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Saturday January 28th, 2023

How Sri Lanka and Vietnam are smashing Coronavirus, and what will happen next

ECONOMYNEXT – Sri Lanka and Vietnam are among the most successful countries in the world in keeping Coronavirus at bay with contact tracing, combined with restrictions against arrivals from China and third countries started at a time when the World Health Organization was advising against such controls.

As of April 15, 2020, Sri Lanka had confirmed 238 Coronavirus cases, 68 had recovered and 7 persons had died. Vietnam has found 266 patients 91 had recovered.

Up to April 16 none had died in Vietnam, though at least two are fighting for their lives. Several old patients had been pulled back from the brink of death at hospitals in Hanoi and Ho Chi Minh City using ECMO therapy.


Vietnam smashes Coronavirus to save elderly patients, deploys ECMO machines against SARS-Cov-2

The virus that causes the disease has been labeled SARS-Cov-2 and the genome decoded by researchers from a virus collected on December 24. Its incubation period is believe to be 2-14 days but may be higher based on initial findings in both Sri Lanka and Vietnam.

Intelligence and health officials of both countries are using epidemiological detective work to find contacts of confirmed patients.

This FAQ aims to explain the ‘world-class epidemiological detective work’ adopted in Sri Lanka and Vietnam and explains questions like; What is the index case? What is contact tracing? Why is the mortality rate so low in Vietnam? What is herd immunity? Does per capita testing matter?

Also, can the burqa stop Coronavirus viruses? What is quarantine tourism?

Q: What is the strategy adopted by Sri Lanka and Vietnam (and also Korea where community transmission is greater) to keep down numbers so far in the pandemic?

A: Sri Lanka, Vietnam and Korea are tracing contacts of infected patients to stop community transmission.

Contact tracing is an old tactic used by health services to fight epidemics spread by human-to-human contact ranging from Tuberculosis to Ebola.

However unlike TB, Coronavirus spreads very fast, so contact tracing has to be quick. Unlike Ebola there is no fever in all patients so testing of contacts has to be fast.

Nigeria used contact tracing against Ebola very successfully from the index case Patrick Sawyer which was recognized as world-class epidemiological detective work.

But unlike Ebola where symptoms come up fast Coronavirus is more evasive as there a asymptomatic cases.

China also contact traced after locking down Wuhan. When community transmission is widespread it is difficult to trace patients back or forward. In the case of Coronavirus, public services collapse once community transmission is widespread and all efforts are put to mitigation.

Q: What is an index case from abroad? What is F0? What is Second Ring?

A: A person who comes from abroad carrying the virus (or the person who got the diseases in Wuhan supposedly from an animal) is the index case or F0. The contacts of F0 are F1. The contacts of F1 are F2. Contacts of F2 and F3, and so on.

In Sri Lanka they are called Fist Ring, Second Ring, Third Ring. Sri Lanka also seems to be separating contacts based on close contacts and casual contacts according to statements made by health officials.

Q: What is contact tracing?

A: When an infected person is first found (index case or FO), who comes from abroad their closest contacts (F1 or First Ring), the contacts of contacts (F2 or Second Ring), and their contacts
are traced (F3) as fast as possible and isolated.

The entire areas is surgically locked down.

“First, three generations of contact (F) with COVID-19 cases should be traced to offer timely testing if the previous contact generation is found positive,” say researchers from Woolcock Institute of Medical Research, Hanoi, Viet Nam; Sydney School of Medicine, Faculty of Medicine and Health, The University of Sydney, Australia said in a recent publication

“All F1 contacts should be tested for SARS-CoV-2 regardless of symptom presentation.

“F1 individuals who are asymptomatic or have two negative tests 24 hours apart should be quarantined for 14 days.”

“F2 contacts should self-isolate at home and be monitored by public health units. If F1 tests positive, we recommend that F3 contacts should also be identified. When the previous F becomes positive, the next one will be informed to follow the contact management procedure.”

Because it is believed that persons develop the disease as closely as two days, Coronavirus can spread rapidly to the next level. But if they are traced quickly and the levels identified the expanding line of transmission or cluster can be stopped.

All quarantined persons should also be tested before at least twice according to the strategies now practiced by Sri Lanka and almost from the beginning in Vietnam.

More on Contact tracing here:

Vietnam Coronavirus research re-defines contact tracing strategy as Sri Lanka expands Covid-19 testing

Contact tracing flow diagram here

Q: Is contact tracing foolproof?

A: Not always. Contacts can slip though because it may not be possible to trace everyone. But if most of them are traced clusters can hopefully be traced because public services are still intact and resources and people can be thrown at the clusters and surgical or temporary lockdowns done.

A case in point is the patient from Suduwella in Ja-Ela.

Another danger is that people who are released from quarantine will also spread the diseases since there is emerging evidence that the disease can develop as much three weeks or later.

To be successful, contact tracing has to start early, when foreign returnees first start coming. The later arrivals are blocked, the more difficult it is to contain community transmission.

Vietnam traced all arrivals from a plane when the first infected person was found in the Wave II phase and also informed the countries of origin and the countries to which passengers left after tracing. But because it was not known which countries had developed community transmission, infected persons continued to flow from other countries.

Sri Lanka had done it only in one flight as far as is publicly known, but generally asked everyone who came from abroad to register and self-isolate after halting all flights on March 19.

Read: Sri Lanka hunting Covid-19 contacts in Malindo Air flight as Coronavirus toll climbs

If community transmission starts it is difficult to put the lid on the virus. Korea is fighting back strongly after initially having a large number of domestic infection clusters.

All testing and contact tracing is now based on the general idea that the incubation period is 14 days.

Q: Is the incubation period of SARS-Cov-2 virus 14 days or longer?

A: If the incubation period of the virus is more than 14 days the, the current strategies may have gaps.

In Sri Lanka at least one patient is believed to have developed the disease after 20 days. He was released from quarantine before testing of all quarantined persons started.

However it is not clear whether testing would have done any good either if a person develops the disease later after release from quarantine.

At the time Sri Lanka was not testing quarantined persons like Vietnam before release.

Sri Lanka has however asked everyone who is released to self-quarantine for another 14 days to close any gaps.

Army Commander Shavendra Silva has said the Italian returnee who was confirmed with Covid-19 after release is not likely to have contracted the disease in quarantine because anyone in a building where a patient was found was quarantined for 28 days.

Read :Sri Lanka Coronavirus contact tracing gaps plugged as incubation of SARS-Cov-2 suspected to top 20 days

Nor are quarantine workers or medical workers tested frequently. A minor worker at a hospital in Sri Lanka has been found with the disease.

Vietnam is also finding patients now who seem to have developed the disease 20 or more days after contact or had a mild version of the disease for some time. More investigations are underway.

If the incubation period is longer than 14 days to close any gaps quarantine may have to be extended.

The lockdowns/curfews are supposed to take care of any gaps in contact tracing/quarantine.

Assuming 14 days on average and a few who develops the disease after 20 days would require 34 days of lockdown or 21 + 21 days 42 days to be sure. However the numbers of such persons may be small.

Sri Lanka closed the country for all arrivals and quarantined everyone from March 19.

Q: Are patients who develop a mild case less likely to spread the disease to others unlike those with a cough?

A: There have been no such statements from any reliable health agency. But coughing can spread droplets further away as opposed to normal breathing through the nose.

Both the Centres of Disease Control of the US and National Health Service in UK are now asking to keep 6 feet away especially when talking.

Also health authorities in Sri Lanka have said that the viral load phlegm samples of asymptomatic patients seem to be lower than in others.

Q: Why are patients that do not have an index case from abroad or are not linked to existing patients indicative of a higher risk?

A: The lack of an index case shows that there is at least one other person (or many) in society who may be infected, but has not been found. In other words community transmission is under way.

It may also be that the infected person had contact with a foreigner or returnee, or a person who has been identified which he cannot recall.

Then later an index patient is found after border closure/all arrival quarantine, the higher the chance that there is community transmission and that the patient got it from a local person who has given it to others and has since recovered or still has the disease and is capable of transmitting it to others.

However lockdowns/curfews can be extended to cover the gap if the period is not correct.


Sri Lanka Coronavirus cases linked to index patients except two minister says, as scapegoating drive fear

Q: How come Sri Lanka and Vietnam got into contact tracing and quarantine very early?

A: It is not clear. Both Sri Lanka and Vietnam both had close contacts with China where the virus originated. As a result both countries got into checking Chinese arrivals for fever, then restricted visas and quarantined and self-quarantined arrivals.

Authorities of both countries faced public pressure to restrict arrivals from China on social media and in other ways, helping the process start early in Wave I.

Sri Lanka and Vietnam both quarantined and effectively killed the Wave I from China. Sri Lanka found 01 patient from Hubei province in China, who was treated in hospital and sent back to China. Vietnam found 16 during January and February 2020.

Wave I did not lead to community transmission either in Sri Lanka or Vietnam. It was successfully eradicated by all available evidence. None of the patients so far confirmed in Vietnam or Sri Lanka in March and Aprll 2020 have been found to have any links to Wave I patients in January or February.

But when Wave II hit, both countries were not aware of the extent to which Wave I had triggered community transmission in third countries. Both countries dropped their guard until Italy started to fall. Even then the extent to which it had spread to the UK and other countries were not appreciated.

Q: What is Wave I and Wave II?

A: Wave I is the infection that spread from China to third countries. Any country that restricted arrivals from China, quarantined those that came, and stopped community transmission from Wave I, also stopped the of export of their citizens with Coronavirus to third countries.

Any country that allowed returnees to come from China without quarantine (either Chinese or their own citizens) let community transmission to take place in the Wave I epidemic. They then re-exported their citizens to contribute to the Wave II pandemic.

Sri Lanka and Vietnam did not contribute to the pandemic from available evidence, but due to lack of testing of all exiting passengers, it is not certain whether one or two slipped away.

In both Sri Lanka and Vietnam Wave II had Italian links. In Sri Lanka Wave II started with a tour guide linked to an Italian travel group. In Vietnam a person who went to see a fashion show in Italy and returned via UK to start Wave II.

Read : Sri Lanka, Vietnam in Coronavirus battle of wits to bust the Covid-19 bug

Q: Did the World Health Organization tell Sri Lanka or Vietnam to block arrivals and quarantine arrivals from China during Wave I in January 2020?

A: WHO advice was contradictory. In fact WHO asked countries not to quarantine ‘healthy’ arrivals from China or any other country as late as February 29, after giving the nod to trace contacts in January 29.

“WHO continues to advise against the application of travel or trade restrictions to countries experiencing COVID-19 outbreaks,” the agency said.

“In general, evidence shows that restricting the movement of people and goods during public health emergencies is ineffective in most situations and may divert resources from other interventions.”

Read: Updated WHO recommendations for international traffic in relation to COVID-19 outbreak


WHO says ‘no reason’ to close borders with China, quarantine healthy travelers

Closing borders could allow China virus to spread faster: WHO

But in practice the health or intelligence workers involved in contact tracing and quarantine got rapidly overwhelmed unless borders were closed. Vietnam quarantined over 40,000 persons before giving up and closing airports for new arrivals. Sri Lanka quarantine over 3,000 before closing borders.

Sri Lanka started checking arrivals and sending people to hospital and asking them to fill a health declaration form from January 23 more than a week before the World Health Organization declared the virus a Public Health Emergency of International Concern (PHEIC) on January 30.

Q: Did WHO ask not to close borders due to political pressure from China?

A: There has been no public evidence or an inquiry to find out. In the case of Sri Lanka, there is no public evidence that pressure was used on Sri Lanka to keep borders open.

Sri Lankan officials have gone on record saying visa restrictions were imposed after talking to the Chinese embassy. China also asked their citizens working in the country to delay arrivals until Sri Lanka gave the go ahead, according to reports.

WHO has come under fire from some quarters including President Donald Trump for not taking action early enough and for allegedly misleading the world by going with Chinese data.

Meanwhile diplomatic analysts have also blamed Trump for his isolationist ‘America First’ policies that allowed China to appoint senior officials into organizations in the United Nations and increase its influence.

China has also protested against calling the Wuhan virus or China virus. Large pandemics have been associated with place names in the past and no one seem to have protested. It was common practice to name a virus where it became widely known first.

The Hong Kong virus (believed to have been originated from Southern China), Asian flu (also Southern China) and Spanish Flu (it is not clear that the virus originated in Spain at all) had place names.

WHO however tends to give tongue twisting acronyms to diseases which global media also follow.

The general strategy until now in the case of pandemics has been not to halt arrivals and isolate the countries. In the case of Ebola, the US and others kept borders open and allowed aircraft to come from Africa subject to temperature checks.

But Coronavirus has raised questions about these practices, and they may need re-evalution as there are asymptomatic persons and it seems to spread very fast. Containing Wave I in the single country epidemic phase seems to be the key to stop a pandemic.

Q: What is herd immunity?

A: Herd immunity is a phenomenon seen in viral diseases. Unlike bacteria which will repeatedly attack, people (and animals) tend to develop immunity against viruses, until it evolves into a new strain.

When 60 percent or more of a population develops the disease the epidemic tends to stop. Assuming an infected person comes in (say from a foreign country) the first and second person he meets may be immune to the virus. He has to meet the third person to give the virus to.

When the third person goes home, half his or her family members may already be infected (or all if there are only one two others) since more than half the population is infected.

The immune members can go around shopping and to work without infecting others, containing the infection at home. As a result the line of transmission ends.

Britain seems to have tried to implement herd immunity and reversed course against public pressure.

Many countries were caught unawares that UK was trying herd immunity and did not close borders with the UK as it did with China, which in fact locked down Wuhan and asked their people not to travel out. Sweden, the Netherlands seem to be following the same strategy to some degree.

The second country to bring infections to Vietnam was UK. Many countries were not aware of the UK strategy which some critics say is irresponsible and should only be practiced after barring all outward passengers.


Sri Lanka not yet considering travel restrictions to UK despite ‘herd immunity’ strategy

UK’s slow, steady ‘herd immunity’ coronavirus strategy stokes debate

The extent to which UK played a role in the global pandemic is not known. But Europeans are in general among the top world travellers. In Vietnam tourists were key index cases. Tourists and bars were deadly combinations. In Sri Lanka most index cases were foreign returnees.

Q: Are the claims made by Western experts that herd immunity is the only way to go correct? That unless a vaccine is found the disease cannot be stopped?

A:There is evidence from other respiratory outbreaks that herd immunity is not necessarily the only way to end pandemics.

SARS ended without herd immunity. Vietnam was the first country in the world to be declared free from SARS by the World Health Organization on April 28, 2002, after 17 days without a new patient being discovered.

MERS also ended without herd immunity. Both had higher levels of mortality.

Having said that, a key difference is that there seems to be a higher proportion of asymptomatic patients in the case of Covid-19 from Wuhan. That makes infected persons harder to detect and therefore easier to trigger community transmission and requires effective use of testing.

But evidence that that Wave I from China was effectively stopped by both Sri Lanka and Vietnam tends to show that it is possible to kill this disease as well.

Emerging evidence also seems to show that the strains that came from China and the strains that are in Western countries now are different, which may have implications.

Q: Is Sri Lanka under-testing? Should Sri Lanka test like the US or some other country per capita?

A: There is no comparison between the ad hoc testing done in Western countries or elsewhhere in South Asia and the testing in Sri Lanka, Vietnam and to some extent in Korea.

In Western countries, testing is academic. Community transmission is rife and testing will not make much difference except to get reliable information for any firefighting and records for the future.

Vietnam, Sri Lanka and Korea are testing strategically to act on the information and stop community transmission in its tracks.

Sri Lanka did not test F1 and F2 contacts in the early stages. Neither did Sri Lanka test before releasing quarantined patients. However the gaps were taken care of (largely) by quarantine and the severe curfew/lockdown that followed.

Vietnam has done more than 100,000 tests but has not found significantly larger numbers of patients than Sri Lanka.

But Vietnam were also very fast on the ground from the early catching F1s and testing arrivals for a country that gets 18 million tourists a year. About 160 patients in Vietnamese hospitals were foreigners.

An attempt was also made to test arrivals at Noi Bai airport but halted after it created crowds of (angry) passengers risking disease spread. Everyone in quarantine (about 50,000 at peak) and later in lcokdown were tested repeatedly.

If the lockdown is relaxed the more opportunities should be for voluntary testing so that the chance of any isolated cases being discovered expands without any cost to the public health system.

Drive through testing of persons who think they may develop disease or just to make sure would be a good way to go. In the UAE drive through PCR testing is available and results come through SMS. The data can be shared with health authorities to create a live map.

Sri Lanka should start testing people in delivery and inter-district transport as soon as equipment and consumables (swabs etc) are available, especially high risk areas.

Q: Why are there many Muslim confirmed cases in Sri Lanka in last stages?

A: Malaysia was one of the last countries for flights to be blocked or quarantined. Neither Sri Lanka nor Vietnam were fully aware of the extent of the spread of the disease in all countries. As a result arrivals from Malaysia, a top aviation hub were out of quarantine or not barred for a longer period than arrivals from Western nations. European countries were blocked before March 19 in Sri Lanka.

A similar trend was seen in Vietnam. Muslim Cham peoples who returned from a religious gathering in Malaysia were among the last that escaped quarantine just before all returnees from all countries were put on mandatory quarantine.

In addition in the early days Sri Lanka also did not test all persons in quarantine to catch asymptomatic patients who may have recovered on their own unlike Vietnam, which may have under-reported numbers.

Did the burqa help stop MERS? Can it stop Coronavirus in the Middle East?

A: There is a debate. The smaller proportion of women infected during MERS may have been due to the relatively high mobility by men, it has been argued, and not necessarily the burqa.

An earlier study had found that burqa wearers were more susceptible to respiratory diseases.

In some regions more men seem to be getting infected during the current Coronavirus crisis as well. Due to lack of testing of asymptomatic persons, data is not reliable.

Q: How is that old people are not dying in Vietnam unlike other countries? Are Western (and Chinese mortality statistics wrong?

A: In most Western countries public health services public health services have collapsed. Patients cannot be given ventilators in many cases.

Vietnam’s Prime Minister Nguyen Xuan Phuc has decreed that no expense or technology be spared in saving lives, either Vietnamese or foreign. When patients find it difficult to breathe they are given CPAP. When CPAP does not work they are intubated linked to a ventilator.

When lung damage worsens or they get heart trouble, the patients are connected to an ECMO machine – where blood is taken out re-oxygenerated and put back in the body. When kidneys lose function they are dialysed.

Read: Vietnam smashes Coronavirus to save elderly patients, deploys ECMO machines against SARS-Cov-2

In Wave I, doctors at Choy Ray hospital in Saigon saved a 72 year old Chinese man with a history of cancer and complications according to press reports. It is not clear whether any other country other than Vietnam has tried ECMO therapy.

Q: How should a country open up?

A: Sri Lanka has started to allow some economic activities already. Vietnam is even now partially open. Bars, massage parlours gyms are closed. People are asked to shop for food once a week – but they go out more.

Apparel shopping is discouraged for the time being. Some large factories employing over 30,000 in one location are closed. Anyone breaking social distancing rules are fined and the money is put in a fund. Unlike Sri Lanka people are not arrested wholesale. But anyone mentioning the word lockdown (oh oh) on social media is fined.

Vietnam and Korea (Korea almost lost the plot and the jury is still out though they are giving a good fight) shows that it is possible to combat Coronavirus without full lockdowns if contact tracing is fine tuned and started early in the game

However a wider pre-emptive testing strategy is perhaps needed after relaxation. A strategy for random testing and space for voluntary testing should be put in place as the country opens up to discover asymptomatic persons.

Large factories should do tests. Factories could start with workers isolated in a hired dorms or vacant hotels. Restaurants could have spaced out tables. Inter-district travel could be restricted for some time.

Surgical lockdowns should be done in case there are outbreaks of clusters.

All arrivals should be quarantined and tested. Vietnam had ‘premium’ quarantine for tourists until the numbers became so big that arrivals were restricted. Robot waiters distributed food in some cases.

Sri Lanka can also start quarantine tourism. First arrivals should be sent to frontline centre/hotels for testing and released to second level quarantine hotels for further quarantine.

Testing before flying can also be put for outgoing passengers from Sri Lanka as a further precaution.

Q: Did the WHO err in not advocating the Vietnam/Sri Lanka strategy more widely? Should the world change direction?

A: Perhaps. But it was not only the WHO that was reluctant to close borders. The strategy in the past has been to avoid closing borders.

But WHO may have erred in asking countries that did close borders not to. There is no evidence that they listened however. Closing inward arrivals from the pandemic country and both directions when community transmission is underway is a strategy that should be examined further.

The experience from Sri Lanka and Vietnam shows that in Wave I, minimum border restrictions against China in its epidemic phase and maximum quarantine could have stopped the global pandemic in its tracks.

A re-evaluation of strategy in dealing with epidemics seems to be in order. Quarantine and tighten border controls first and ask questions later.

Q: Is China a particular risk to the world than other countries because of its lack of transparency and tight state control on information lack of twitter etc?

A: The SARS virus is loose in the jungles of China from available evidence. There have been unproven claims that it was devised in a lab. In the case of the first SARS China was blamed for not sharing information early. According to WHO, China had not been hiding information this time and it has been effusive in its praise of China.

Anecdotal evidence from people in neighbhouring countries who had access to Chinese social media in January and February seem to show the situation in Wuhan was far more dire and chaotic than it appeared to outsiders. The drama played out in English news channels now, of body bags, mass burials now had been played out before.

It was crematoria running overnight, body bags piling up, people dying in their homes, old people taking chairs to wait in line, failing to get access to hospitals, walking miles to other hospitals (no public transport) to get the same treatment before dying, exhausted doctors and nurses wearing pampers going around the entire day with their body waste to save PPE, before dying also in some case, and other horror stories were played out in social media.

With the collapse of public services, data whether from mortuaries or hospitals, may not be accurate.

Journalists tracking the pandemic in Sri Lanka or Vietnam can write confidently about patient number 75 (who came from Italy and was confirmed from the Kandakadu quarantine centre) or patient number 92 (a British national and Vietnam Airlines pilot on ECMO therapy) but China had no such luxury.

The first Chinese doctors knew about the disease was in December when seriously ill patients started turning up in hospital with an unknown pneumonia type disease when community transmission was already rife.

Having said that, the largest respiratory pandemics after World War II that hit the world seem to have come from China according to data compiled by UK health authorities.

It is not clear why it has happened that way and whether the tight information control in the country after World War II is related to it, or it is simply that deadly evolving viruses are in the jungles of China.

Swine flu came from Mexico. MERS in the Middle East is believed to be from a bat. So viruses can also come from other countries.

Comments (1)

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  1. dma says:

    There are so many mandatory vaccination programs in Sri Lanka. Also people also eat so much of spices with their meals. There are more. These kind of things will increase the immunity.

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  1. dma says:

    There are so many mandatory vaccination programs in Sri Lanka. Also people also eat so much of spices with their meals. There are more. These kind of things will increase the immunity.

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)

Continue Reading

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.

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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