Desperate Sri Lanka ponders ‘something’ and anything when more creditors come calling

Sri Lanka, which has continued to kick the crushing debt can down the road, is now trying everything in the financial playbook, including seeking IMF support to dodge an ignominy.

Finance minister Basil Rajapaksa has told London’s Financial Times, that Sri Lanka is “negotiating with everybody”, and “trying all our options”, to avoid default and alleviate the economic crisis. He did not elaborate, and admitted to the world the helplessness and the desperation, noting the lack of hard cash for fuel and medicine. Exporters and industries are also in a bind without forex for intermediate goods.

Asked by the Financial Times if he is negotiating a restructuring with bondholders, Basil Rajapaksa replied, “something like that”.

“Obviously you can understand what we want and you can understand what the bondholders would like to have,” he added.

Just the past Monday, Central Bank Governor Ajith Nivard Cabraal sounded confident in an interview with the US financial news network, CNBC: “Well, we don’t need relief if we have an alternative strategy’’, when asked about an IMF arrangement. He said the next loan is being funded with “alternative sources’’, admitting not being able to borrow anymore in international capital markets. Cabraal also mentioned a “dearth of funds out there’’. In fact, global financial markets are awash in liquidity in a low interest rate environment, which favour credit markets. Cabraal likely meant market liquidity, rather than monetary liquidity. Global investment banks have achieved record performance in asset management and wealth.

Investors gravitate to high-grade fixed income such as U.S. Treasuries, as well as Australian and New Zealand government bonds, and A-rated corporates. In 2021, good performance was seen in the higher quality, double-B rated, US high-yield segment. Some investment banks predict a rotation into triple- C rated bonds this year.

After recently begging from the neighbourhood, while controversially handing over state assets to creditors, again, to settle a US$ 500 million international sovereign bond on January 18, the Sri Lanka Podu Jana Peramuna government is staring nervously at another US$1b ISB due in July this year.

Price controls were removed and inflation in Sri Lanka galloped to 12% in December, while the US Federal Reserve set the stage the past Wednesday for raising the benchmark interest rate by a quarter-percentage point, or 0.25%. This would raise borrowing costs. Home mortgage costs would also rise. The Federal Open Market Committee, said Wednesday in a statement, that the panel “expects it will soon be appropriate to raise the target range for the federal funds rate’’. At least three Fed rate increases are in store, in an important monetary policy shift.

Sri Lanka's weekly average prime lending rate has risen to 8.6%.

At this stage, Sri Lanka is unable to borrow from international capital markets.

Finance Minister Rajapaksa has also to grapple with foreign debt service payments, including principal and interest, of US$ 6.9 billion in 2022. This is equivalent to nearly 430% of official gross international reserves as of November 2021, Fitch Ratings had earlier estimated.

In all, foreign-currency debt service adds up to US$26b up to 2026.

“We have [international sovereign bonds] which we have to repay back, [sic] so we are negotiating with them. Then we have creditors and we have to service their debt, so whether we can have an adjustment or some type of thing,” Basil Rajapaksa has told the UK Financial Times.

He is keeping the option open for an IMF bailout. He said he would “think about a programme with the IMF…. All those discussions are going as well.”

Suffocated by rapidly evaporating forex reserves, the Government has even implored Sri Lankan workers overseas to help, only to face a backlash from them following a remittance crackdown engineered by Ajith Nivard Cabraal, head of the Central Bank of Sri Lanka. Foreign remittances coming through the official banking channels are dropping at an alarming rate due to the artificial exchange rate. No foreign direct investment has been forthcoming, either.

The Financial Times reports that Basil Rajapaksa insisted the government could manage, but was preparing for contingencies. “I know it’s very difficult because we have to pay this year US$ 6.9b and, additional to that, we have to find money for medicine, raw material, fuel, all these things,” he said.

Governor Cabraal, on the other hand, had exuded confidence of “having enough money’’. In a CNBC interview in August last year, pressed about his claim of US$ 2.65b inflows in six months, he said that “some are swaps,’’ including from “Bangladesh Bank and the Reserve Bank of India’’, and also “about US$ 800m from the IMF from the SDR facility under new allocations’’.

“We are also having a new area that we are looking at... new inflows to the country, which is the utilisation of under-utilised assets. There are quite a number of Sri Lankan assets that we have not been able to use to generate inflows, but now we are very effectively attending to that, and I am sure that we will be able to rake in at least US$ 400m and if we are on the right track on that we probably will be able to realise about US$ 1b. So, those will be inflows that are non-debt type and I am sure that will be very helpful in making our ends meet.”

Then, in conversation with CNBC just the past week, Cabraal brushed off “risk’’.

“Out of the US$ 6.9b, most are Sri Lankan-based loans, which we already have negotiated for rollover, as well as certain multilateral debts, which are also being funded with new receipts that are coming in. So, we don't really see too much of a risk there. The only area that we do see some kind of risk as well as concern, is the ISBs out of which we need to pay US$ 1.5b back this year, and we have already paid back US$ 500m, and we have one more [USD] billion to be paid. Now, the overall situation is like this … we have approximately a further US$ 12.5b of debt in ISBs to be paid over the next seven years, and in that context, we have already made arrangements to pay back the next loan and we are funding that with alternative sources and our strategy has been, since it is difficult to go to the market at this stage, we have found alternative sources of new financing, which has assisted to repay the debt of the ISB, which means that in the last two and a half years, we have reduced our ISBs by 17% and by July we would reduce it by 23%.”

He added: “If you don't have the ability to go to the markets right now, and the prices are high and there is a dearth of funds out there then you got to find alternative sources, which is actually a kind of new change in the mix of our debt, which is quite sustainable. By then the economy would have grown.”

The World Bank Group recently predicted a sharp contraction of Sri Lanka’s economic output in 2022. Real GDP growth will drop from an estimated 3.3% in 2021 to 2.1% in 2022. Cabraal bets that “about 5.5% growth is possible for this year.’’ CBSL said on January 20, it “expects about 4% growth’’ in 2021.

The trade deficit has further ballooned to US$ 7.1b from US$ 5.4b year-on-year in the 11 months to November, 2021. Remittances from Sri Lankans overseas slumped to US$ 4.89b from January to October, from US$ 5.68b in the same period in 2020. But, CBSL “estimates’’ US$ 5.5b remittances.

Earnings from apparel shipments last year were a mere US$ 2.5b net, when import costs of inputs are deducted.