Lazard releases preliminary report

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The financial adviser of Sri Lanka’s debt restructuring process, the Lazard Group, has already given Sri Lanka a preliminary report containing proposals on how to achieve debt sustainability in Sri Lanka according to the criteria of the International Monetary Fund (IMF),a top Government official told Finance Today.

It is also stated that Lazard will further analyse Sri Lanka’s debt dynamics and prepare the final report within the next few days.

Accordingly, in the coming days, Lazard is going to hold further discussions with the Ministry of Finance of the Central Bank of Sri Lanka and all parties officially involved in the debt restructuring programme of Sri Lanka.

Sri Lanka’s acting president Ranil Wickramasinghe yesterday became the 8th Executive President of Sri Lanka with a big margin over his competitors 134/82/3. Former president Gotabaya Rajapaksa was compelled to resign due to public protest, which also urges Ranil Wickremesinghe to step down.

The election of a new President through the Parliamentary process has given a clear indication to the local and foreign community about political stability in Sri Lanka.

Accordingly, arrangements will be made to appoint a new Prime Minister, Finance Minister and Cabinet within the next few days.

Interim Budget

Parallelly, consent to present the revised budget for 2022 and 2023 is now finalised and 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.

Accordingly, after the new Cabinet is appointed, the Ministry of Finance will take steps to prepare the income and expenditure estimates for the relevant ministries for the coming period of this year. Accordingly, the revised budget for this year will be submitted for approval of Parliament next month.

Economists say that with the election of Ranil Wickremesinghe as President, Sri Lanka will be able to continue the ongoing negotiations with the IMF with the usual team.

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 with a proper consent of the Government.

Also decisive is the debt restructuring exercise underway by the 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 analysing these 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 10 July. Some analysts earlier felt that the delay may be due to the difficulty of achieving debt sustainability in Sri Lanka without restructuring domestic debt, which simply is not part of the Lazard mandate.

Therefore CBSL is now said to be confident that Lazard will provide the finalised report shortly.

A major criterion will be to reduce Public Debt to GDP ratio, which is currently close to 140 per cent, to a level below 100 per cent on 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 August.

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.

By Ishara Gamage