Dilemma over debt talks

Inconclusive talks on debt restructuring between the Sri Lankan Government and its private creditors revolving around US$12 billion invested in sovereign bonds have cast a shadow over any final agreement on a scheduled calendar of payments.

Into the quagmire also falls the forthcoming elections with a former Treasury Secretary last week expressing concern that if no agreement is reached by June, the hopefully continuing discussions would enter the pre-election phase and could lead to a suspension of talks. If that happens, the discussions could stretch into 2025 with breathing space during the pre- and postelection period. That would hamper the third tranche of the IMF’s $2.9 billion facility, due in June, to bail out Sri Lanka from its dollar-short economy.

The IMF engagement is purely out of need to service

Sri Lanka’s debt which has been put on hold with the negotiations to reschedule debt payments.

But one reader asked an interesting question last week: Sri Lanka seems to be increasing its dollar revenues with the foreign reserves rising close to $5 billion now compared to 2022 when it was less than $1 billion. The Central Bank has also been buying dollars in the money markets – at least $10-20 million per day with $245 million in January 2024 and $280 million in February – to reduce pressure on the rupee. So if the country is flushed with dollars why cannot we pay our foreign debt?

Interesting question for which only the mandarins at the Central Bank could answer.

Last month, the debt restructuring talks in London were held between the government – joined by its legal and financial advisors, Clifford Chance and Lazard – and a Steering Committee (helped by this group’s legal and financial advisors, White & Case and Rothschild & Co) which controls approximately 50 per cent of the aggregate outstanding amount of international sovereign bonds.

As I delved deeper into Sri Lanka’s foreign debt and delayed repayment process, the phone at home rang. It was my jollymood economist friend, Sammiya (short for Samson), calling on Thursday morning.

“I say, I’m interested in the debt structuring negotiations between the government and private creditors. Why have the discussions failed?” he asked.

“It has not failed but is temporarily suspended as no agreement has been reached between the two sides. It would hopefully resume next month,” I said.

“Will it end conclusively or get more positive next month and have a favourable response?” he asked again.

“There are four grey areas in which there are disagreements. But government officials and a former Central Bank governor seem confident that these roadblocks can be overcome,” I said.

“I suppose no negotiation of this nature is straightforward and I recall some other countries involved in foreign debt negotiations had similar roadblocks before the favourable conclusion of those discussions,” he said.

As we ended our conversation hoping to catch up in the coming weeks with another discussion on similar trends, my attention was drawn to the conversation under the margosa tree by the three ‘amba yahaluwas’ (mango friends).

“Hamoma janadipathi waranayata laesthi wena wagey (Everyone seems to be preparing for the presidential election),” said Serapina.

“Eth paksha wala godak prashna thiyenawa, wediyen-ma sri lanka nidhahas pakshaye nadu thiyenawa-ne (But there are many problems among political parties particularly the

Sri Lanka Freedom Party which is involved in many court cases),” noted Mabel Rasthiyadu.

“Mathiwarana wala honda thama aanduwen eka eka eva janathawata dena eka – den haal denawa janathawa dina ganna (The only good part about elections is that the government offers many handouts and in this case free rice to win the support of the people),” said Kussi Amma Sera.

Coming back to the discussion on debt restructuring, officials – despite some confidence in some sections of the authorities – are concerned that the debt talks might not be concluded, as envisaged by end-May or early-June.

“We need to iron out the differences……otherwise, we are heading into the pre-election period when such issues are put on the backburner,” said one worried official.

The government seems to be on the right path and conforming to the stipulated IMF conditions for its loan. In line with these conditions, the Sunday Times last week reported that a draft law would be presented to the Cabinet for approval seeking to forfeit proceeds or “fruits” of crime.

In another positive move, the government said it has closed preliminary submissions towards acquiring the assets of key state-owned enterprises which have been making losses or have an accumulated debt burden.

It said deadlines for the submission of RfQs for state organisations - HDL, CHPL, LHCP, SLT, SLIC, LITRO and SriLankan Airlines have now closed.

This was an update on the divestiture process of shares held by the Government of Sri Lanka in several entities and the measures taken to manage the State Owned Enterprise (SOE) sector.

It said all transactions other than SriLankan Airlines will be concluded by August 2024, while the timeline for SriLankan Airlines is likely to be extended to the end of September 2024. However, that timeline also may not be achievable as it happens during the election period when there could be electionrelated rules that might deter such engagement and decisions.

According to an official statement on the debt talks, the issues narrowed down to four features of the MLB (MacroLinked Bonds):

1. The baseline parameters of the instruments proposed by the group were calibrated by reference to the group’s “alternative baseline”, rather than Sri Lanka’s IMF-Supported Programme baseline.

2. While the group had already updated its original MLB structure to include a scenario where Sri Lanka might underperform IMF-Supported Programme GDP projections, Sri Lanka invited the group to consider a structure that would provide greater protections to Sri Lanka in such a scenario.

3. The test for triggering upward/downward adjustments in the MLB.

4. The share of additional value in an upward adjustment scenario – Sri Lanka invited the group to consider lower bondholder allocation in the scenario in which the country outperformed IMF-Supported Programme GDP projections and satisfied the upward adjustment test in the MLB. Sipping my second mug of tea, I wound up the column on growing concerns whether the authorities would reach an agreement with its private creditors before the elections for the presidency are announced around July.