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Sri Lanka fail at Foreign-law Debt Hair Cut and Debt to GDP to Rise

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God Father

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Senior Manager - Equity Analytics
Senior Manager - Equity Analytics

Sri Lanka fail at Foreign-law Debt Hair Cut and Debt to GDP to Rise Scree414

The IMF programme envisaged a "haircut" of 60% of the amounts due to Bilateral and Private Creditors so that the foreign-law debt of $ 27,943 mn could be cut by 60% amounting to $ 16,921 mn. (see page 26 of IMF Report of 20th March 2023). https://www.imf.org/-/media/Files/Publications/CR/2023/English/1LKAEA2023001.ashx

However, bilateral creditors have not granted a single dollar "haircut", and only agreed to a slight reduction in interest rate in some instances and a 2 year moratorium in payment period.

On that basis, the ISB holders also won't agree to a "haircut" on the grounds of "equitable treatment of all Creditors" principle.

Therefore, the Govt is now back to square One, and there won't be any reduction in the Debt to GDP ratio as touted by the Govt and CBSL.

Sri Lanka fail at Foreign-law Debt Hair Cut and Debt to GDP to Rise Scree418

Of the total public debt outstanding, it is stated that the total “foreign-law debt” amounts to USD 41,474 million, of which the “Official bilateral” creditors hold debt of USD 11,419 million, while “Private” creditors hold debt of USD 16,524 million, together totaling USD 27,943 million (page 45).

Since the IMF has assumed the total “debt relief” and “moratorium” of USD 16,921 million as per the Table at its Staff Report page 26, such “hair-cut” would amount to a massive 60.6% “cut” out of the total foreign-law debt outstanding of USD 27,943 million that is payable to those two categories of creditors. Therefore, if the IMF has worked out its debt restructuring and financing based on such a massive “hair-cut” being imposed, in all probability, such an exercise would result in dragging the economy and country into a serious uncertainty, intense risk, protracted litigation, and prolonged economic pain. Such an eventuality would definitely be counter- productive and unsustainable from the point of view of many creditors, including the several Sri Lankan commercial banks who reportedly hold a significant USD 1,750 million out of the International Sovereign Bonds, plus accrued interest.

It is noted that the IMF’s “External Financing Gap” and “Programme Financing” calculation also envisages an ISB inflow of USD 1,500 million in 2027. Such an inflow is envisaged even as the Government is expecting to impose a “hair-cut” of USD 1,482 million on its “Official bi-lateral” and “Private” creditors in the very same year. That contradiction indicates the absurdity of such an assumption which displays a total lack of understanding of “creditor-sensitivity” as well as even a modest degree of common sense, as it would be obvious that it would be well-nigh impossible to attract any ISB investment in a magnitude of USD 1,500 million, in such circumstances.

After preparing the “Programme Financing” calculations on the above basis, the IMF’s expectation seems to be for the CBSL to accumulate Gross International Reserves of USD 14,208 million, whilst defaulting on sovereign loan repayments amounting to almost a similar amount in those years. In fact, such GIR accumulation by the end of 2027 seems to be a rough mirror- image of the massive “hair-cuts” expected to be imposed on the country’s Official bilateral creditors and Private creditors, which those creditors would very likely consider quite unacceptable or even offensive, since the GIR build- up appears to be a mere transfer of the debts payable to the foreign-law creditors to the CBSL Reserves!

It is also a matter of grave concern that the Sri Lankan authorities as well as the IMF have both chosen (for some unknown reason) to completely ignore the “pipe-line” of highly likely FX inflows that were to be received by the Government at the time the untimely “debt default” was hastily announced by some officials. In this regard, while it must be mentioned that it is quite suspicious as to why those credible inflows have not been followed up at that time, it must be re-iterated that FX inflows around USD 7,150 million were highly likely to materialize within the 2nd, 3rd and 4th quarters of 2022 itself. In addition, the Peoples Bank of China SWAP of USD 1,550 million would also have become “usable” when those anticipated receipts materialized as the CBSL’s GIR would have then reached the reserve levels required for the PBOC SWAP to become operative for use.

However, due to the reckless debt default announcement, those promising inflows were summarily and instantaneously lost. If not, those timely “bridging finance” inflows would have been quite adequate to keep Sri Lanka solvent up to the end of 2024, by which time the improvements in workers’ remittances, exports, tourism receipts, service inflows, and other new avenues of “non-debt” inflows would have comfortably ensured Sri Lanka’s continued solvency and the maintenance of the country’s impeccable track record of being an honest and respected debtor-nation.

Sri Lanka fail at Foreign-law Debt Hair Cut and Debt to GDP to Rise Foreig10

In that background, the IMF assumption that bi-lateral loan disbursements will record USD 1.5 bn in 2024 is simply “wishful thinking” unworthy of the IMF, since no bi-lateral creditor is likely to even consider providing further financing to a country/borrower which has just defaulted to the tune of (a currently projected) 60% of its outstanding debt due to the same creditor. The assumption that the ISB market could also be accessed by 2027 is another “pipe-dream” as no private creditor which is already suffering from a “hair-cut” of about 60% will be willing to further fund a debtor which has caused such a large loss to them. Similarly, the financing envisaged via T-bills and T-Bonds are also unlikely to be at the rates expected in the assumption, as already explained elsewhere in this analysis.

It is also shocking that this Debt Sustainable Analysis (DSA) does not propose or indicate a single “non-debt creating” inflow, which is the most critical element in restoring debt sustainability. After all, even in the case of a stressed debtor seeking further time from a local bank, the first question that the Bank asks is as to the sources from which the borrower expects new funds to settle the debt. Instead of following such a sensible and practical approach, all the assumptions listed by the IMF, relate to more debt inflows, which will surely lead to the further aggravation of the debt crisis. That is further confirmed in page 40 where it is shown that external debt is expected to rise from USD 58.7 billion at end-2022 to USD 69.8 billion by end-2028.

Therefore, since the DSA has been prepared with such ill-judged assumptions and glaring gaps, it is most unlikely that the situation will turn benign reasonably quickly, since these impractical assumptions will soon be exposed. Sadly however, the Programme will then be facing failure, to the consternation of those who expected much from it.



Last edited by God Father on Tue Jan 09, 2024 8:31 am; edited 1 time in total

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Sri Lanka external public debt edges up to 109-pct of GDP in 3Q 2023: analysis

Sri Lanka fail at Foreign-law Debt Hair Cut and Debt to GDP to Rise 2023-d10

Sri Lanka’s external debt including guaranteed debt of state-owned enterprises had moved up to 109.6 percent of gross domestic product in the September 2023 quarter, up from 106.04 percent in June, an analysis of official data shows.

Central government debt, without SOE debt was 105.4 percent of GDP in September, up from 101.9 percent of GDP in June.

Nominal rolling GDP in the quarters to September 2023, 26.956 billion rupees, up from 26.636 in June. Sri Lanka’s GDP has started to grow in real terms from the second quarter, with low inflation.

In 2022 GDP expanded steeply from inflation, keeping pace with depreciation.

The September rise in debt was partly due to the depreciation of the rupee to 324.4 rupees in September from 308.83 to the US dollar in June as well as new debt acquired for the deficit.

Foreign debt valued in rupees was 11.8 trillion rupees at an exchange rate of 324.4 rupees, compared to 11.3 trillion rupees in June.

External debt fell to 36.3 billion US dollars in September from 36.59 billion US dollars in June. Dollar denominated domestic debt fell from 1,147.84 million dollars in June to 349.41 million in September as Sri Lanka Development Bonds were repaid in rupees.

Sri Lanka’s central bank has generally kept the rupee around 322 to 330 to the US dollar, backed by broadly deflationary monetary policy and has also collected reserves.

Though the rupee has been volatile under a so-called ‘flexible exchange rate’ but has been stable.

Maintaining a fixed or stable exchange rate is the most simple monetary regime imaginable, and can be done if macro-economic policy (printing money for growth or other reasons), is curbed by law, a practice more or less followed by most East Asian nations and stable countries in the Middle East.

When money is printed to cut rates, triggering forex shortages, foreign borrowings rise as the country loses the ability to collect dollars for rupees and desperately seeks loans.

J M Keynes labelled the phenomeonon ‘transfer problem’ believing it was linked to the trade deficit (current account deficit in neo-Mercantilist terms) and not monetary instability. Classical economists pointed out that the repayment of external obligations outward investments will tend to generate a current account surplus.

https://economynext.com/sri-lanka-external-public-debt-edges-up-to-109-pct-of-gdp-in-3q-2023-analysis-146596/?

Wrapping up Sri Lanka external debt deals critical, property tax needed: IMF

ECONOMYNEXT – Sri Lanka’s economy is starting to recover under a stabilization program, and further progress has to be made on debt restructuring while monetary policy decisions have to be prudent to keep inflation down, an International Monetary Fund official has said.

“A swift completion of final agreements with official creditors and reaching a resolution with external private creditors remain critical,” IMF Senior Mission Chief Peter Breuer said after a staff visit.

“Building on the Central Bank of Sri Lanka’s success in taming inflation, future monetary policy decisions should remain prudent with a focus on keeping inflation expectations well anchored.”

The mission called for a speeding up a “progressive property tax”.

Swift progress towards the introduction of a progressive property tax is key to ensuring fair burden sharing while sustaining the revenue-based consolidation.

The full statement is reproduced below:

Colombo, Sri Lanka – January 19, 2024: An International Monetary Fund (IMF) mission team led by Mr. Peter Breuer visited Sri Lanka from January 11 to 19, 2024 to discuss recent macroeconomic developments and progress in implementing economic and financial policies under the EFF arrangement. At the end of the mission, Mr. Breuer issued the following statement:

“The economic reform program implemented by the Sri Lankan authorities is yielding the first signs of recovery. Real GDP recorded positive growth of 1.6 percent year-on-year in the third quarter of 2023, the first expansion in six consecutive quarters. Shortages of essentials have eased, and inflation remains contained. Gross international reserves increased by USD 2.5 billion during 2023, and preliminary data point to improved fiscal revenue collections during the fourth quarter of 2023. However, challenges remain as these improvements need to translate into improved living conditions for Sri Lanka’s people.

“In this context, sustaining the reform momentum and ensuring timely implementation of all program commitments are critical to rebuilding confidence and putting the recovery on a firm footing that will benefit all people. Swift progress towards the introduction of a progressive property tax is key to ensuring fair burden sharing while sustaining the revenue-based consolidation.

Tax policy measures need to be accompanied by strengthening tax administration, removing tax exemptions, and actively eliminating tax evasion to make the reforms more sustainable and to further build confidence among creditors to support Sri Lanka’s efforts to regain debt sustainability.

“Building on the Central Bank of Sri Lanka’s success in taming inflation, future monetary policy decisions should remain prudent with a focus on keeping inflation expectations well anchored. Against continued uncertainty, it remains important to continue rebuilding external buffers through strong reserve accumulation. Protecting the poor and the vulnerable through improved targeting and better coverage of cash transfers remains critical.

“To safeguard the stability of the financial sector and bolster its capacity to support economic growth, the authorities need to urgently finalize amendments to the Banking Act in line with their commitment under the IMF-supported program, implement the bank recapitalization plan and strengthen the financial supervision and crisis management framework.

“Following the publication of the IMF Governance Diagnostic report, it is now imperative for the authorities to adopt their own action plan for implementing the recommendations in the report beyond the priority commitments under the EFF arrangement. At the same time, ensuring an enabling environment for governance and transparency reforms to take place is key to bolstering public confidence and facilitating implementation of these important efforts.

“The authorities have made commendable progress with putting debt on a path towards sustainability. The execution of the domestic debt restructuring was an important milestone. A swift completion of final agreements with official creditors and reaching a resolution with external private creditors remain critical. Progress in meeting key commitments under the IMF-supported program will be formally assessed in the context of the second review of the EFF arrangement alongside the forthcoming 2024 Article IV consultation assessing Sri Lanka’s economic health.

“The IMF team held meetings with President and Finance Minister Ranil Wickremesinghe, Central Bank of Sri Lanka (CBSL) Governor Dr. P. Nandalal Weerasinghe, Speaker Mr. Mahinda Yapa Abeywardana, Minister Mr. Kanchana Wijesekera, Minister Mr. Wijeyadasa Rajapakse,State Minister Mr. Shehan Semasinghe, Secretary to the Treasury Mr. K M Mahinda Siriwardana, Governor of Northern Province Mrs. P.S.M.Charles, Governor of Eastern Province Senthil Thondaman, and other senior government and CBSL officials. The IMF team also met with Parliamentarians, representatives from the private sector, civil society organizations, and development partners.

“We would like to thank the authorities for the excellent collaboration during the mission, including during the mission’s visit to the Northern and Eastern provinces. This visit enriched the mission team’s understanding of the challenges as well as the potential of Sri Lanka. We reaffirm our commitment to support Sri Lanka for a full economic recovery from the crisis.

https://economynext.com/wrapping-up-sri-lanka-external-debt-deals-critical-property-tax-needed-imf-147988/

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