IT’S A HARD ROAD TO DEBT RESTRUCTURING

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Sri Lanka is currently engaged in a debt- restructuring process as per a requirement of the IMF before the latter decides on a bailout for the ‘bankrupt’ country. The challenge is humongous, as Prime Minister Ranil Wickremesinghe explained in Parliament on 5 July. Among the challenges are: getting the diverse community of creditors to agree to a common formula and implementing the IMF’s politically inconvenient conditions.

According to sources, the following steps are contemplated: higher taxes, trimming of State Owned Enterprises (SOEs), slashing unproductive expenditure, creating conditions for foreign direct investment, prudence in foreign borrowing, generation of employment and the cushioning of the poor against the adverse effects of the systemic changes.

Debt Repayment Burden

As the Prime Minister pointed out, the timetable for debt repayments looks daunting – USD 3.4 billion to be repaid between now and December 2022; USD 5.8 billion in 2023; USD 4.9 billion in 2024; USD 6.2 billion in 2025; USD 4.0 billion in 2026; and USD 4.3 billion in 2027.In April, the Government had defaulted on instalment payments to the tune of USD 7 billion. It had also decided to seek restructuring of the debt that now totals USD 51 billion.

Government appointed the French firm Lazard, and the British firm Clifford Chance, as consultants. Their report, expected in August, will be submitted to the IMF for a Staff Level Agreement prior to submission to the IMF board to get a bailout package. Lazard is said to be an expert on debts owed to China, as Clifford Chance is on private investors. Both have their work cut out: China is not willing to restructure the debt owed to it. It is ready to refinance not to restructurerepayment. Private bondholders are reportedly represented by Rothschild,which is known to be a tough negotiator. Already, creditor Hamilton Reserve Bank has filed a suit in a New York court seeking full payment on 25July, of USD 245 million owed to it.

A most critical issue Lazard and Clifford Chance could be facing is getting all creditors to agree to one formula. These are very different entities as they could be governments, State-owned banks, international financial institutions, private investors and Sri Lankan financial institutions. Some of the countries involved may belong to the ‘Paris Club’ for debt restructuring, and some may not, like India and China. Their norms and expectations would thus vary. To knit of all of them into one group will be a challenging task.

Literature on debt restructuring reveals that the process may take two or three years. It is said that it took Zambia 13 months to restructure loans totallingjust USD 16 billion. Sri Lanka’s debt is more atUSD 51 billion.However, Sri Lankan Opposition MP and economist Dr. Harsha de Silva, expects the IMF package to come through in six months.

The debt-restructuring process is delicate and fraught with dangers, says Dhananath Fernando of the Advocata Institute. He quotes a paper by Lee Buchheit et al., which says: “All sovereign debt workouts are painful for the debtor country, its citizens, its creditors and its official sector sponsors. If mishandled, a sovereign debt workout can be incandescently painful. A mangled debt restructuring can perpetuate the sense of crisis for years, sometimes even for decades”.

The IMF could insist that Sri Lanka tones up its economy by raising taxes, spreading the tax net; reducingthe bloated and unproductive bureaucracy, and selling off stakes in unproductive and loss-making SOEs. Sri Lanka might be urged to sign trade agreements and invite investments from various advanced countries. In the past these idea were spurned. India had been touting the idea of an Economic and Technical Cooperation Agreement (ETCA) and a Comprehensive Economic Partnership Agreement (CEPA) for years.

Since 2015, China has been asking Sri Lanka to sign a FTA with it.An Institute of Policy Studies report of 2015 showed that Sri Lanka produces 566 products with Asian regional price advantages, of which, 243 items could be exported to China. There were an additional 299 products with trading potential with China. These included vegetable products, rubber, and plastics.

But Sri Lankan nationalists, both within and outside governments, and trade unions across the board, have fought these proposals tooth and nail. Thus, ETCA and CEPA could not be signed.  The Sino-Lankan FTA was stopped by the Sri Lankan Government because it could not agree to China’s terms. 

However, under progressive regimes, as under the 2015-2019 ‘Good Governance’regime, FDI had grown. In 2017, FDI into Sri Lanka grew to over USD 1,710 million, including foreign loans received by companies registered with the BOI. This was twice the FDI (USD 801 million) achieved in the previous year, points out Tatiana Nenova of the World Bank in her note on FDIs in Sri Lanka. But the increase had largely been in infrastructure projects which take a long time to give returns. FDI has not yet gone into manufacturing, especially into high value-added global production networks,that can rake in money, she notes.

Furthermore, policy uncertainty has proved to be a barrier for investors. There is a paucity of information on regulations. There is high fragmentation in policymaking. Policy changes are frequent and policy implementation is slow, Nenova points out.

Equally importantly, Sri Lanka’s basket of exportable goods has remained the same for decades. “Where innovation exists, it is limited to a handful of industries,” Nenova notes. Financial products have also remained inadequate especially for Small and Medium Enterprises.

Sri Lanka has to change its outdated labour laws, the World Bank expert says. Job termination procedure is lengthy and costly. Equally importantly, Sri Lankan workers have to have the skills demanded by a modernising and globalised marketplace. Opposition to the employment of skilled foreign personnel must be tackled. Local employers should be able to hire foreign expertise,and for this,the visa procedures should be made easier.

Sri Lanka’s transport infrastructure, whether it is road, rail or air, remains very poor. Rail infrastructure is outdated and limited, especially for the transport of goods, Nenova points out.

Therefore, even with debt restructuring, Sri Lanka will not be free from the possibility of another major forex crunch and debt repayment default, if it does not tone up its economy and changes its mindset on modernisation and globalisation.

The current crisis should be the crucible to create a new system. In fact, there is hope in the top echelons of the Government, that given the severity of the crisis, politicians and trade unions will see the writing on the wall and change their outlook.

By P.K. Balachandran