the Foreign, Commonwealth and Development Office of the UK, planted a Kumbuk (Terminalia arjuna) sapling at the Bellanwila – Attidiya Bird Sanctuary last week.

The Department of Wildlife said Lord Ahmad had been joined by the British High Commissioner in Colombo Sarah Hulton, Hasanthi Urugodwatte Dissanayake, Acting Additional Secretary of Ocean Affairs, Environment and Climate Change at the Foreign Ministry, Saman Liyanagama, Wildlife Ranger of the Colombo Wildlife Range, Department of Wildlife Conservation and Professor Sevvandi Jayakoddy, Senior Lecturer of the Wayamba University.

The planting activity was followed by a brief visit to the wetland and Prof. Jayakoddy, and Liyanagama explained the importance of wetland ecosystems as well as challenges in conservation and maintenance, while Dissanayake briefed him on the Sri Lanka’s pioneering work related to mangrove restoration and conservation, both at policy level as well as at the ground level.

Hasini Sarathchandra, Publicity Officer, Department of Wildlife Conservation said British High Commission in Colombo with the International Water Management Institute Headquartered in Sri Lanka, had already launched a project under the Darwin Initiative at the Baddegana Wetlands.  Similar collaborations are envisaged involving the Bellanwila – Attidiya Bird Sanctuary.

Wetlands play an important role in our natural environment. They mitigate the impacts of floods, absorb pollutants and improve water quality. They provide habitat for animals and plants and many contain a wide diversity of life, supporting plants and animals that are found nowhere else. Colombo is a city built on and around wetlands. Despite progressive loss and degradation, wetlands still cover some 200 km2 of the Colombo metropolitan area and suburbs.

The wetlands are fundamental to the well-being of the people of Colombo and its suburbs. The wetlands can reduce extreme air temperatures and make the city more live able due to evaporative cooling. The wetlands provide a critical land-mass which helps to maintain the richness of Colombo’s biodiversity.

The Bellanwila-Attidiya wetlands was declared as a bird sanctuary on 25 July 1990, due to biodiversity of the area and its contribution to controlling floods. The wetlands, which span over 930 acres, host endemic species and is a paradise for migratory birds. 44 species of fish including 06 which are endemic to the country have been identified in the Bolgoda River which flows through the wetlands. The wetlands are also home to 21 reptilian species, 17 species of mammals and 10 butterfly species. Bellanwia-Attidiya sanctuary falls within the upper catchment of the Bolgoda river basin. The Department of Wildlife Conservation manages the Bellanwila-Attidiya Sanctuary.

Selection of the location was also due to the close collaboration that Sri Lanka has with the Government of the UK on conservation of mangroves and wetlands.

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