Lazard lateness in finalising DSA, hints local debt in danger of restructuring?

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The people of Sri Lanka are now in the cusp of reversing the trend to economic oblivion, returning to a path less travelled, that should yield, firstly the need for stability and secondly upward mobility. It results from the success of the near 100-day-old public uprising labelled the ‘Aragalaya’ (The Struggle) that culminated in storming the capital, Colombo, similar to the French Revolution of some 233 years ago,almost to the date. The public uprising, unseen in the recent history of Sri Lanka, was in response to equally hitherto unseen acute economic, social and political issues confronting the Island Nation. The turnaround, both tangible and irreversible, is all the more remarkable as it was achieved despite government-initiated acts to stifle it.

Gota Goes

The victory, many faceted, was in the main flight and subsequent resignation of President ‘(Gota)baya’ Rajapaksa, elected to office by a landslide only 2½ years ago. The resignation demanded by them, remained unwavering since building the ‘GotaGoHome’ village, by occupying the main entrance and the surrounding areas of the Presidential Secretariat in the heart of the capital, Colombo.

With the resignation of the President, many, in particular, the external debtors of the country, are now waiting to see what direction the negotiations with the International Monetary Fund (IMF) will take in the immediate future. The external debtors are essentially of three types.

They are namely, holders of commercially priced US dollar denominated debt instruments issued by Sri Lanka, designated as International Sovereign Bonds (ISBs), debt extended by other countries labelled ‘bilateral debt’ and finally debt extended by global multilateral agencies such the World Bank, Asian Development Bank, etc.

It is widely understood that no matter who comes to power in Sri Lanka, there is no other alternative solution to the dire foreign debt related crisis that Sri Lanka is currently facing, than an IMF-based fully funded ‘Balance of Payments’ assistance programme. As publicly emphasised by the current Governor of the Central Bank of Sri Lanka (CBSL), Dr. Nandalal Weerasinghe, not only is there no other alternative, but also had IMF assistance been initiated months ago, when the need surfaced initially, the gravity of the current dislocation would have been much less severe.This statement by the CBSL Governor is all the more important as he is the lead member of the economic team that represented Sri Lanka when the IMF arrived in Colombo for negotiations.

IMF intention

Clearly concerned by events unfolding in Sri Lanka, Gerry Rice, the IMF spokesman, in a scheduled press briefing, said on Thursday that the IMF were hoping for a resolution of the current situation that would allow resumption of a dialogue on an IMF-supported programme. He said any new loan programme for Sri Lanka would require adequate assurances on debt sustainability. Rice further said the IMF still has technical counter parties in Sri Lanka within the CBSL and the Ministry of Finance and hopes to be able to have high-level discussions with the authorities on a programme “as soon as possible.”

Curious CBSL

In order to continue the negotiations with the IMF following the public uprising and resulting in the resignation of the president, CBSL is said to be expecting two major outcomes simultaneously.

The new in coming government must exhibit their tangible willingness to continue the IMF discussions along with appointed financial and legal advisers to reach a staff level agreement with the IMF shortly.

Parallelly, consent to present the revised budget for 2022 and 2023 now finalised that will, among other policies, launch a wider revenue-led fiscal consolidation programme that includes cost reflective pricing strategies for fuel and electricity tariffs and the quick privatisation of SriLankan Airlines.

Stable Seats

The ruling Sri Lanka Podujana Peramuna (SLPP), which is numerically the majority power in the Parliament, has the decisive rolein appointing the new president and the prime-minister to be selected on 20 July. Accordingly, the forecast is that the current PM Ranil Wickremesinghe now appointed acting president, by the outgoing President Rajapakse, although lacking any members from the party he leads,will be appointed the next president of Sri Lanka. As both Finance Minister and PM of the outgoing government, Wickremasinghe was involved in the recent talks with the IMF and in formulating a new budget with the backing of the SLPP parliamentarians. Leader of the Opposition Sajith Premadasa with some 5.4 million votes to his credit at the 2019 election and MP Dulles Alahapperuma, a dissident SLPP member were also shortlisted for the 20 July election.

Accordingly, the process of electing the new president and the new prime minister is to be undertaken democratically according to the majority power of the parliament. In these circumstances, Acting President Ranil Wickremesinghe had ordered the deployment of maximum Military and Police personnel if any protest were to break the “peace” of the country.

Speaking to the international media, Dr. Nandalal Weerasinghe said on Thursday that if the negotiations with the IMF are to be successful, a stable administrative structure must be established immediately in the country with the consent of all political parties at least for the shorter period of time until a proper general election is held.

Many are of the opinion that the new government will not seek an alternative solution outside of the IMF at this difficult juncture.

In particular, it is essential to obtain the consent of the bilateral creditors for the success of the foreign debt restructuring programme launched by the Government of Sri Lankan under the guidance of their appointed financial advisors. A stable all-party government will be essential in obtaining such consent from other governments.

Lazard Lateness

In order to reach a staff-level agreement with the IMF, it is necessary that Sri Lanka presents a comprehensive economic adjustment programme to them.

Also decisive is the debt restructuring exercise underway by the financial advisor, Lazard Group, that will help establish the level of debt sustainability, a key variable with the IMF.

The IMF has provided Lazard with several scenarios in the preparation of a comprehensive debt sustainability analysis (DSA) for Sri Lanka on 20 June 2022. It is after analyzing those scenarios extensively that Lazard is required to recommend the optimum method to achieve debt sustainability along with the opinion of Legal Advisor, Clifford Chance.

The analytical work and recommendation were to be completed by 10July. Some analysts feel that the delay may be due to the difficulty of achieving debt sustainability in Sri Lanka without restructuring the domestic debt which simply is not part of the Lazard mandate. CBSL is said to be confident that Lazard will provide the finalised report shortly.

A major criterion will be to reduce the Public Debt to GDP ratio, which is currently close to 140 percent, to a level below 100 percenton a medium to long-term basis within a time frame of 10 years (2023-2032).

The Sri Lankan delegation hopes to submit the comprehensive economic adjustment programme prepared by Sri Lanka to the IMF next month based on the Lazard report.

Based on the adjustment programme submitted by Sri Lanka, the IMF may approve or decide to discontinue their programme for Sri Lanka

If it is possible to obtain the approval of the IMF, the opportunity will be provided to reach a staff-level agreement with the IMF in the month of August.

The main advantage of the SLAis that from its signing, the Sri Lanka economy will be under the supervision of the IMF, thereby reducing the impact of risk factors across the economy and hence uplifting its attraction as a destination for foreign and local investment.

Based on the SLA, Lazard will be given the opportunity to officially start negotiations with external creditors for debt restructuring agreements.

The SLA will state that it is essential to obtain the full consent of bilateral creditors within the Paris Club such as Japan, as well as the full consent of non-Paris Club bilateral creditors like China and India. In the absence of such mandatory language, it is widely held that, approval of the Executive Board of the IMF to implement an Extended Fund Facility (EFF) programme for Sri Lanka will be difficult. When queried, a spokesperson of the CBSL stated that only a “sufficient assurance of financing” is required for Executive Board approval.

Analysts, however,say that Sri Lanka is currently receiving support from most bilateral creditors except China. In this connection, it is reported that The Hindu raised the issue, at the 14 July Press Briefing at the China Ministry of Foreign Affairs in Beijing thus, “Does China have any plans to offer any new financial assistance to Sri Lanka and are you having any discussions with Colombo at the moment on this?”

Wang Wenbin, the Ministry spokesperson is reported to have replied as follows“As we have previously stated, China stands ready to work with countries and international financial institutions concerned to continue to play a positive role in supporting Sri Lanka’s response to current difficulties and efforts to ease debt burden and realise sustainable development.”

Janet ‘s Jury

US Treasury Secretary Janet Yellen on Thursday, addressing a press conference, on the sidelines of a meeting of G20 Finance Ministers, on the Indonesian island of Bali, said that China is a ‘very important’ creditor of Sri Lanka and it would likely be in the interest of both countries if China participated in restructuring Sri Lanka’s debt.

“Sri Lanka is clearly unable to repay that debt, and it’s my hope that China will be willing to work with Sri Lanka to restructure the debt,” she is reported to have said.

Therefore, she urged other members of the Group of 20 major economies to put pressure on China to be more cooperative in long-stalled efforts to restructure the debts of countries in debt distress, including Sri Lanka.

According to government statistics Sri Lanka owes at least $5 billion to China. India has also lent $3.8 billion and Japan is owed at least $3.5 billion and another $1 billion is due to other rich countries.

Restricted Reserves

The need to obtain ‘bridging finance’ for at least the next 06 months of this year continues to be highlighted until a final agreement is reached with the IMF.

That is because Sri Lanka’s foreign exchange payment requirements are met only from the export conversions of some one billion dollars received by the country and foreign remittances of about 300 million dollars. However, CBSL says that foreign remittances have dropped to a level of less than 300 million dollars in June. It believes that this drop may have occurred due to the heightened ‘gray’ market activities along with the easing of restrictions on open accounts. Compared to last year, the government also expects some setback in the apparel and tea exports this year due to sluggish economic conditions and other economic restrictions. Currently, foreign reserves of Sri Lanka are at an insignificant level.

Given these circumstances, CBSL is currently financing the essential import bills including fuel and pharmaceuticals of the country through export conversions and the settlement left over from the Asian Clearing Union (ACU) postponements.

Some CBSL sources indicate that it will be difficult to keep the value of the LKR against the US dollar under control in the future without entering into a SLA with the IMF.

They also say that restricting imports by another billion dollars will also help to maintain the rupee value of the dollar at the current level.

Accordingly, after reaching a SLA with the IMF, the government expects to obtain an additional one billion dollar swap facility from India. In addition to that, it is also possible to obtain a concessional loan of one billion dollars from Japan.

Indian Interest

CBSL is awaiting the approval of the Reserve Bank of India (RBI) to classify the Indian Rupee (INR) as a designated foreign currency in Sri Lanka, in order to facilitate and promote trade and tourism in the SARC region, including India. It is said that a proposal regarding this was presented by the high-level Indian delegation that visited Sri Lanka recently.

The Sri Lanka Tourism Development Authority had also submitted similar requests for permission to use the Russian ruble as a designated foreign currency along with the Indian rupee in Sri Lanka. The CBSL sources also say that the approval of the USA is expected through the Ministry of Foreign Affairs of Sri Lanka regarding the use of Russian rubles as well as to introduce Russian payment platforms to Sri Lanka due to prevailing US sanctions against Russia. There are 15 designated foreign currencies at the moment in Sri Lanka, namely the Australian Dollar, Norwegian Kroner,Canadian Dollar, Pound Sterling,Chinese Renminbi, Singapore Dollar,Danish Kroner, Swedish Kroner,Euro,Swiss Franc, Hongkong Dollar, Thai Baht,Japanese Yen,United States Dollar and New Zealand Dollar.

Thus, several initiatives are in play as Sri Lanka turns a new corner heading in a potentially stable direction. The dynamics need close and professional management.

(The Writer is a Senior Staff Journalist with over 20 years’ experience in financial journalism –[email protected])

By Ishara Gamage