Running out of options
Afew days before the Government is due to repay (tomorrow-Monday) part of a Chinese loan, the Central Bank together with the Treasury on Tuesday declared (near) bankruptcy saying the administration has decided to temporarily halt all foreign debt repayments until a debt restructuring process with new dates for repayment is discussed during negotiations with the International Monetary Fund (IMF) and by a newly appointed debt structuring manager.
Last weekend, the Treasury called for proposals from potential financial advisors to assist Sri Lanka in improving the medium and long-term debt management and reform strategies of Sri Lanka; recommend a strategy to achieve the best possible results in discussions with the IMF and the creditors of the Sri Lanka Government; and negotiate and represent the interests of the Government in meetings with creditors. The scope of work of the financial advisor includes advising the Government on the strategies to be taken in managing this debt and facilitating the execution of such strategies in consultation with relevant stakeholders.
By the time this column is read on Sunday, the Sri Lankan delegation for the IMF talks starting from Monday, April 18 onwards – Finance Minister Ali Sabri, Central Bank Governor Dr. Nandalal Weerasinghe and Treasury Secretary Mahinda Siriwardene – would already have flown to Washington. Ahead lies tough negotiations similar to previous IMF bailouts with demands to cut Government spending and subsidies to loss-making state companies (and in some cases shutting these units) and handouts to underprivileged classes, increasing tax revenue and reducing the budget deficit – all for seeking $3-4 billion in IMF support to bolster the economy and provide much needed cash for the import of essential items and goods.
According to Ruwanputha, my young economist-friend, the negotiations won’t be easy. “Yes the IMF has agreed to provide much needed support to Sri Lanka but as always, it comes with conditions and strings attached,” he said, during a telephone conversation on Thursday.
Over the past three decades, Sri Lanka has sought IMF support on numerous occasions, the significant one being soon after the separatist war ended in May 2009. Pushing for an IMF bailout was then Central Bank Governor Ajith Nivard Cabraal with India’s help being sought to influence the IMF, when there was resistance from the west to block an IMF programme on the grounds of alleged human rights abuses and excesses by Sri
Lanka’s security forces during the final stages of the conflict.
Ironically, while Cabraal was energetically seeking IMF support then, it is the same former Central Bank Governor (Cabraal) who has been blocking moves (in the past few months) to garner IMF financial support. In fact, Finance Minister Sabri was quoted in the media as saying that while all the ministers wanted IMF help, it was Cabraal, former Treasury Secretary S. Attygalle and former President’s Secretary Dr. P.B. Jayasundera who were opposed to it.
“Getting money is the easy part but agreeing to the conditions set by the IMF is not going to be easy. The Government is mired in debt and, for example, won’t be able to increase tax revenue (by increasing income tax and taxes on goods) since people are suffering with the rising costs of goods and services,” I told Ruwanputha.
“Well it’s a take-it-or-leave-it kind of situation. We need the money and to get it, we need to agree to the conditions that come attached with such loans. It’s much like a normal banking loan which requires collateral; if you fail to repay the loan, the bank retains the collateral,” he said. On some occasions in the past, the Government has been unable to obtain the final tranche of an IMF loan due to not meeting its obligations.
Meanwhile, ahead of IMF discussions, the Central Bank on April 8 (Friday) announced its sharpest ever increase in interest rates – a 7 per cent hike – to 13.50 per cent and 14.50 per cent in policy rates, setting the trend for higher interest rates. This triggered a phenomenal rise in interest rates of 3-month treasury bills to 19.71 per cent this week, from 8 per cent a few months ago, while 6-month t-bills were offered at 22.73 per cent and one year t-bills at 23.36 per cent. Banks would follow suit with double-digit interest rates on deposits (at the same time hiking interest rates on borrowings), compared to 5-6 per cent for deposits in previous months.
On the positive side, the move is seen curbing inflation, particularly food inflation which has surged to 30 per cent last month, because more money being deposited in banks means less for consumption. Furthermore, less consumption (more money in banks than being spent) means less pressure on imports which, in turn, would ease pressure on the US dollar, according to the normally accepted theory when interest rates are hiked.
But on the flipside, bank borrowings by the private sector become costlier and would adversely affect businesses and input. In turn, the high cost of borrowings would be added to the cost of production of goods and services resulting in Sri Lankans having to pay more for their essentials.
This comes at a time when Sri Lanka’s crisis-hit industrial sector – particularly tea, rubber and garments – is facing severe production difficulties largely due the shortage of fuel and crippling power cuts.
Meanwhile, the trio had gone to their villages for ‘ Avurudu’ but had met under the margosa tree on Monday. “Mama peya pahak hitiya polime gas ganna. Seeyakata wediya hitiya eth silindar panahai beduwe. Wasanavata mata silindarayak ganna puluwan wuna (I waited in the queue for five hours to get cooking gas. While there were more than 100 people, only 50 LPG containers were distributed. I was lucky to get one),” said Kussi Amma Sera.
“Mama sathosata giya, eth ethana parippu, seeni saha paan piti thibune ne. Aanduwa boruda kiyanne me deval sathose thiyenawa kiyala (I went to the Sathosa shop and they didn’t have dhal, sugar or flour. Is the Government lying when they say these items are available at Sathosa),” asked Serapina.
Adding to the conversation, Mabel Rasthiyadu said: “Kohomada danne ne, Galle Face eke virodaya prakasha karana kattiya kanne (I wonder how the protestors at Galle Face Green are managing for food).”
Responding, Serapina said, “Mama hithanawa godak kattiya egollanta kaema saha baema denawa kiyala (I think there are many people who are offering food and drink to the protestors).”
The country’s declaration of bankruptcy – at least for a temporary period – has already sent international rating agencies scurrying to downgrade Sri Lanka’s rating and standing amongst international lenders. Even if Sri Lanka has access to loans and credit, it would come at higher and costlier interest rates.