Features
Domestic Debt Restructuring fiasco
By sumanasiri liyanage
Addressing a meeting of company directors, President Ranil Wickremesinghe said: “I hope that by September [2023] Sri Lanka will be able to shed its bankruptcy status”. What does this statement of the president really mean? Does it give the impression that Sri Lanka is back on the right path under the direction of his regime? Or, does it simply imply that Sri Lanka will re-start the repayment of foreign loans that were put on hold (so-called debt standstill) in July 2022? The commencement of the repayment of foreign loans would definitely exert pressure once again on the economy if there is no substantial haircut by foreign creditors. At the moment, total public debt/ GDP ratio is about 130 percent. By 2027- 2032 it is expected to decrease\ to 95 percent of GDP. This is in itself a formidable task in the context of the shrinkage of the GDP the growth rate which is minus 11 percent in the first half of 2023. Hence, the government has to plan to reduce not only the public debt/ GDP ratio but also the nominal value of public debt that stands today at 83 billion US dollars. Foreign currency debt service payments were around 6 and 7 billion US dollars in 2020 and 2021 respectively. Because of debt standstill, it reached 2013 level in 2022.
It is in this context, that the International Monetary Fund (IMF) proposed to restructure public debt as a pre-condition to offer financial assistance to debt-ridden Sri Lanka. The restructuring may be done either through a ‘haircut’ or lengthening the maturity time or reducing the rate of interest or a combination of these three. The IMF initially asked only for restructuring of foreign debt; there was no mention about the domestic debt restructuring (DDR). Nonetheless, the international sovereign bond (ISBs) holders insist that domestic debt restructuring is imperative for them to consider restructuring of the ISBs held by Sri Lanka. Hence, the government added domestic debt restructuring that was eventually called domestic debt optimisation (DDO) into its arsenal and the President also as a Minister of Finance picked this opportunity to increase his dictatorial powers making him the sole authority and decision-maker on DDO. Hundred and twenty-two members of the Parliament last Saturday voted for doing away with parliamentary power over public finance.
According Prof. Howard Nicholas, the government’s capitulation before the international sovereign bond holders is totally unwarranted. ISBs were purchased with the presumption that there was some degree of probability that the Sri Lankan government would default. In order to offset this risk, Sri Lankan government had agreed to pay an interest rate substantially higher than that of the rupee denominated bonds, 6 percent vis-à-vis 4 percent. In a such a situation the demand by the ISB holders is unjust and immoral. Hence, according to Prof Nicholas, two kinds of investors should not be treated in the same terms. As a tame and subservient slave, now the government and the CBSL are exploring ways and means of reducing the government financial needs (GFN).
The Misuse and Mismanagement of the EPF
The government and the CBSL have been making contradictory statements with reference to the DDO process. This is visible especially with regard to the restructuring of superannuation funds, particularly, the EPF the largest fund of Sri Lanka with more than three trillion rupees. The CBSL proposed and 122 members of the Parliament affirmed that amount that equals to 0.5 percent of the GDP should be taken away from the EPF in their attempt to reduce GFN from 34.6 percent of the GDP in 2022 to 13 percent of the GDP in 2032. CBSL loudly states that there will not be a ‘haircut’. Let us look at this argument. The expected contribution from EPF to debt restructuring would be US 377.5 million dollars (Rs. 113 billion) that is 3.3 percent of the total present nominal value of the EPF. Of course, this does not imply that this massive fund exceeding three trillion rupees will dry off in thirty odd years. That would not happen because every year there will be addition to the fund that exceeds at the moment its total yearly payment out of the fund.
The government has proposed myriad of methods to extract Rs 113 billion from the fund. First, the Treasury proposed to change the portfolio of the fund in favour of long-term bonds. Hence, the fund should convert its Treasury Bills into Treasury Bonds. The conversion of short-term debt instruments to long-term debt instrument would reduce the total payment of the debtor, i. e, the Government of Sri Lanka. Short-term debt instruments have higher turnover than the long-term debt instruments.
Marx in the second volume of his magnum opus discussed at length the turnover of capital and how it affected the surplus value generation. The same argument may be used to explain the reduction of interest payment when capital with less turn-over exceeds capital with high turn-over. The reduction of interest payment would occur even if there was no reduction of the rate of interest on treasury instruments in the fund portfolio. Secondly, the government would impose prohibitive tax if superannuation funds refuse to convert TB into T Bonds. Those funds would be subject to pay 30 percent instead of present rate 14 percent. This would be a heavy burden for small superannuation funds.
Macro-Economic Impact
In the discussion of DDO, one of the neglected aspects was its macro-economic implications. For an economy to run smoothly, it requires a certain proportion of liquid assets. Notwithstanding his trivia, once again, the second volume of capital throws some light in understanding these possible adverse macro outcomes.
Marx notes that only part of the industrial capital is actively engaged in the production process. It is required if the production process to go on without interruption. Thus, Marx highlights the importance of the role of money capital, capital in its liquid form. In capitalist system, this is equally true for individuals, banks and companies. Hence, it is imperative to maintain a proper balance between liquid and illiquid assets. The disturbance of this balance would affect adversely the operations of the economy.
It is also interesting to note that contrary to the orthodox theory, the amount of liquid assets including money supply are endogenously determined by the level of economic activity of the country. If, the economic agents have unnecessary liquid assets, they tend to convert it into more illiquid assets. On the other hand, if there is no adequate supply of liquid assets, economic agents like banks would create more money or issue commercial bills. Moreover, CBSL would buy government securities like Treasury Bonds in open market operations releasing more money to the economy.
There are multiple factors that determine the ratio between liquid/ illiquid assets. As I do not have in my possession exact data on this ratio in Sri Lanka, I propose to use the data given by the Governor of the CBSL in his presentation as a proxy. The total of the Treasury papers in the local currency market is Rs. 12.8 trillion. Out of which Rs. 4.1 trillion are Treasury Bills while Rs. 8.7 trillion are Treasury Bonds. Approximately, the ratio is 32: 68. Using this as a proxy, we may say that the economy in order to run properly and smoothly, this ratio, 32: 68 should be maintained. The way in which DDO is planned disturbs this ratio in favour of Treasury Bonds, relatively an illiquid asset. How would economy respond to it?
Artificial reduction of liquid assets under the guise of DDO would definitely generate pressure on the short end of the capital market. The economy would respond to it by increasing money supply by the banking system since money supply is endogenously determined. Last Thursday, the CBSL reduced it policy interest rate assuming that the market would respond positively. Nonetheless, in an environment in which market seeks more liquid funds to offset the reduction, Treasury Bills would, other things being equal, drive up interest rates. Anticipating John Maynard Keynes, Marx argues that the demand for and supply of money is the key determinant of the rate of interest. Hence, would the money market follow the CBSL lead and reduce its interest rate? Sometimes, laws of the market are more powerful than the dictatorial powers of politicians.
Ernest Mandel, writing an excellent introduction to Marx’s volume two of Capital feared that the volume two “does not contain much material for agitation”. Alas! Mandel was wrong. The DDO of the Sri Lankan government and the proposed reform for superannuation funds contain adequate material for agitation by the individual account holders of those superannuation funds.
(The writer is a retired teacher of political economy. E-mail: sumane_l@yahoo.com)
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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