Has the time come to consider seriously the merits of restructuring the government’s external debt obligations? The Sri Lankan authorities have indicated that they are in the process of negotiating inflows to meet the country’s immediate foreign exchange requirements. However, there is considerable uncertainty as to whether there would be sufficient inflows to meet the acute dollar illiquidity over the medium-term.
Companies and even families restructure their debt when foreseeable future earnings become insufficient to repay debts while maintaining their financial viability. The same applies to countries. Over the years, a number of countries have restructured their debt and the pandemic is pushing others to follow suit. Has Sri Lanka reached that point when it would be advantageous to restructure its external debt? What are the costs and benefits of doing so? If debt restructuring is a credible option, how one would go about it?
Should Sri Lanka restructure its external debt?
Foreign revenues in the next couple of years are extremely unlikely to be sufficient to service external debt obligations, while supporting the essential foreign exchange (Forex) requirements of the economy. Known external debt repayments amount to USD26 billion over the next five years. It is unrealistic to expect to repay about USD five billion per year, particularly in the next 12-24 months, when foreign inflows are unlikely to increase on the scale necessary to service debt and finance imports necessary to meet essential needs and support the growth of the economy, particularly as the downgrading of Sri Lanka’s sovereign rating has excluded it from international capital markets. Countries protect access to these markets scrupulously to have the capacity to roll-over debt and avoid such a predicament.
It is noteworthy that the following Business Chambers have jointly issued a statement highlighting the severe problems being faced by their members due to the acute shortage of Forex which has been caused primarily by the combination of the loss of tourism earnings and access to international capital markets: Ceylon Chamber of Commerce, FCCISL, Ceylon National Chamber of Industries, The National Chamber of Commerce of Sri Lanka, The Women’s Chamber of Industry and Commerce, Chamber of Young Lankan Entrepreneurs, The International Chamber of Commerce Sri Lanka, National Chamber of Exporters and the Chamber of the Construction Industry.
Collectively, these Chambers represent almost all sectors of the economy. Their concerns cannot be addressed while there is a diversion of large amounts of Forex from markets to the Central Bank of Sri Lanka (CBSL) to service external debt. As a result, there is now a strong case for considering debt restructuring to release foreign exchange to meet the needs of businesses and acquire the essential needs of the people, e.g., food, fuel and pharmaceuticals.
The costs and benefits of external debt restructuring
The most significant disadvantage of restructuring external debt is an immediate loss of access to international capital markets. This is now completely irrelevant for Sri Lanka as market access was lost when the economy was downgraded to a CCC rating. It is now even lower, at CC. As a result, Sri Lanka can no longer borrow in international markets. Another downside is the increase in the risk premium Sri Lanka would need to pay when it is eventually able to regain market access. However, the increased risk premium demanded by markets as a result of the restructuring is likely to be tempered by the impressive commitment Sri Lanka has shown in meeting its obligations thus far. Two International Sovereign Bonds (ISBs) of USD 1 billion each were repaid on time in October 2019 and July 2020, despite having to deplete external reserves, thereby imposing sacrifices on domestic businesses and households. This combined with Sri Lanka’s impeccable debt servicing record to date is likely to contain the increase in the cost of future borrowing when it becomes possible.
Options for Restructuring
Debt restructuring is a long and complex process. Having delayed and allowed usable reserves to deplete to barely one month’s import cover, it is no longer possible to achieve a soft pre-emptive restructuring. There are three modalities available to restructure debt: re profiling the principal (extending maturities); modifying coupon (interest) rates; and write-down of principal (haircuts). Given its current circumstances it is unlikely that Sri Lanka could avoid haircuts for its creditors.
It is unrealistic and impractical to expect to restructure external debt without the support of the IMF. Before embarking on an external debt restructuring one needs the IMF to independently validate that Sri Lanka has a strong need to restructure its debt, in order to assure creditors that the Sri Lankan authorities are not being opportunistic. The IMF would also need to validate the proposed medium term fiscal adjustment path to debt sustainability.
Rescheduling bilateral, commercial and multilateral debt requires different treatments. Bilateral debt rescheduling is negotiated with the Paris Club of creditors. It is not possible to approach the Paris Club without IMF support. China and India are not members of the Paris Club and separate negotiations would be necessary with them. An option is to seek to initiate an informal “Common Framework” approach (approved by the G20 which includes both China and India). It would need to be informal as the “Common Framework” is not available for a middle income country like Sri Lanka.
This approach would have the advantage of including Sri Lanka’s three major bilateral donors: China, India and Japan. Bilaterals are likely to focus more on stretching maturities. Commercial creditors could be approached once a deal is in place with bilateral donors. Such sequencing can lead to a better deal for the debtor country on the basis of equivalence across all creditors in terms of the rescheduling. In this respect, there is considerable merit in taking soundings from the Japanese Ministry of Finance regarding their suggestions for the terms of the restructuring. Over the years, Japan has proved to be a flexible and generous creditor in this respect.
On Commercial debt, here again, it is exceedingly difficult to proceed without the IMF. Given its current circumstances, the restructuring package for Sri Lanka’s commercial debt is likely to include a combination of stretching maturities; coupon modification and a haircut. Haircuts on repayment of principal should be avoided, if at all possible, as they delay rating improvement and regaining market access. It is likely that it is now too late for Sri Lanka to avoid a haircut for its commercial creditors.
It is not possible to restructure Multilateral debt (i.e., debt owed to the World Bank, the Asian Development Bank and the IMF) without a complete suspension of the relationship between Sri Lanka and these institutions. There would be a suspension of all lending activity including project loans. However, the practice has been for to these institutions to provide financing to assist the debtor country to service the payments owed to each of them, once the debt rescheduling package is negotiated.
Appointment of Advisers
It is customary to appoint a financial and a legal adviser at the outset of the restructuring process. The IMF is able to provide a list of potential advisers from which the country concerned can choose.
The unsustainability of Sri Lanka’s external debt is the cumulative effect of poor economic management over several decades. The size and persistence of the external financing gap for the foreseeable future makes debt restructuring an urgent priority. It should be possible to negotiate a package which provides three years of breathing space to rebuild Sri Lanka’s economy to earn and attract sufficient foreign inflows to achieve external debt sustainability and place the economy on a path of sustained growth. Nearly 75% of Government external debt is owed to bilateral and commercial creditors, all of which is eligible for rescheduling, thus providing considerable scope for relief from onerous debt repayments. Now that Sri Lanka has lost access to international capital markets and is extremely unlikely to regain it for some years due to its CC rating, there is very little downside and very considerable upside to debt restructuring.
There is now no choice but to restructure our external debt. The positive impact on dollar liquidity will be substantial and could be measured in billions of dollars. It is also timely as the negative social consequences are manifesting themselves in terms of ever-increasing hardships for the people, particularly the poor and vulnerable. It does not seem realistic to count on short term liquidity injections or a reliance on a revival in tourism as well as increased exports, FDI and remittances, to overcome the dollar illiquidity and its negative consequences in the next couple of years. Paying back debt at the expense of scarring the economy and imposing hardships on the people should not be seen as a badge of honour.
This is A Pathfinder Perspective issued by the Pathfinder Foundation can view on https://pathfinderfoundation.org/ Readers’ comments via email to email@example.com are welcome.
BRICS emerging as strong rival to G7
It was in the fitness of things for Indian Prime Minister Narendra Modi to hold a special telephonic conversation with Russian President Vladimir Putin recently for the purpose of enlightening the latter on the need for a peaceful, diplomatic end to the Russian-initiated blood-letting in Ukraine. Hopefully, wise counsel and humanity would prevail and the world would soon witness the initial steps at least to a complete withdrawal of invading Russian troops from Ukraine.
The urgency for an early end to the Russian invasion of Ukraine which revoltingly testifies afresh to the barbaric cruelty man could inflict on his fellows, is underscored, among other things, by the declaration which came at the end of the 14th BRICS Summit, which was held virtually in Beijing recently. Among other things, the declaration said: ‘BRICS reaffirms commitment to ensuring the promotion and protection of democracy, human rights and fundamental freedoms for all with the aim to build a brighter shared future for the international community based on mutually beneficial cooperation.’
It is anybody’s guess as to what meanings President Putin read into pledges of the above kind, but it does not require exceptional brilliance to perceive that the barbaric actions being carried out by his regime against Ukrainian civilians make a shocking mockery of these enlightened pronouncements. It is plain to see that the Russian President is being brazenly cynical by affixing his signature to the declaration. The credibility of BRICS is at risk on account of such perplexing contradictory conduct on the part of its members. BRICS is obliged to rectify these glaring irregularities sooner rather than later.
At this juncture the important clarification must be made that it is the conduct of the Putin regime, and the Putin regime only, that is being subjected to censure here. Such strictures are in no way intended to project in a negative light, the Russian people, who are heirs to a rich, humanistic civilization that produced the likes of Dostoevsky and Tolstoy, among a host of other eminent spirits, who have done humanity proud and over the decades guided humans in the direction of purposeful living. May their priceless heritage live long, is this columnist’s wish.
However, the invaluable civilization which the Russian people have inherited makes it obligatory on their part to bring constant pressure on the Putin regime to end its barbarism against the Ukrainian civilians who are not at all party to the big power politics of Eastern Europe. They need to point out to their rulers that in this day and age there are civilized, diplomatic and cost-effective means of resolving a state’s perceived differences with its neighbours. The spilling of civilian blood, on the scale witnessed in Ukraine, is a phenomenon of the hoary past.
The BRICS grouping, which encompasses some of the world’s predominant economic and political powers, if not for the irregular conduct of the Putin regime, could be said to have struck on a policy framework that is farsighted and proactive on the issue of global equity.
There is the following extract from a report on its recent summit declaration that needs to be focused on. It reads: BRICS notes the need to ensure “Meaningful participation of developing and least developed countries, especially in Africa, in global decision-making processes and structures and make it better attuned to contemporary realities.”
The above are worthy goals that need to be pursued vigorously by global actors that have taken upon themselves the challenge of easing the lot of the world’s powerless countries. The urgency of resuming the North-South Dialogue, among other questions of importance to the South, has time and again been mentioned in this column. This is on account of the fact that the most underdeveloped regions of the South have been today orphaned in the world system.
Given that the Non-aligned Movement and like organizations, that have espoused the resolution of Southern problems over the decades, are today seemingly ineffective and lacking in political and economic clout, indications that the BRICS grouping is in an effort to fill this breach is heartening news for the powerless of the world. Indeed, the crying need is for the poor and powerless to be brought into international decision-making processes that affect their wellbeing and it is hoped that BRICS’s efforts in this regard would bear fruit.
What could help in increasing the confidence of the underdeveloped countries in BRICS, is the latter’s rising economic and political power. While in terms of economic strength, the US remains foremost in the world with a GDP of $ 20.89 trillion, China is not very far behind with a GDP of $ 14.72 trillion. The relevant readings for some other key BRICS countries are as follows: India – $ 2.66 trillion, Russia – $ 1.48 trillion and Brazil $ 1.44 trillion. Of note is also the fact that except for South Africa, the rest of the BRICS are among the first 15 predominant economies, assessed in GDP terms. In a global situation where economics drives politics, these figures speak volumes for the growing power of the BRICS countries.
In other words, the BRICS are very much abreast of the G7 countries in terms of a number of power indices. The fact that many of the BRICS possess a nuclear capability indicates that in military terms too they are almost on par with the G7.
However, what is crucial is that the BRICS, besides helping in modifying the world economic order to serve the best interests of the powerless as well, contribute towards changing the power balances within the vital organs of the UN system, such as the UN Security Council, to render them more widely representative of changing global power realities.
Thus, India and Brazil, for example, need to be in the UNSC because they are major economic powers in their own right. Since they are of a democratic orientation, besides pushing for a further democratization of the UN’s vital organs, they would be in a position to consistently work towards the wellbeing of the underprivileged in their respective regions, which have tremendous development potential.
Queen of Hearts
She has certainly won the hearts of many with the charity work she is engaged in, on a regular basis, helping the poor, and the needy.
Pushpika de Silva was crowned Mrs. Sri Lanka for Mrs. World 2021 and she immediately went into action, with her very own charity project – ‘Lend a Helping Hand.’
When launching this project, she said: “Lend a Helping Hand is dear to me. With the very meaning of the title, I am extending my helping hand to my fellow brothers and sisters in need; in a time where our very existence has become a huge question and people battling for daily survival.”
Since ‘Lend a Helping Hand’ became a reality, last year, Pushpika has embarked on many major charity projects, including building a home for a family, and renovating homes of the poor, as well.
The month of June (2022) saw Pushpika very much in action with ‘Lend a Helping Hand.’
She made International Father’s Day a very special occasion by distributing food items to 100 poor families.
“Many are going without a proper meal, so I was very keen, in my own way, to see that these people had something to keep the hunger pangs away.”
A few days later, the Queen of Hearts made sure that 50 more people enjoyed a delicious and nutritious meal.
“In these trying times, we need to help those who are in dire straits and, I believe, if each one of us could satisfy the hunger, and thirst, of at least one person, per day, that would be a blessing from above.”
Pushpika is also concerned about the mothers, with kids, she sees on the roads, begging.
“How helpless is a mother, carrying a small child, to come to the street and ask for something.
“I see this often and I made a special effort to help some of them out, with food and other necessities.”
What makes Pushpika extra special is her love for animals, as well, and she never forgets the street dogs that are having a tough time, these days, scavenging for food.
“These animals, too, need food, and are voiceless, so we need to think of them, as well. Let’s have mercy on them, too. Let’s love them, as well.”
The former beauty queen served a delicious meal for the poor animals, just recently, and will continue with all her charity projects, on a regular basis, she said.
Through her charity project, ‘Lend a Helping Hand,” she believes she can make a change, though small.
And, she says, she plans to be even more active, with her charity work, during these troubled times.
We wish Pushpika de Silva all the very best, and look forward to seeing more of her great deeds, through her ‘Lend a Helping Hand’ campaign.
Hope and political change:No more Appachis to the rescue
KUPPI on the current economic and political crisis: intervention 1
by Harshana Rambukwella
In Buddhist literature, there is the Parable of the Burning House where the children of a wealthy man, trapped inside a burning house, refuse to leave it, fearful of leaving its comfort – because the flames are yet to reach them. Ultimately, they do leave because the father promises them wonderful gifts and are saved from the fire. Sri Lankans have long awaited such father figures – in fact, our political culture is built on the belief that such ‘fathers’ will rescue us. But this time around no fathers are coming. As Sri Lankans stare into an uncertain future, and a multitude of daily sufferings, and indignities continue to pile upon us, there is possibly one political and emotional currency that we all need – hope. Hope is a slippery term. One can hope ‘in-vain’ or place one’s faith in some unachievable goal and be lulled into a sense of complacency. But, at the same time, hope can be critically empowering – when insurmountable obstacles threaten to engulf you, it is the one thing that can carry you forward. We have innumerable examples of such ‘hope’ from history – both religious and secular. When Moses led the Israelites to the promised land, ‘hope’ of a new beginning sustained them, as did faith in God. When Queen Viharamahadevi set off on a perilous voyage, she carried hope, within her, along with the hope of an entire people. When Martin Luther King Jr made his iconic ‘I have a dream’ speech, hope of an America where Black people could live in dignity, struck a resonant chord and this historical sense of hope also provided inspiration for the anti-Apartheid struggle in South Africa.
This particular moment, in Sri Lanka, feels a moment of ‘hopelessness’. In March and April, this year, before the cowardly attack on the Gota Go Gama site, in Galle Face, there was a palpable sense of hope in the aragalaya movement as it spread across the country. While people were struggling with many privations, the aragalaya channeled this collective frustration into a form of political and social action, we have rarely seen in this country. There were moments when the aragalaya managed to transcend many divisions – ethnic, religious and class – that had long defined Sri Lanka. It was also largely a youth led movement which probably added to the ‘hope’ that characterized the aragalaya. However, following the May 09th attack something of this ‘hope’ was lost. People began to resign themselves to the fact that the literally and metaphorically ‘old’ politics, and the corrupt culture it represents had returned. A Prime Minister with no electoral base, and a President in hiding, cobbled together a shaky and illegitimate alliance to stay in power. The fuel lines became longer, the gas queues grew, food prices soared and Sri Lanka began to run out of medicines. But, despite sporadic protests and the untiring commitment of a few committed activists, it appeared that the aragalaya was fizzling out and hope was stagnant and dying, like vehicles virtually abandoned on kilometers-long fuel queues.
However, we now have a moment where ‘hope’ is being rekindled. A national movement is gathering pace. As the prospect of the next shipment of fuel appears to recede into the ever-distant future, people’s anger and frustration are once again being channeled towards political change. This is a do-or-die moment for all Sri Lankans. Regardless of our political beliefs, our ideological orientation, our religion or class, the need for political change has never been clearer. Whether you believe that an IMF bailout will save us, or whether you believe that we need a fundamental change in our economic system, and a socially and economically more just society, neither of these scenarios will come to pass without an immediate political change. The political class that now clings to power, in this country, is like a cancer – poisoning and corrupting the entire body politic, even as it destroys itself. The Prime Minister who was supposed to be the messiah channeling international goodwill and finances to the country has failed miserably and we have a President who seems to be in love with the idea of ‘playing president’. The Sri Lankan people have a single existential choice to make in this moment – to rise as one to expel this rotten political order. In Sri Lanka, we are now in that burning house that the Buddha spoke of and we all seem to be waiting for that father to appear and save us. But now we need to change the plot of this parable. No father will come for us. Our fathers (or appachis) have led us to this sorry state. They have lied, deceived and abandoned us. It is now up to us to rediscover the ‘hope’ that will deliver us from the misery of this economic and political crisis. If we do not act now the house will burn down and we will be consumed in its flames.
Initiated by the Kuppi Collective, a group of academics and activists attached to the university system and other educational institutes and actions.
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