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Saturday January 28th, 2023

Biden-Harris: What’s in store for Sri Lanka?

ECONOMYNEXT – If all goes well – not a small ‘if’, given recent events – Joe Biden will be sworn in as the 46th President of the United States later this evening, Sri Lanka time. Outgoing President Donald Trump is boycotting the inauguration, and words like “civil war” are being thrown around freely, but – CNN’s premature frenzy notwithstanding – the transition should be mostly smooth. Mostly. In a few hours’ time, Biden will be conferred the increasingly dubious title ‘leader of the free world’ and Kamala Harris will create history by being the first woman and first person of colour to be Vice President of the US, an “enlightened” country that was mysteriously lagging behind on that count until November 2020. While this is all arguably good news for America, what are the short and long term implications of a Biden-Harris administration for Sri Lanka?

EconomyNext reached out to three experts, an economist and two former senior and reputed diplomats, for their views.

Research Economist at the Institute of Policy Studies (IPS) Kithmina Hewage predicts a return to multilateralism after years of isolationist foreign policy under Trump.

“This means that in many ways, Biden’s foreign policy will closely reflect Obama’s and his proposed appointments to the State Department and Defence Department show that. However, there will be some significant shifts between the Biden and Obama foreign policies. The world Biden has inherited is very different to the one Obama left in 2016 – China is a much more powerful player in global politics and traditional US allies like South Korea, Japan, EU, and the UK have started seeking alternate alliances amongst themselves due to US policy inconsistency under Trump. Therefore, Biden will likely continue to be somewhat aggressive against China whilst trying to rebuild US alliances at the multilateral level,” he said.

This muted aggression notwithstanding, Hewage believes that Biden is less likely to continue Trump’s controversial trade war with China. This, coupled with the promised return to multilateralism, he said, will be in Sri Lanka’s favour.

“Biden will attempt to push back through multilateral forums such as the World Trade Organisation (WTO) on issues like copyright infringement and other trade concerns. This is good news for Sri Lanka as it will create a much more stable global economic environment. The US might also attempt to reinvest in developing stronger economic alliances in South and East Asia (with India and former TPP partners) to try and balance Chinese economic interests in the region. That might provide more opportunities for Sri Lanka to join regional and global value chains, so long as we get our macroeconomic fundamentals in place,” he said.

Despite attempts to balance Chinese interests, Hewage does not see a Biden administration forcing a “with us or against us” choice on smaller nations, as was seen during the hurried visit of outgoing Secretary of State Mike Pompeo to Sri Lanka in October last year.

Another area of importance for Sri Lanka, according to Hewage, will be possible attempts under Biden to restart the Iran Nuclear Deal. This is because Iran has historically been a significant oil supplier and an important destination for the island nation’s exports. He also believes the new administration’s focus on climate change will be in the interest of Sri Lanka.

“As a particularly vulnerable economy to climate change, this will benefit us in the long run, both in terms of mitigating climate change as well as promoting greater global investment and innovation into green tech and sustainable energy,” he said.

Economic implications aside, the new administration’s approach to Sri Lanka’s human rights record will be of utmost concern to the Government of Sri Lanka (GoSL). The US is widely expected to rejoin the United Nations Human Rights Council (UNHRC) under Biden and once again assume a role of global leadership in addressing issues of human rights. It was the US, under a Democratic administration, that took the initiative in holding Sri Lanka accountable at the UNHRC for the country’s alleged violations of human rights in the final phases of the separatist war.

A retired senior diplomat who spoke to EconomyNext on condition of anonymity said the intensity of focus on Sri Lanka will depend on a number of factors.

“A Biden administration will rejoin all multilateral processes, including the UNHRC in time to come, but by March this year it will be too soon for any significant US interest to manifest. Given that several Democratic party leading functionaries have had a focus on South Asia including  Sri Lanka, US interest in Sri Lanka at the UNHRC will manifest in time to come. However, the level of that focus will be a function of the quality and quantity of interaction at Congress,  the State Department, and the White House by Tamil and human rights lobby groups on the one hand and the GoSL and the Embassy in Washington on the other,” the diplomat said.

With regard to China, he said, ongoing US-China dissonance will essentially remain the same. “But in style it will manifest differently and Sri Lanka, too, will come under focus accordingly. However, it’s likely that the US will let India handle that issue as a QUAD (Quadrilateral Security Dialogue) partner given that US-Sri Lankan relations have now reached an all-time low,” he said.

The diplomat further said that the Biden-Harris administration’s approach to Sri Lanka will depend on how Sri Lanka handles its own reconciliation process and human rights issues as well as economic policies. Another factor, he said, will be how best Sri Lanka can manage the ‘Comprehensive Partnership Dialogue Process’ between the two countries initiated in 2017.

Another former senior diplomat who also spoke to EconomyNext on condition of anonymity said that though it is unclear at present whether the US under Biden will get back to piloting the Sri Lanka resolution at the UNHRC, they will likely play a proactive role in using international mechanisms to enforce human rights in various countries, especially in the developing world.

“They have picked Samantha Power to be the head of the USAID. She was very much active on the human rights front and very much focused on Sri Lanka during the former administration. So you can expect a more active stance. Whether that stance will be an aggressive one is not clear,” he said.

There has been some speculation that the ethnicity of Vice President-elect Harris, whose mother was born in Tamil Nadu, will factor in newfound resolve on the part of the US to see that Sri Lanka is held accountable for its alleged war crimes. Asked to comment on this, the diplomat said it is unlikely that Harris would be guided by her ethnic origins.

“Quite frankly, I think the American administration works more on institutional guidance rather than personal compulsion. I’m not sure Harris would be guided by her ethnic origins rather than by the interests of the US. They also understand that they have to work with Sri Lanka because Sri Lanka is strategically important for the new Indo-Pacific strategy. They understand that more pressure on human rights on Sri Lanka could make Sri Lanka gravitate more towards China. They’ll be cautious of that,” he said.

Asked if the new administration might continue to pressure countries like Sri Lanka to resist Chinese influence, the diplomat said, echoing Hewage, that the US is unlikely to adopt a zero-sum, “if you don’t deal with China, you’re better off with us” approach.

“But they will certainly discourage Sri Lanka from entering into strategic partnerships with China. They will also be cautious about Sri Lanka getting into undeliverable financial commitments like the so-called debt trap. At the same time, they understand that China is a good source of investment and purchasing power for Sri Lanka.

“I believe they will have a more nuanced, perhaps balanced approach to let Sri Lanka deal with China on commercial matters, but without giving China any strategic or military or other advantage,” he said, cautioning that this is still speculation as the new administration has yet to articulate their foreign policy in full.

However, he expressed confidence that the US under Biden will not follow Trump’s “doctrine of zero sum thinking”.

The inauguration ceremony will begin at 10.30pm tonight, Sri Lanka time. (Colombo/Jan20/2021)

Comments (4)

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  1. Dalit Prawasi says:

    Democrats have never been good for smaller countries like us. Who ever are the individuals running USA from Biden to the lowest poor and powerless countries will be doomed.

  2. Robbo says:

    He’s senile, he doesn’t even know where he is, let alone Sri Lanka LOL. So sad what has happened to America. So, so sad for the world. Fingers crossed I guess, we can only hope for the best.

  3. Chulie says:

    A comprehensive analysis. Thank you.

  4. Shan says:

    When it comes to strategic importance India is now a much more important country to USA and the west. This is the result of growing power of China. India is determined to get involved in Sri Lankan matters not to protect Tamils but for its own geopolitical interest. Their geopolitical groups. Indian Ocean’s strategic equation has changed. The reason is, while India was sleeping mired in its internal politics China has grown by leaps and bounds, economically, technologically and militarilly. Now India is gearing up to grow rapidly while the Sri Lankan government plays ethnic politics to win votes.

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Comments (4)

Cancel reply

Your email address will not be published. Required fields are marked *

  1. Dalit Prawasi says:

    Democrats have never been good for smaller countries like us. Who ever are the individuals running USA from Biden to the lowest poor and powerless countries will be doomed.

  2. Robbo says:

    He’s senile, he doesn’t even know where he is, let alone Sri Lanka LOL. So sad what has happened to America. So, so sad for the world. Fingers crossed I guess, we can only hope for the best.

  3. Chulie says:

    A comprehensive analysis. Thank you.

  4. Shan says:

    When it comes to strategic importance India is now a much more important country to USA and the west. This is the result of growing power of China. India is determined to get involved in Sri Lankan matters not to protect Tamils but for its own geopolitical interest. Their geopolitical groups. Indian Ocean’s strategic equation has changed. The reason is, while India was sleeping mired in its internal politics China has grown by leaps and bounds, economically, technologically and militarilly. Now India is gearing up to grow rapidly while the Sri Lankan government plays ethnic politics to win votes.

Sri Lanka utility to continue power cuts, regulator says no

ECONOMYNEXT – Sri Lanka’s state-run Ceylon Electricity Board has decided to continue power cuts, as the dry season hits the country despite orders to give 24 hours of power.

The utility said its Board “has decided to continue the demand management programme” and it has informed the regulator of this decision on January 27.

The Public Utilities Commission of Sri Lanka said it had not approved the power cuts “as it violate and affect the rights of 331,000 students sitting for the Advanced Level exams.”

Sri Lanka’s CEB has high running costs due to long term scuttling of planned coal plants by activists and lastly President Maithripala Sirisena.

‘CEB’s costs went up as demand went up since the last coal plant opening and steady collapse of the currency from 131 to 182 to the US dollar due to open market operations unleashed to suppress rates and operate a flexible inflation targeting by the central bank.

Even more aggressive liquidity injections after 2020 to target an output gap then busted the currency from 182 to 360 to the US dollar.

CEB has to use extra fuel from around February to April 2022 as the dry season hits reducing hydro power.

Sri Lanka’s Human Rights Commission has ordered the Ceylon Petroleum Corporation to supply fuel and banks to give credit for extra power.

Power Minister Kanchana Wijesekera has alleged that CPC officials agreed under duress and threat of jail sentence to supply fuel.

The CEB has to cut power in case demand outstrips supply to maintain frequency at 50 Hz to avoid cascading failures, according to sector analysts. (Colombo/Jan28/2023)

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Sri Lanka president suspends parliament till Feb 08

ECONOMYNEXT – Sri Lanka President Ranil Wickremesinghe has suspended parliament till February 08, according to a gazette notice.

Parliament will re-convene at 1000 am on January 08.

President Wickremesinghe told party leaders that he would make a speech, officially declaring his intention to give effect to the 13th amendment to the constitution on provincial councils.

Provincial councils, a power sharing arrangement backed by India as a solution to the ethnic Tamil have not yet been given police and land powers. (Colombo/Jan28/2023)

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Sri Lanka, other defaulting nations have widely differing debt indicators: Expert

ECONOMYNEXT – Sri Lanka other recently defaulting nations have widely differing debt indicators, and some other countries survive with even higher levels of debt, a US based analyst has said.

“If you look at the ratio of debt to GDP, the size of the economy the number is very high, mostly because there has been a lot of depreciation, so the debt in dollars keeps growing relative to GDP,” Sergai Lanau, Deputy Chief Economist at Washington based Institute of International Finance said.

“This is sometimes over-emphasized… but this ratio at 120 is a lot.”

He was speaking at a forum organized by the Bar Association of Sri Lanka.

“Just for a reference point about 6 or 7 years ago Italy’s debt was 120 percent GDP, there was a lot of concern in the Euro area and that is a country that has the ECB. So Sri Lanka at 120 is a lot.”

Italy however is in a monetary union with Euro which is a floating exchange rate without anchor conflicts and forex shortages and basic external payment problems.

Sri Lanka is trying to bring the ratio down to 95 percent by 2032 under an International Monetary Fund backed program, according to a leaked letter from India.

“Typically for many years there was as lot of emphasis on debt ratios, when people looked at debt restructuring – or at least economists,” Lanau said.

“And that is something that always puzzled bond traders who came from the corporate sector. For them it is all about the flows and gross financing needs.

“The IMF has shifted its focus a lot financing needs over the years and it is a less of a problem now.”

Ghana has defaulted and it is trying to reduce its debt from around 90 percent to below 60 percent by 2028. It is starting at a much lower level and correcting within a shorter period to an even lower level.

Sri Lanka’s debt ratio is high but it “may or may not be a constraint”, he said.

What the … was that?

The IMF’s default workout framework is a work in progress, which has changed over the years since mass defaults hit market market countries which were denied monetary stability through intermediate regimes especially in Latin America from the early 1980s.

Until 1980, when the so-called BBC policy (now called exchange rate as the first line of defence) where countries were encouraged to bust their currencies instead of withdrawing inflationary policy, sovereign defaults were not a problem.

“During the 1970s, the risk of sovereign default was not perceived as a major concern,” the IMF itself admits.

“Most “external arrears” generated by a country were created by exchange restrictions. For example, an importer might miss a payment because the authorities were slow to release foreign exchange.

“Sovereign default had not been a problem since the Second World War.

“Therefore, the IMF’s policy framework was not equipped to confront the complications that arose in the context of the sovereign debt difficulties that emerged in the 1980s.

“In fact, it took until 1980 for the IMF’s Executive Board even to agree that a default on sovereign debt should also be covered under the external arrears policy.”

Washington based policy circles began to prescribe, inconsistent, anchor conflicting intermediate regimes with aggressive open market operations to anyone who was willing to listen after the Fed floated, in the false belief that currencies fell due to ‘overvaluation’ and not liquidity injections.

Countries like Sri Lanka where there is no doctrinal foundation in sound money and no knowledge of classical monetary theory, were easy prey, critics say.

East Asia and Japan rejected such regimes. Malaysia is a prime example which despite not having a legal hard peg, fixed itself, repaid debt ahead of time, when tin and other commodity prices collapsed in the wake of Volcker tightening, while Latin America defaulted.

Elephant in the Room

A country with a soft pegged central bank (flexible exchange rate or intermediate regime) will see debt rocket each time it suppresses interest rates to target a policy rate and triggers a currency crisis.

Once a currency crisis hits, on one had the domestic currency value of external debt which is denominated in dollars protecting sovereign bond holders, goes up.

Interest rates of domestic debt also have to go up to stop the money printing and halt forex shortages which can widen the overall deficit in the short term.

The currency collapse also kills purchasing power and the real economy slows or contracts.

Once the credibility of the exchange rate has been lost, due to excess money injected the country loses the ability to settle both imports and debt repayment by exchanging domestic money for dollars.

The reserves (savings of past years) are used for current imports and debt repayments more money is injected to sterilize the interventions to maintain the policy rate, reserves collected over several years are run down in a few months.

Falling reserves, a depreciating currency then trigger rating downgrades (usually due to so-called exchange rate of as the first line of defence which saw downgrades in 2018 and 2020 in Sri Lanka) and sovereign bond as yields soar, and market access is lost, triggering a default.

As reserves dwindle further due to holding the policy rate with new money, more downgrades follow.

Countries with flexible exchange rates/flexible inflation targeting with market access can default at virtually any level of debt, critics say.

Market Access

Sri Lanka’s debt to GDP ratio shot up over 100 percent and lost almost all its reserves following a currency crisis in 2000/2001.

But at the time (or in earlier soft-peg crises in 1988/89 and earlier) the country did not have market access and bullet repayment debt.

In Sri Lanka bonds are big part of the country’s debt.

“Once you have lost market access there is virtually no level of gross financing needs that is sustainable,” Lanau said.

Analysts say the once market access has been lost, and the IMF declares that debt is unsustainable, which blocks the World Bank and ADB from giving loans, default is almost certain.

Argentina which has the archetypal soft-pegged Latin America central bank, which sterilizes interventions, strikes zeros off the peso at intervals and get into forex trouble.

“The country got into an IMF program in mid-2018, it was a very optimistic set of IMF targets, policy adjustments,” Lanau said.

“And this IMF program did not work and the situation got critical in August 2019 at which point Argentina defaulted.”

In March 2020 the IMF had presented a debt sustainability analysis where it was expected to to get its debt to 40 percent of GDP by 2030 and foreign exchange debt service to 3 percent of GDP, Lanau said, compared to 4.5 percent for Sri Lanka to make debt sustainable.

Ecuador which had a successful pre-emptive debt re-structuring, had debt levels of around 60 percent when it went talked to bond holders.

It was an ‘easy re-structuring, Lanau said.

It was a “lot about a bunch of maturities coming due in very few years as opposed to a very high debt ratio or a situation that was very unsustainable economically.”

Ecuador however is a dollarized country where its central bank effectively died in the 1990s after the sucre collapsed to 25,000 to the US dollar.

The Central Bank of Ecuador is no longer capable of creating forex shortages or driving the people to starvation and external debt is effectively in domestic currency.

Ecuador’s gross financing needs are now down to around mid single digits, while Sri Lanka’s has shot up to around 30 percent of GDP following the currency collapse.

Ecuador central bank was set up by Edwin Kemmerer, a US money doctor, with a gold peg (no obstinate policy rate) but was corrupted in 1947 by Robert Triffin, a US Keynesian who set up Argentina style central banks in several Latin America countries that frequently defaulted from the 1980s.

Sri Lanka’s central bank was also set up in 1950 by a US money doctor with broadly similar sterilizing powers.

Sri Lanka also started to depreciate the currency from around 1980 without withdrawing inflationary policy (an earlier re-incarnation of first line of defence strategy) triggering strikes, social unrest but no sovereign default due to lack of market access.

Sovereign defaults were mostly absent during the Bretton Woods era even in Latin America when countries maintained their pegs more or less with complementary monetary policy and the IMF also supported external anchors.

However after 1980 when the US tightened policy under Chairman Paul Volcker there were widespread defaults in pegged Latin American countries which did not hike rates in tandem or sterilized interventions (resisted the BOP) trying to operate independent monetary policy.

Latin America countries including Argentina that suffer currency crises typically have revenues to GDP of around 20 to 30 percent, overall deficits of around 5 to 6 percent (or even surpluses) when the central bank plunges the country into chaos and default by sterilizing outflows and trying to extend the credit cycle beyond that of the Fed.

Now there are a number of market access countries in Africa and Asia with reserve collecting central bank which are trying to operate flexible inflation targeting, another monetary policy which are in conflict with the balance of payments which are ripe for serial currency crises and default.

Clean floating central bank do not use foreign reserves for imports nor collects them. (Colombo/Dec27/2022)

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