Business

Sri Lanka needs ‘bridge financing’ to last next six months, says Indrajit Coomaraswamy

Published

3 years ago

2022/04/4

by Sanath Nanayakkare

Sri Lanka needs to take steps on getting to a framework programme with the IMF, restructure its external debt and bring some bridge financing to last for next six months until negotiations with the IMF on external debt is completed,”former central bank governor Dr. Indrajit Coomaraswamy said recently, at a forum hosted by CT CLSA.

“IMF won’t be able to transact with Sri Lanka until we fix the unsustainable situation in the country,” he said.

Dr. Coomaraswamy highlighted the fact that IMF may include fiscal consolidation in a programme of debt restructuring for Sri Lanka.

CT CLSA, a leading capital market service provider that offers investment banking, stockbroking and wealth management services , conducted the forum on the timely topic ‘ The IMF and the Order of Priorities for Reforms.”

Elaborating on the topic, he said, “In fact, we have a solvency problem on our external debt. Trying to treat it as a cash flow problem and addresing it with short-term measures may create a bigger problem. However, we are beginning to see light at the end of the tunnel due to the policy measures taken by the government recently. Now having approached the IMF, and the government considering some external debt restructuring; we are shifting to the right path, but this is going to be tough.”

“Interest rates are about to rise. As per previous levels where inflation was high, 91-day treasury bill yield was 16%, SLFR was 12% and SDFR was 10.5%. According to former deputy governor of the central bank, Dr. W. A. Wijewardena, the interest rates are expected to double from the current levels.”

Responding to a question on the upward movement of the exchange rate, he said, “I think we could have taken measures to reduce the imbalance between demand and supply of foreign exchange before letting the exchange rate float.”

Referring to domestic debt, Dr. Coomaraswamy said,”We should not suggest or ever take into consideration to restructure our domestic debt. If we restructure the domestic debt, it will lead to serious undermining of the stability of the financial system. Such a situation may not help Sri Lanka in meeting its commitments with external creditors.”

“In fact, the crisis was two years in the making from the time the government cut taxes after the presidential election The country’s banking system is highly exposed to sovereign debt because in recent years, the banking system provided for bridging the budget deficit of the country. And therefore, if there is any restructuring of domestic debt, the impact of such a move could spill over to the balance sheets of the banks and would likely create a crisis in the financial sector. And some of the banks would be affected in the event of external debt restructuring. However, this effect could be managed through regulatory programmes of the central bank. The only way to solve this problem on a sustainable basis is to create a primary surplus in the budget,” he emphasised.

“All creditors of Sri Lanka would seek equality of treatment, and therefore, multilateral debt; namely, World Bank, ADB and the little bit of IMF debt should not be restructured. If it were to be restructured, those institutions could stop their operations in Sri Lanka, and even their financing in the pipeline may not be disbursed.”

“Bilateral debt, mainly OECD which is West + Japan are part of the Paris Club. As China and India are not part of the Paris Club, one of the possibilities for us is to see whether we are eligible for B20 framework earmarked for low-income countries. [B20 proposes to consider the issue of public debt management within the international financial architecture reform].

Dr. Dushni Weerakoon, the Executive Director of the Institute of Policy Studies of Sri Lanka (IPS) was also a panelist at the CT CLSA forum.

When she was asked how Sri Lanka should put the reforms in a particular order to be implemented, she said,”We no longer can afford sequential reforms. What is most critical for Sri Lanka in terms of its economic outlook is to gain some sense of macro stability as a first priority.”

“We are currently witnessing a clear shift in policy. We have to work on several fronts simultaneously with well-coordinated action on three fronts; namely, monetary policy front, exchange rate front and fiscal front. We have entered a monetary policy tightening cycle. The moves of the central bank led to a market-driven exchange rate. But the fiscal side is missing. As long as this is neglected the progress made on monetary and exchange rate fronts will not bring stability. This will put pressure on other two fronts.”

“There is slowness on fiscal adjustment maybe because it’s difficult to do it. Fiscal adjustment will require to raise taxes on the revenue side, and the spending side will require to freeze expenditures. Clear communication of these reforms to the general public is important as these changes should not create more social unrest. The way to do this could be that greater sacrifices would have to be made by those who have greater ability to pay taxes. The richer segment of the Sri Lankan population may have to bear a larger burden of the tax adjustments”.

“On the expenditure side, government spending may have to be frozen and public sector wages and salaries may also have to undergo changes. In such a context, there will be the need to try as much as possible to provide social safety nets for needy segments. It could be provided by implementing a cash transfer programme to reduce the potential social unrest.”

“The other reforms include State Owned Enterprise (SOE) reforms, labor market reforms and banking sector reforms,” she said.

When asked about the possible scenario of debt restructuring with debt to equity swaps, she said,” The possible cost of that is; you will face a prolonged negotiating process with the threat of legal action on the country. Unlike in the past, now our creditor landscape is huge. Our creditors are mostly based in the U.S., and then we have bilateral debt providers such as China and India. we will have to bring all these stakeholders to a common ground and ensure equality of treatment.”

“Another risk is that we need to know that the bonds issued by Sri Lanka has clauses where the majority of the bond holders can buy the minority. If not, there could be a hold off problem where we may have to face legal consequences.”

“The recent debt restructuring of Ecuador and Argentina only had restructuring of interest rate adjustments and maturity extensions and did not receive a haircut,” she pointed out.

Sri Lanka for the first time in 63 years achieved a Rs. 21.9 billion surplus in the primary balance of the fiscal account during the first 10 months of 2017. The country recorded a primary surplus of 0.6 percent of GDP in 2018, the second year running. Dr. Indrajit Coomaraswamy was the governor of the central bank at that time.

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Business

Mini-hydro power emerging a more sustainable option than thermal power

Published

20 hours ago

2025/03/19

Sahan Weerasooriya

Public Utilities Commission of Sri Lanka (PUCSL) analysis shows that the running cost for mini- hydro projects is some Rs 25 million per year, making them a financially sustainable solution for energy generation, in comparison to the extremely high running costs borne by thermal power plants operated by the Ceylon Electricity Board.

A senior official told The Island Financial Review that in the pursuit of sustainable and cost-efficient energy solutions, mini- hydro projects have emerged as a viable alternative, particularly for the private sector. “Small-scale hydroelectric power can be managed effectively with minimal operational costs, he added.

The official noted that mini hydro projects are typically small-scale hydroelectric power stations that generate electricity by utilizing natural water flow without the need for large dams or reservoirs. They offer a reliable source of renewable energy with lower environmental impact compared to larger hydro projects.

The private sector has been actively involved in managing mini- hydro projects, recognizing their potential to provide a stable revenue stream while contributing to clean energy production. “The scale of these projects aligns well with private sector capabilities, as they require relatively lower capital investment and can be efficiently managed by smaller teams, he added.

Moreover, the official said, with advancements in technology and increasing emphasis on renewable energy, mini- hydro projects offer opportunities for public-private partnerships. Incentives such as tax benefits, favorable tariffs, and government support for renewable energy further enhance the attractiveness of these investments.

“Beyond financial feasibility, mini- hydro projects bring several long-term benefits. They contribute to energy security by reducing dependence on fossil fuels and mitigating the impact of power shortages. Additionally, they have minimal environmental disruption compared to large-scale hydroelectric plants, preserving local ecosystems and water resources, he added.

By Ifham Nizam

Business

HNB hosts Women’s Day program empowering 300+ microfinance entrepreneurs

Published

20 hours ago

2025/03/19

Sahan Weerasooriya

Hatton National Bank PLC (HNB) reaffirmed its commitment to fostering financial inclusion and empowering women entrepreneurs by hosting a corporate event in celebration of International Women’s Day 2025. The program brought together over 300 microfinance entrepreneurs, alongside business leaders, financial experts, and HNB representatives, creating a platform for knowledge sharing and empowerment. The initiative aimed to equip women with the insights and resources needed to drive sustainable business growth and strengthen their entrepreneurial journeys.

Held under the theme of Empowerment and Financial Literacy, the event featured insightful discussions, educational sessions, and an engaging panel on financial management and entrepreneurship. Women entrepreneurs from across the country participated in the event, sharing their experiences and learning from industry experts on how to navigate challenges and expand their businesses.

HNB’s Managing Director/CEO, Damith Pallewatte, addressed the gathering, reiterating the bank’s role in fostering inclusive economic growth and empowering women-led enterprises.

“Today, there is a growing trend of grassroots-level women engaging in entrepreneurship, which is a crucial factor for the country’s progress. Recognizing the importance of empowering women, HNB has taken steps to create vast opportunities for them. Through initiatives focused on financial literacy, empowerment, introducing role models, and strengthening networks, we aim to contribute to the advancement of women and support their journey toward success.”

The event featured a series of expert-led sessions designed to equip women entrepreneurs with the knowledge and tools to make informed financial decisions. A financial literacy program conducted by Keerthi Dunuthilaka, Deputy Director of the Central Bank of Sri Lanka (CBSL), provided key insights on managing and growing businesses. Viranga Gamage, HNB’s Head of Deposits, presented investment options tailored for women entrepreneurs, while Raman Jeikumaar, Senior Manager – Tax & Group Accounting, simplified tax management for SMEs. Dr. Hashi Peiris from the University of Kelaniya delivered an inspiring session on holistic empowerment, and entrepreneur Shamali Wickremasinghe shared her journey to success. Additionally, Sanesh Fernando, Chief Business Officer of HNB Assurance PLC, highlighted the importance of life insurance in securing financial stability for business owners.

Business

‘Sri Lanka’s digital industry: Resilient, adaptive, and poised for growth amid policy shifts’

Published

20 hours ago

2025/03/19

Sahan Weerasooriya

The digital services sector in Sri Lanka has witnessed new tax measures introduced in the latest national budget, which mark a significant shift in the industry’s financial landscape. While these measures present challenges, the industry remains steadfast in its commitment to growth, innovation, and resilience. The Ministry of Digital Economy, in collaboration with key industry stakeholders, is actively engaging to ensure that Sri Lanka remains a competitive and attractive hub for digital services, both regionally and globally.

The digital sector has long been one of the most dynamic and future-ready industries in Sri Lanka, withstanding economic crises, global downturns, and disruptive technological shifts. Even during the most difficult periods, such as the COVID-19 pandemic and the economic crisis that followed, the industry remained robust, leveraging innovation and adaptability to sustain growth. The introduction of new tax policies, while impacting stakeholders, is being met with a proactive approach by both the Government and industry leaders to mitigate negative consequences and capitalize on long-term opportunities.

A key aspect of the Government’s fiscal strategy has been to ensure a level playing field by requiring all companies—both local and international—to contribute to the nation’s economy through taxation. Historically, non-domiciled digital service providers had an advantage over local companies, as they were not required to pay taxes for services offered within Sri Lanka. This policy shift is expected to generate additional revenue for the Government while ensuring fairness in the market. However, concerns have been raised regarding the potential implications of increased taxation on digital exports and freelancers, as this may encourage relocation of businesses and banking operations to more tax-friendly jurisdictions. Despite these challenges, the Ministry of Digital Economy, in collaboration with key industry organizations, is focused on implementing measures to sustain and enhance the growth of Sri Lanka’s digital economy. Several strategies are being explored to provide relief and long-term benefits to industry players. These include concessionary loan schemes, investment in skill development, improved digital infrastructure, and the creation of IT parks and co-working spaces to foster innovation and entrepreneurship.