For generations, our lament has been the absence of policies at national level. As Governments change, so do the policies adapted by the outgoing Government. It is this lacunae that has bitten us in the posterior end resulting in the ongoing economic crisis. As we struggle to navigate through this current challenge, one thing is clear - our economy and foreign relations have become spouses.
Usually, the economy of a country is the king. Everything else, including foreign affairs and national security, are that economy’s consorts.
Today in Sri Lanka, our economy has become the henpecked husband of world affairs. We must make the effort to understand who will really benefit as we try to follow prescriptions as ‘right size’ the military, declaw the Prevention of Terrorism Act, ‘re-bundle’ our State Owned Enterprises (SOE), implement the 13th Amendment to the Constitution or even reduce the bulging State sector.
On the eve of 2022, SLPP MP (Retired) Rear Admiral Sarath Weerasekera - the only MP to vote against the 21st Amendment to the Constitution - called for an explanation regarding his claim that the enactment of the Amendment was an IMF prerequisite for the finalisation of the USD 2.9 billion loan.
All these decisions, if actually implemented in the prescribed manner that purportedly aims to redress one malady but curiously overlooks the overall adverse effect, will have serious repercussions domestically. It can even push the Government over the political precipice. Thus the incumbent Government has the unenviable task of balancing between local and foreign perceptions and expectations.
Right now though, the priority is assuring our external creditors of our bonafides. Without their support, none of our internal organs can function for every single one of these are dependent on forex.
This has pushed our foreign policy up the ladder from the rest of consorts, to sit domineeringly alongside our weakened economy. Instead of our economic aspirations directing the conduct of our foreign affairs, it is our foreign relations that are dictating terms to our economy.
If we are not careful, we will be ‘independent’ and ‘democratic’ only in name. If we continue to mismanage our economy and fail to work our way out of this current economic crisis soon, it will be unelected officers, who are not even citizens of this country, who will decide matters as our retirement age, how much taxes we must pay and what we will get out of those taxes.
Sympathetic Creditors
We approached the International Monetary Fund (IMF) in March 2022 for an Extended Fund Facility (EFF), popularly known as the ‘bailout package’. Even at the time we knew that the IMF cannot technically bail us out.
The point of approaching the IMF was not for its money per se. ‘Roping’ in the IMF as one of our creditors was to assure our other creditors to continue their business with us. We are not looking for a shortcut out of our financial obligations.
As President Ranil Wickremesinghe clearly stated, we are not asking from China, our largest bilateral creditor, to write off our debt, but to allow us to meet our financial commitments within 20 years. We are thus not looking for charity but more time to settle our dues.
On the surface, this seems like a reasonable enough request. All of our bilateral creditors have been sympathetic and supportive. Early December 2022, it was widely reported that The Paris Club proposed a 10-year debt moratorium on Sri Lankan debt and 15 years of debt restructuring as a formula to resolve the crisis.
However, according to State Finance Minister Shehan Semasinghe, even by the third week of December, despite Paris Club’s expressed willingness to help Sri Lanka, none of the bilateral creditors have officially informed GoSL anything on debt restructuring.
On 10.01.2023, President Wickremesinghe, also in the capacity of Finance Minister, held a fruitful video conference with Export-Import Bank of China Chairman Wu Fulin. The two sides exchanged views on bilateral cooperation, Sri Lanka’s current debt issues and helping country’s economic recovery and achieve sustainable development. However, there was an indication on an agreement to restructure debt was not in sight.
On 14.01.2023, China’s Communist Party Vice Minister and International Department Head Chen Zhou arrived in Sri Lanka. Over the next two days, he met with President, PM Dinesh Gunawardena and a host of other party leaders, political analysts and media personalities.
He personally delivered President Xi Jinping’s letter to President. He spoke of China’s journey out of poverty and aspirations in the international arena. Commiserating on Sri Lanka’s energy crisis, donated 1,000 solar-powered generators to party leaders to be distributed as they see fit. However, it was the PM’s Office that said the Chinese dignitary conveyed the message that, “You will have some good news soon.”
On 19.01.2023, Indian Minister of External Affairs Dr. S. Jaishankar arrived for a two-day visit. President hosted the Indian dignitary for breakfast at his official residence. They discussed a number of topics, mostly on Indian projects and programmes in the island.
The matter of debt restructuring continues to be the elephant in the room.
During this segment of the discussion, the Indian Minister had reminisced a similar crisis India faced in 1991. The Indian Government had overcome the crisis by pledging the Government’s gold reserves, said Dr. Jaishankar.
If this was a hint for Sri Lanka to look beyond assistance and try some ‘self-help’, it was a good and timely one. It must be frustrating for our friends and neighbours to be expected to hoist our burdens whilst our attention is on an election estimated at Rs 10 billion.
Dr. Jaishankar stated that the primary purpose of his visit is to express India’s solidarity and support to Sri Lanka to overcome her economic crisis. He recalled the proactive role India played from this crisis’s onset on the stance that ‘Sri Lanka’s creditors must play a proactive role’ in facilitating the island through its recovery.
Indeed, when Sri Lanka approached the IMF in April 2022, a high delegation from India too sat in the meeting. Thereby, India signaled to the IMF of India’s confidence in Sri Lanka.
Geopolitical Spin
However, India continues to reiterate that all bilateral creditors must be dealt equally. Whether this is a fair expectation needs further reflection. Sri Lanka’s external debt is not shared equally among the bilateral creditors.
China is Sri Lanka’s biggest bilateral creditor, followed by India. Therefore, by insisting on ‘equal’ treatment, all creditors are trying to wield the same level of negotiation powers as China has, but without having lent as much as China. This may create an uneven field for Sri Lanka.
All eyes are currently on China to see what kind of restructuring plan the two countries will agree on. Other bilateral creditors are waiting to take their cue from these negotiations with China.
Minister Semasinghe revealed that China has asked for more clarity. This will be given, he assured. Sri Lanka’s Central Bank Governor Dr. Nandalal Weerasinghe however says all necessary information has been already provided. Yet, both India and China do not have experience in how IMF works, he says. This is causing delays in the much needed restructuring to qualify for the IMF’s EFF.
In the meantime, this delay in finalizing negotiations with China has been taken out of context by anti-Chinese elements.
‘Restructuring’ Debt
Debt Justice - a campaign-oriented organisation primarily focused on unjust public debt in exploited countries, maps the root causes of Sri Lanka’s economic crisis. According to their findings, 40 percent of Sri Lanka’s external debt is owed by private creditors, mostly in the form of International Sovereign Bonds (ISBs).
Their findings state, that ‘liquidity expansion and low interest rates in the world economy,’ for the past decade has allowed private lenders to provide ‘loans to low and middle income countries at higher interest rates than for advanced countries’. These higher rates were purportedly to protect the lenders on the presumption that recovering debt repayment from these economically vulnerable countries posed a greater risk.
With the COVID-19 global pandemic, subsequent price shocks and interest rate hikes in 2022, ‘that risk has now materialized,’ assets the report. However, the report continues, the ‘higher interest rates mean that’ these lenders had already received ‘over 50 percent of external debt payments.’ As ‘such lenders charged a premium’ from ‘Sri Lanka to cover their risks,’ they earned massive profits but also contributed to ‘Sri Lanka’s first ever default in April 2022’.
Thus, it is these lenders who benefited from higher returns because of the ‘risk premium’ who must be willing to take the consequences of that risk, states the report. Furthermore, according their findings, ‘ISBs are now trading at significantly lower prices in the secondary market’. Therefore, ‘giving private bondholders an upper hand relative to sovereign debtors in the Paris Club and the IMF’s required debt negotiations violates the basic principles of natural justice.’
Private investors typically buy sovereign debt of countries near or in default at deep discounts. Afterwards, they fiercely litigate to claim full payments, even though they had long recovered their investment in full. Most unethically, they continue to intimidate debtors into paying interests manifolds the actual borrowed amounts.
IMF’s Assurances
When we went to the IMF, we were quite optimistic. We thought that within a few months we would get the bailout. On this presumption, we even declared a ‘debt standstill’ instead of continuing to quietly negotiate with our creditors on a one-on-basis for more time as we had been doing since at least 2021.
For this January 2023, it would be 10 months since approaching the IMF. During this time, however, we have made very little headway. At ‘staff level’, we have reached an agreement with the IMF. However, this is not an executive level decision and hence without teeth to execute it. To get the directors’ go-head for the USD 2.9 billion EFF, we have a list of prerequisites we must first fulfill.
On top of this list is getting our bilateral creditors’ agreement to restructure our debts. Thus in essence, to get the IMF to assure our creditors to work with us despite our poor finances, we must first get our bilateral creditors to assure the IMF to work with us. No wonder we are going round in circles.
Bilateral Creditors
SLPP ‘independent’ MP Dr. Nalaka Godahewa, appearing in a popular one-on-one political programme on a private channel discussed Sri Lanka’s debt crisis. An economist by profession, he explained the root causes and the numerous missteps we took over the past 15 years that culminated into the present day crisis.
In summary, he noted that since 2010 we have been obtaining short term, high interest commercial loans for projects whose return on investment was not short term but projected for long term. This error was highlighted by Mahinda Rajapaksa’s opponents as they accused him of entangling the country in a debt trap.
Yet, once in power, they too continued to repeat this same error by issuing ISBs. Compared to President Mahinda’s USD 5 billion, the Yahapalana Government issued USD 12.5 billion worth of ISBs. The Gotabaya Administration could not manage this brewing crisis, which resulted in the ‘economic explosion,’ he said.
Contrary to the Government’s expectations, he asserted that increasing taxes and interest rates will not help the economy but will continue to contract it. A Government’s right to tax must not be misconstrued as a licensee to exploit the citizens, he said.
The way forward is to stimulate the economy so that the Government can increase its income but without burdening the people. The Small-Medium Enterprises (SME) that contribute 60 percent to the economy and create 55 percent of employment must be protected, he stated.
The current interest rates, which are hovering around 30 percent, means SMEs must generate at least 50 percent profits to stay in business. As it is not feasible, many businesses are collapsing, he noted. The current exodus of our young workforce out of the country is a direct consequence of this situation, he pointed out.
While his reading on the current economic situation makes sense, his geopolitical interpretation is questionable. The economist-turned-politician advocates elections at the earliest possible.
Dr. Jaishankar however categorically noted that the political setup in Sri Lanka had now stabilized.
It is true that the President’s mandate is to resuscitate our economy. However, the implicit understanding from one of our creditors is tied to a matter ‘outside the mandate’. This puts the Government in a very difficult place.
It is in this context that we must analyze the benefit the upcoming local government elections will hold for Sri Lanka. It might not bring the political stability hoped for by Dr. Godahewa. Instead, it might lead to even more fragmentation and a weaker political set up. Political actors must look beyond their own political careers and analyze how this would be interpreted and used by geopolitical forces.
We can always hold elections at any point. However, that option may not be available to extract our country out of the current crisis. Clearly, recovering from the economic woes is only half the issue. Recovering while strengthening our interests is the real challenge.
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