Features
A Pathfinder Perspective: Sri Lanka no choice but to Restructure External Debt
Has the time come to consider seriously the merits of restructuring the government’s external debt obligations? The Sri Lankan authorities have indicated that they are in the process of negotiating inflows to meet the country’s immediate foreign exchange requirements. However, there is considerable uncertainty as to whether there would be sufficient inflows to meet the acute dollar illiquidity over the medium-term.
Companies and even families, restructure their debt when foreseeable future earnings become insufficient to repay debts, while maintaining their financial viability. The same applies to countries. Over the years, a number of countries have restructured their debt and the pandemic is pushing others to follow suit. Has Sri Lanka reached that point when it would be advantageous to restructure its external debt? What are the costs and benefits of doing so? If debt restructuring is a credible option, how one would go about it?
Should Sri Lanka restructure its external debt?
Foreign revenues in the next couple of years are extremely unlikely to be suffucuent to service external debt obligations, while supporting the essential foreign exchange (Forex) requirements of the economy. Known external debt repayments amount to USD26 billion over the next five years. It is unrealistic to expect to repay about USD 5 billion per year, particularly in the next 12-24 months, when foreign inflows are unlikely to increase on the scale necessary to service debt and finance imports necessary to meet essential needs and support the growth of the economy, particularly as the downgrading of Sri Lanka’s sovereign rating has excluded it from international capital markets. Countries protect access to these markets scrupulously to have the capacity to roll-over debt and avoid such a predicament.
It is noteworthy that the following Business Chambers have jointly issued a statement highlighting the severe problems being faced by their members due to the acute shortage of Forex which has been caused primarily by the combination of the loss of tourism earnings and access to international capital markets: Ceylon Chamber of Commerce, FCCISL, Ceylon National Chamber of Industries, The National Chamber of Commerce of Sri Lanka, The Women’s Chamber of Industry and Commerce, Chamber of Young Lankan Entrepreneurs, The International Chamber of Commerce Sri Lanka, National Chamber of Exporters and the Chamber of the Construction Industry.
Collectively, these Chambers represent almost all sectors of the economy. Their concerns cannot be addressed while there is a diversion of large amounts of Forex from markets to the Central Bank of Sri Lanka (CBSL) to service external debt. As a result, there is now a strong case for considering debt restructuring to release foreign exchange to meet the needs of businesses and acquire the essential needs of the people, e.g., food, fuel and pharmaceuticals.
The costs and benefits of external debt restructuring.
The most significant disadvantage of restructuring external debt is an immediate loss of access to international capital markets. This is now completely irrelevant for Sri Lanka as market access was lost when the economy was downgraded to a CCC rating. It is now even lower, at CC. As a result, Sri Lanka can no longer borrow in international markets. Another downside is the increase in the risk premium Sri Lanka would need to pay when it is eventually able to regain market access. However, the increased risk premium demanded by markets as a result of the restructuring is likely to be tempered by the impressive commitment Sri Lanka has shown in meeting its obligations thus far. Two International Sovereign Bonds (ISBs) of USD 1 billion each were repaid on time in October 2019 and July 2020, despite having to deplete external reserves, thereby imposing sacrifices on domestic businesses and households. This combined with Sri Lanka’s impeccable debt servicing record to date is likely to contain the increase in the cost of future borrowing when it becomes possible.
Domestic banks have holdings of both ISBs and Sri Lanka Development Bonds (SLDBs). Both these instruments will be impacted by any debt restructuring exercise. Foreign bond holders are extremely unlikely to accept exemption from haircuts of domestic entities, mainly banks, which hold US-denominated debt, issued both abroad and domestically. Hence not only ISBs but also SLDBs will need to be included in the pool of debt to be restructured.
It is important to note that the impact of any haircut will not be as painful as some may fear, since many of the domestic entities have purchased ISBs at an already discounted price in the secondary market. (There would be no such mitigation for SLDBS, which are not a tradeable instrument.) If necessary, the CBSL would need to provide some temporary regulatory forbearance to any domestic bank which experiences capital adequacy challenges due to haircuts imposed on creditors as part of the debt restructuring.
Options for Restructuring
Debt restructuring is a long and complex process. Having delayed and allowed usable reserves to deplete to barely one month’s import cover, it is no longer possible to achieve a soft pre-emptive restructuring. There are three modalities available to restructure debt: reprofiling the principal (extending maturities); modifying coupon (interest) rates; and write-down of principal (haircuts). Given its current circumstances it is unlikely that Sri Lanka could avoid haircuts for its creditors.
It is unrealistic and impractical to expect to restructure external debt without the support of the IMF. Before embarking on an external debt restructuring one needs the IMF to independently validate that Sri Lanka has a strong need to restructure its debt, in order to assure creditors that the Sri Lankan authorities are not being opportunistic. The IMF would also need to validate the proposed medium-term fiscal adjustment path to debt sustainability.
Rescheduling bilateral, commercial and multilateral debt requires different treatments. Bilateral debt rescheduling is negotiated with the Paris Club of creditors. It is not possible to approach the Paris Club without IMF support. China and India are not members of the Paris Club and separate negotiations would be necessary with them. An option is to seek to initiate an informal “Common Framework” approach (approved by the G20 which includes both China and India). It would need to be informal as the “Common Framework” is not available for a middle-income country like Sri Lanka.
This approach would have the advantage of including Sri Lanka’s three major bilateral donors: China, India and Japan. Bilaterals are likely to focus more on stretching maturities. Commercial creditors could be approached once a deal is in place with bilateral donors. Such sequencing can lead to a better deal for the debtor country on the basis of equivalence across all creditors in terms of the rescheduling. In this respect, there is considerable merit in taking soundings from the Japanese Ministry of Finance regarding their suggestions for the terms of the restructuring. Over the years, Japan has proved to be a flexible and generous creditor in this respect.
On Commercial debt, here again, it is exceedingly difficult to proceed without the IMF. Given its current circumstances, the restructuring package for Sri Lanka’s commercial debt is likely to include a combination of stretching maturities; coupon modification and a haircut. Haircuts on repayment of principal should be avoided, if at all possible, as they delay rating improvement and regaining market access. It is likely that it is now too late for Sri Lanka to avoid a haircut for its commercial creditors. It makes little sense to scar the economy and cause hardship to the people in order to pay ISB holders 100 cents in the dollar when most of the bonds outstanding have been discounted by more than 40 percent.
It is not possible to restructure Multilateral debt (i.e., debt owed to the World Bank, the Asian Development Bank and the IMF) without a complete suspension of the relationship between Sri Lanka and these institutions. There would be a suspension of all lending activity including project loans. However, the practice has been for to these institutions to provide financing to assist the debtor country to service the payments owed to each of them, once the debt rescheduling package is negotiated.
Appointment of Advisers
It is customary to appoint a financial and a legal adviser at the outset of the restructuring process. The IMF is able to provide a list of potential advisers from which the country concerned can choose.
Pathfinder Perspective – Conclusion
The unsustainability of Sri Lanka’s external debt is the cumulative effect of poor economic management over several decades. The size and persistence of the external financing gap for the foreseeable future makes debt restructuring an urgent priority. It should be possible to negotiate a package which provides three years of breathing space to rebuild Sri Lanka’s economy to earn and attract sufficient foreign inflows to achieve external debt sustainability and place the economy on a path of sustained growth. Nearly 75% of Government external debt is owed to bilateral and commercial creditors, all of which is eligible for rescheduling, thus providing considerable scope for relief from onerous debt repayments. Now that Sri Lanka has lost access to international capital markets and is extremely unlikely to regain it for some years due to its CC rating, there is very little downside and very considerable upside to debt restructuring.
There is now no choice but to restructure our external debt. The positive impact on dollar liquidity will be substantial and could be measured in billions of dollars. It is also timely as the negative social consequences are manifesting themselves in terms of ever-increasing hardships for the people, particularly the poor and vulnerable. It does not seem realistic to count on short term liquidity injections or a reliance on a revival in tourism as well as increased exports, FDI and remittances, to overcome the dollar illiquidity and its negative consequences in the next couple of years. Paying back debt at the expense of scarring the economy and imposing hardships on the people should not be seen as a badge of honour.
This is A Pathfinder Perspective issued by the Pathfinder Foundation can view on https://pathfinderfoundation.org/ Readers’ comments via email to are welcome.
by Dr Gotabhya Ranasinghe
Senior Consultant Cardiologist
National Hospital Sri Lanka
When we sought a meeting with Hon Dr. Ramesh Pathirana, Minister of Health, he graciously cleared his busy schedule to accommodate us. Renowned for his attentive listening and deep understanding, Minister Pathirana is dedicated to advancing the health sector. His openness and transparency exemplify the qualities of an exemplary politician and minister.
Dr. Palitha Mahipala, the current Health Secretary, demonstrates both commendable enthusiasm and unwavering support. This combination of attributes makes him a highly compatible colleague for the esteemed Minister of Health.
Our discussion centered on a project that has been in the works for the past 30 years, one that no other minister had managed to advance.
Minister Pathirana, however, recognized the project’s significance and its potential to revolutionize care for heart patients.
The project involves the construction of a state-of-the-art facility at the premises of the National Hospital Colombo. The project’s location within the premises of the National Hospital underscores its importance and relevance to the healthcare infrastructure of the nation.
This facility will include a cardiology building and a tertiary care center, equipped with the latest technology to handle and treat all types of heart-related conditions and surgeries.
Securing funding was a major milestone for this initiative. Minister Pathirana successfully obtained approval for a $40 billion loan from the Asian Development Bank. With the funding in place, the foundation stone is scheduled to be laid in September this year, and construction will begin in January 2025.
This project guarantees a consistent and uninterrupted supply of stents and related medications for heart patients. As a result, patients will have timely access to essential medical supplies during their treatment and recovery. By securing these critical resources, the project aims to enhance patient outcomes, minimize treatment delays, and maintain the highest standards of cardiac care.
Upon its fruition, this monumental building will serve as a beacon of hope and healing, symbolizing the unwavering dedication to improving patient outcomes and fostering a healthier society.We anticipate a future marked by significant progress and positive outcomes in Sri Lanka’s cardiovascular treatment landscape within the foreseeable timeframe.
by Fr. Emmanuel Fernando, OMI
Jesuit Fr. Aloysius Pieris (affectionately called Fr. Aloy) celebrated his 90th birthday on April 9, 2024 and I, as the editor of our Oblate Journal, THE MISSIONARY OBLATE had gone to press by that time. Immediately I decided to publish an article, appreciating the untiring selfless services he continues to offer for inter-Faith dialogue, the renewal of the Catholic Church, his concern for the poor and the suffering Sri Lankan masses and to me, the present writer.
It was in 1988, when I was appointed Director of the Oblate Scholastics at Ampitiya by the then Oblate Provincial Fr. Anselm Silva, that I came to know Fr. Aloy more closely. Knowing well his expertise in matters spiritual, theological, Indological and pastoral, and with the collaborative spirit of my companion-formators, our Oblate Scholastics were sent to Tulana, the Research and Encounter Centre, Kelaniya, of which he is the Founder-Director, for ‘exposure-programmes’ on matters spiritual, biblical, theological and pastoral. Some of these dimensions according to my view and that of my companion-formators, were not available at the National Seminary, Ampitiya.
Ever since that time, our Oblate formators/ accompaniers at the Oblate Scholasticate, Ampitiya , have continued to send our Oblate Scholastics to Tulana Centre for deepening their insights and convictions regarding matters needed to serve the people in today’s context. Fr. Aloy also had tried very enthusiastically with the Oblate team headed by Frs. Oswald Firth and Clement Waidyasekara to begin a Theologate, directed by the Religious Congregations in Sri Lanka, for the contextual formation/ accompaniment of their members. It should very well be a desired goal of the Leaders / Provincials of the Religious Congregations.
Besides being a formator/accompanier at the Oblate Scholasticate, I was entrusted also with the task of editing and publishing our Oblate journal, ‘The Missionary Oblate’. To maintain the quality of the journal I continue to depend on Fr. Aloy for his thought-provoking and stimulating articles on Biblical Spirituality, Biblical Theology and Ecclesiology. I am very grateful to him for his generous assistance. Of late, his writings on renewal of the Church, initiated by Pope St. John XX111 and continued by Pope Francis through the Synodal path, published in our Oblate journal, enable our readers to focus their attention also on the needed renewal in the Catholic Church in Sri Lanka. Fr. Aloy appreciated very much the Synodal path adopted by the Jesuit Pope Francis for the renewal of the Church, rooted very much on prayerful discernment. In my Religious and presbyteral life, Fr.Aloy continues to be my spiritual animator / guide and ongoing formator / acccompanier.
Fr. Aloysius Pieris, BA Hons (Lond), LPh (SHC, India), STL (PFT, Naples), PhD (SLU/VC), ThD (Tilburg), D.Ltt (KU), has been one of the eminent Asian theologians well recognized internationally and one who has lectured and held visiting chairs in many universities both in the West and in the East. Many members of Religious Congregations from Asian countries have benefited from his lectures and guidance in the East Asian Pastoral Institute (EAPI) in Manila, Philippines. He had been a Theologian consulted by the Federation of Asian Bishops’ Conferences for many years. During his professorship at the Gregorian University in Rome, he was called to be a member of a special group of advisers on other religions consulted by Pope Paul VI.
Fr. Aloy is the author of more than 30 books and well over 500 Research Papers. Some of his books and articles have been translated and published in several countries. Among those books, one can find the following: 1) The Genesis of an Asian Theology of Liberation (An Autobiographical Excursus on the Art of Theologising in Asia, 2) An Asian Theology of Liberation, 3) Providential Timeliness of Vatican 11 (a long-overdue halt to a scandalous millennium, 4) Give Vatican 11 a chance, 5) Leadership in the Church, 6) Relishing our faith in working for justice (Themes for study and discussion), 7) A Message meant mainly, not exclusively for Jesuits (Background information necessary for helping Francis renew the Church), 8) Lent in Lanka (Reflections and Resolutions, 9) Love meets wisdom (A Christian Experience of Buddhism, 10) Fire and Water 11) God’s Reign for God’s poor, 12) Our Unhiddden Agenda (How we Jesuits work, pray and form our men). He is also the Editor of two journals, Vagdevi, Journal of Religious Reflection and Dialogue, New Series.
Fr. Aloy has a BA in Pali and Sanskrit from the University of London and a Ph.D in Buddhist Philosophy from the University of Sri Lankan, Vidyodaya Campus. On Nov. 23, 2019, he was awarded the prestigious honorary Doctorate of Literature (D.Litt) by the Chancellor of the University of Kelaniya, the Most Venerable Welamitiyawe Dharmakirthi Sri Kusala Dhamma Thera.
Fr. Aloy continues to be a promoter of Gospel values and virtues. Justice as a constitutive dimension of love and social concern for the downtrodden masses are very much noted in his life and work. He had very much appreciated the commitment of the late Fr. Joseph (Joe) Fernando, the National Director of the Social and Economic Centre (SEDEC) for the poor.
In Sri Lanka, a few religious Congregations – the Good Shepherd Sisters, the Christian Brothers, the Marist Brothers and the Oblates – have invited him to animate their members especially during their Provincial Congresses, Chapters and International Conferences. The mainline Christian Churches also have sought his advice and followed his seminars. I, for one, regret very much, that the Sri Lankan authorities of the Catholic Church –today’s Hierarchy—- have not sought Fr.
Aloy’s expertise for the renewal of the Catholic Church in Sri Lanka and thus have not benefited from the immense store of wisdom and insight that he can offer to our local Church while the Sri Lankan bishops who governed the Catholic church in the immediate aftermath of the Second Vatican Council (Edmund Fernando OMI, Anthony de Saram, Leo Nanayakkara OSB, Frank Marcus Fernando, Paul Perera,) visited him and consulted him on many matters. Among the Tamil Bishops, Bishop Rayappu Joseph was keeping close contact with him and Bishop J. Deogupillai hosted him and his team visiting him after the horrible Black July massacre of Tamils.
Sri Lanka-Singapore Free Trade Agreement
By Gomi Senadhira
senadhiragomi@gmail.com
“You might tell fairy tales, but the progress of a country cannot be achieved through such narratives. A country cannot be developed by making false promises. The country moved backward because of the electoral promises made by political parties throughout time. We have witnessed that the ultimate result of this is the country becoming bankrupt. Unfortunately, many segments of the population have not come to realize this yet.” – President Ranil Wickremesinghe, 2024 Budget speech
Any Sri Lankan would agree with the above words of President Wickremesinghe on the false promises our politicians and officials make and the fairy tales they narrate which bankrupted this country. So, to understand this, let’s look at one such fairy tale with lots of false promises; Ranil Wickremesinghe’s greatest achievement in the area of international trade and investment promotion during the Yahapalana period, Sri Lanka-Singapore Free Trade Agreement (SLSFTA).
It is appropriate and timely to do it now as Finance Minister Wickremesinghe has just presented to parliament a bill on the National Policy on Economic Transformation which includes the establishment of an Office for International Trade and the Sri Lanka Institute of Economics and International Trade.
Was SLSFTA a “Cleverly negotiated Free Trade Agreement” as stated by the (former) Minister of Development Strategies and International Trade Malik Samarawickrama during the Parliamentary Debate on the SLSFTA in July 2018, or a colossal blunder covered up with lies, false promises, and fairy tales? After SLSFTA was signed there were a number of fairy tales published on this agreement by the Ministry of Development Strategies and International, Institute of Policy Studies, and others.
However, for this article, I would like to limit my comments to the speech by Minister Samarawickrama during the Parliamentary Debate, and the two most important areas in the agreement which were covered up with lies, fairy tales, and false promises, namely: revenue loss for Sri Lanka and Investment from Singapore. On the other important area, “Waste products dumping” I do not want to comment here as I have written extensively on the issue.
1. The revenue loss
During the Parliamentary Debate in July 2018, Minister Samarawickrama stated “…. let me reiterate that this FTA with Singapore has been very cleverly negotiated by us…. The liberalisation programme under this FTA has been carefully designed to have the least impact on domestic industry and revenue collection. We have included all revenue sensitive items in the negative list of items which will not be subject to removal of tariff. Therefore, 97.8% revenue from Customs duty is protected. Our tariff liberalisation will take place over a period of 12-15 years! In fact, the revenue earned through tariffs on goods imported from Singapore last year was Rs. 35 billion.
The revenue loss for over the next 15 years due to the FTA is only Rs. 733 million– which when annualised, on average, is just Rs. 51 million. That is just 0.14% per year! So anyone who claims the Singapore FTA causes revenue loss to the Government cannot do basic arithmetic! Mr. Speaker, in conclusion, I call on my fellow members of this House – don’t mislead the public with baseless criticism that is not grounded in facts. Don’t look at petty politics and use these issues for your own political survival.”
I was surprised to read the minister’s speech because an article published in January 2018 in “The Straits Times“, based on information released by the Singaporean Negotiators stated, “…. With the FTA, tariff savings for Singapore exports are estimated to hit $10 million annually“.
As the annual tariff savings (that is the revenue loss for Sri Lanka) calculated by the Singaporean Negotiators, Singaporean $ 10 million (Sri Lankan rupees 1,200 million in 2018) was way above the rupees’ 733 million revenue loss for 15 years estimated by the Sri Lankan negotiators, it was clear to any observer that one of the parties to the agreement had not done the basic arithmetic!
Six years later, according to a report published by “The Morning” newspaper, speaking at the Committee on Public Finance (COPF) on 7th May 2024, Mr Samarawickrama’s chief trade negotiator K.J. Weerasinghehad had admitted “…. that forecasted revenue loss for the Government of Sri Lanka through the Singapore FTA is Rs. 450 million in 2023 and Rs. 1.3 billion in 2024.”
If these numbers are correct, as tariff liberalisation under the SLSFTA has just started, we will pass Rs 2 billion very soon. Then, the question is how Sri Lanka’s trade negotiators made such a colossal blunder. Didn’t they do their basic arithmetic? If they didn’t know how to do basic arithmetic they should have at least done their basic readings. For example, the headline of the article published in The Straits Times in January 2018 was “Singapore, Sri Lanka sign FTA, annual savings of $10m expected”.
Anyway, as Sri Lanka’s chief negotiator reiterated at the COPF meeting that “…. since 99% of the tariffs in Singapore have zero rates of duty, Sri Lanka has agreed on 80% tariff liberalisation over a period of 15 years while expecting Singapore investments to address the imbalance in trade,” let’s turn towards investment.
Investment from Singapore
In July 2018, speaking during the Parliamentary Debate on the FTA this is what Minister Malik Samarawickrama stated on investment from Singapore, “Already, thanks to this FTA, in just the past two-and-a-half months since the agreement came into effect we have received a proposal from Singapore for investment amounting to $ 14.8 billion in an oil refinery for export of petroleum products. In addition, we have proposals for a steel manufacturing plant for exports ($ 1 billion investment), flour milling plant ($ 50 million), sugar refinery ($ 200 million). This adds up to more than $ 16.05 billion in the pipeline on these projects alone.
And all of these projects will create thousands of more jobs for our people. In principle approval has already been granted by the BOI and the investors are awaiting the release of land the environmental approvals to commence the project.
I request the Opposition and those with vested interests to change their narrow-minded thinking and join us to develop our country. We must always look at what is best for the whole community, not just the few who may oppose. We owe it to our people to courageously take decisions that will change their lives for the better.”
According to the media report I quoted earlier, speaking at the Committee on Public Finance (COPF) Chief Negotiator Weerasinghe has admitted that Sri Lanka was not happy with overall Singapore investments that have come in the past few years in return for the trade liberalisation under the Singapore-Sri Lanka Free Trade Agreement. He has added that between 2021 and 2023 the total investment from Singapore had been around $162 million!
What happened to those projects worth $16 billion negotiated, thanks to the SLSFTA, in just the two-and-a-half months after the agreement came into effect and approved by the BOI? I do not know about the steel manufacturing plant for exports ($ 1 billion investment), flour milling plant ($ 50 million) and sugar refinery ($ 200 million).
However, story of the multibillion-dollar investment in the Petroleum Refinery unfolded in a manner that would qualify it as the best fairy tale with false promises presented by our politicians and the officials, prior to 2019 elections.
Though many Sri Lankans got to know, through the media which repeatedly highlighted a plethora of issues surrounding the project and the questionable credentials of the Singaporean investor, the construction work on the Mirrijiwela Oil Refinery along with the cement factory began on the24th of March 2019 with a bang and Minister Ranil Wickremesinghe and his ministers along with the foreign and local dignitaries laid the foundation stones.
That was few months before the 2019 Presidential elections. Inaugurating the construction work Prime Minister Ranil Wickremesinghe said the projects will create thousands of job opportunities in the area and surrounding districts.
The oil refinery, which was to be built over 200 acres of land, with the capacity to refine 200,000 barrels of crude oil per day, was to generate US$7 billion of exports and create 1,500 direct and 3,000 indirect jobs. The construction of the refinery was to be completed in 44 months. Four years later, in August 2023 the Cabinet of Ministers approved the proposal presented by President Ranil Wickremesinghe to cancel the agreement with the investors of the refinery as the project has not been implemented! Can they explain to the country how much money was wasted to produce that fairy tale?
It is obvious that the President, ministers, and officials had made huge blunders and had deliberately misled the public and the parliament on the revenue loss and potential investment from SLSFTA with fairy tales and false promises.
As the president himself said, a country cannot be developed by making false promises or with fairy tales and these false promises and fairy tales had bankrupted the country. “Unfortunately, many segments of the population have not come to realize this yet”.
(The writer, a specialist and an activist on trade and development issues . )
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