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Verite shows how Lanka can achieve sustainable debt dynamics

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Verité Research, a private think tank that provides strategic analysis for Asia, hosted the online discussion Steering out of the Debt Crisis: Recipe for Budget 2022 on Oct 14. The event was anchored around addressing Sri Lanka’s debt and USD liquidity crisis, and featured presentations by Executive Director, Nishan de Mel, Research Director, Deshal de Mel, and Analyst Anushan Kapilan. An expert panel included Dr. Shantayanan Devaranjan (Georgetown University), Dr. Nandalal Weerasinghe (former Senior Deputy Governor – CBSL) and Dr. Mick Moore (Institute of Development Studies – UK).

A press release issued by the think tank said: Verité Research presented analysis pertaining to debt management and fiscal measures, including specific proposals to increase government revenue and improve the allocation of expenditure.

The Verité Research analysis showed that Sri Lanka can achieve sustainable debt dynamics by meeting two conditions with regard to its domestic debt, and two further conditions with regard to its foreign debt. The presentation explained that, despite some challenges, achieving these conditions was feasible for Sri Lanka – provided policy-makers choose to do so.

The main challenges arise from poorly formulated fiscal/budget measures, coupled with the pandemic-induced setbacks which have resulted in successive downgrades of Sri Lanka’s credit ratings. As a result, Sri Lanka has been locked out of global capital markets, and rapidly depleted its foreign reserves, as it has continued to pay back foreign bondholders, at the expense of negative feedback on the local economy.

The Verité Research analysis showed that the worst is yet to come. Sri Lanka’s foreign reserve would be completely depleted by the end of 2022 if no surprise inflows materialise, and even if they did, the crisis would simply re-emerge in 2023. This means that even if Sri Lanka can claim to be technically solvent, it does not have the liquidity to sustainably pay back its foreign debt until the country credit rating is improved by at least two notches.

The current path of repaying debt offers a high return to bondholders at the expense of huge pain to domestic businesses and consumers, and makes the credit rating outlook even more precarious. The solution is to share the pain with bondholders by pre-emptively restructuring the debt. This can improve the foreign reserve position more quickly, and thereby improve the country’s credit rating more quickly as well. This alternative path is less painful to the local economy, offers a faster recovery, with a higher probability of success. It is a better path for the Sri Lankan economy than repaying foreign bondholders in full, even if it were able to do so.

A clear distinction needs to be made between a forced restructuring which would occur if a country were to default in a disorderly way without negotiating with creditors, and an orderly pre-emptive restructuring of debt following negotiations with creditors. The sooner Sri Lanka moves to an orderly pre-emptive debt restructure, the easier it would be to do so, and the more favourable it would be for the Sri Lankan economy. Delaying the decision is damaging and can result in outcomes that are highly disruptive.

Currently the primary deficit is at 7.4% of GDP. At the current GDP growth rate of a little under 4% (predicted by Verité Research), it is necessary to reduce the primary deficit to around 2% of GDP or less to help stabilise the debt.

The Verité Research analysis showed that in the base case scenario with no policy changes, the debt to GDP Ratio would increase to 123.08% by 2025, however with prudent fiscal measures it can be kept down to 108.8% by 2025.

The fiscal measures proposed included the reduction of the personal income threshold to LKR 1 Mn per Annum; the reintroduction of PAYE with a threshold of LKR 1.5Mn; reintroduction of WHT on interest income; increasing the VAT rate to 10% in 2022 and to 12% in 2023; reducing the VAT free thresholds from LKR 300 Mn to LKR 150 Mn in 2022; simplifying the corporate tax regime to a three-tier regime; and increasing the total taxes on cigarettes and alcohol in line with increases in inflation and GDP according to a tobacco taxation formula introduced in the 2019 budget.



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GL explains to UN Special Rapporteur Lanka’s progress related to labour welfare

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Foreign Minister Prof. G.L. Peiris has explained to UN Special Rapporteur on Contemporary Forms of Slavery, including its causes and consequences, Tomoya Obokata, Sri Lanka’s progress related to labour welfare and the constructive steps taken by the government to eradicate child labour.

The Minister also elaborated on steps taken to bring our labour laws in line with international standards in a number of areas, including child labour, migrant workers and debt bondage. The Special Rapporteur commended Sri Lanka on the progress made with regard to making Sri Lanka a ‘child labour free zone’.

The UN official called on Prof. Peiris on Friday, 26 November, at the Foreign Ministry.

The mandate of the Special Rapporteur includes but is not limited to issues such as: traditional slavery, debt bondage, forced labour, children in slavery and slavery-like conditions, sexual slavery, forced and early marriages as well as issues faced by migrant workers and foreign labour.

The Foreign Minister outlined that Sri Lanka was conscious of protecting vulnerable labour groups and emphasized that Sri Lanka will continue to cooperate with the United Nations system. He stated that visits by Special Procedures Mandate Holders have been helpful in enhancing understanding of the specificities of Sri Lanka’s experiences in related fields as well as in improving domestic processes to be in line with our international commitments.

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More gas explosions

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Two women injured

By Rathindra Kuruwita

There were 11 new explosions related to domestic gas cylinders in the 24 hours that ended at 12 noon yesterday. Among the areas these explosions were reported are Agama, Karana, Hungnam, Walasmulla, Kundasale, Katugastota, Dimbula and Giriulla.

Two women have been injured in these latest explosions. In some instances, the gas cooker wasn’t even on when the explosions happened.

Meanwhile, Litro has introduced the hotline, 1311, for the public to make any complaints with regard to their gas cylinders. Once a complaint is received, a team of technicians will arrive and check the cylinder, the company said.

Litro also urged the public not to try any experiments to see if the cylinders are safe.

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Countries tighten travel rules to slow Omicron spread

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Saudi Arabia, Nigeria, Norway, Ghana confirm first cases of the new Omicron COVID-19 variant as countries tighten travel rules.

The United States, Japan and Malaysia have announced tighter travel restrictions in an attempt to slow the spread of the new Omicron coronavirus variant as more countries confirmed their first cases.

Japan and Hong Kong said on Wednesday they would expand travel curbs, and Malaysia temporarily banned travellers from countries deemed at risk, news agencies reported.

Hong Kong added Japan, Portugal and Sweden to its travel restrictions while Uzbekistan said it would suspend flights with Hong Kong as well as South Africa. Japan, which had already barred all new foreign entrants, reported its second case of the new variant and said it would expand its entry ban to foreigners with resident status from 10 African countries.

Malaysia temporarily barred travellers from eight African countries and said Britain and the Netherlands could join the list.

In North America, air travellers to the US were set to face tougher COVID-19 testing rules.

The Centers for Disease Control and Prevention (CDC) said late on Tuesday that the US would require all air travellers entering the country to show a negative COVID-19 test performed within one day of departure.

Currently, vaccinated international travellers can present a negative result obtained within three days from their point of departure. The new one-day testing requirement would apply to US citizens as well as foreign nationals.

Global spread

Saudi Arabia’s health ministry said it recorded the Gulf’s first confirmed case of the Omicron variant in a citizen returning from North Africa.

Nigeria said it had confirmed two cases of the Omicron variant among travellers who had arrived from South Africa in the past week. Ghana and Norway also reported their first cases of the new variant on Wednesday.

Brazilian health regulator Anvisa said late on Tuesday that two Brazilians had tested positive for the Omicron strain, the first reported cases in Latin America. A traveller arriving in Sao Paulo from South Africa and his wife, who had not travelled, had tested positive.

Germany, which is battling a surge in COVID-19 infections and deaths, reported that four fully vaccinated people had tested positive for Omicron in the south of the country but had moderate symptoms.

It also reported the highest number of deaths from coronavirus since mid-February on Wednesday, as hospitals warned that the country could have 6,000 people in intensive care by Christmas, above the peak of last winter.

Other countries braced for more cases: Australia said at least two people visited several locations in Sydney while likely infectious and Denmark said an infected person had taken part in a large concert.

The World Health Organization (WHO) said “blanket travel bans will not prevent the international spread, and they place a heavy burden on lives and livelihoods”, while advising those unwell, vulnerable or 60 years or over and unvaccinated to postpone travel.

Global health officials have offered reassurances and reiterated calls for people to get vaccinated.

BioNTech’s CEO said the vaccine it makes in a partnership with Pfizer would likely offer strong protection against severe disease from Omicron.

European Medicines Agency Executive Director Emer Cooke earlier said that laboratory analyses should indicate over the next couple of weeks whether the blood of vaccinated people has sufficient antibodies to neutralise the new variant.

The European Union brought forward the start of its vaccine distribution programme for five-to-11-year-old children by a week to December 13.

Britain, the US and European countries have expanded their booster programmes in response to the new variant.

First reported in South Africa a week ago, Omicron has highlighted the disparity between substantial vaccination pushes in rich nations and sparse inoculation in the developing world.

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