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Sri Lanka can prosper if it achieves debt sustainability: IMF official

IMF Asia and Pacific Department Director Krishna Srinivasan – Image credit: Flickr

ECONOMYNEXT – Sri Lanka can be put on the path to prosperity if it achieves debt sustainability, an International Monetary Fund (IMF) official said, noting that the island nation must also confront the challenge of restructuring domestic debt without hurting financial stability.

IMF Asia and Pacific Department Director Krishna Srinivasan speaking at an event on Wednesday May 03 said the Sri Lankan government is working on resolving some of these issues and will “flesh out a strategy.”

“Hopefully very soon. That’s the next step,” he said.

Srinivasan was addressing the media on the regional economic outlook on Asia and the Pacific.

The official also noted that inflation has come down in Sri Lanka, albeit from having gone “through the roof”.

The ongoing IMF programme, Sri Lanka’s 17th, is one which emphasises macroeconomic stabilisation and bringing down inflation, he said, adding that inflation is a tax on the poor.

“Fiscal consolidation is based on revenue based consolidation. That’s partly because Sri Lanka has among the lowest in terms of revenue mobilisation, tax collection. And that goes back to the policy mistake they made pre-pandemic, wherein they cut taxes across the board, whether it’s VAT, corporate tax, and personal income tax. So the [IMF]-supported programme is a revenue-based consolidation [programme] which provides stability to the economy,” he said.

Srinivasan was referring to widely criticised tax cuts that were introduced soon after the election of then President Gotabaya Rajapaksa in late 2019. However, a recent IMF-backed hike in progressive personal income tax in Sri Lanka has been met with resistance from a minority of the working population that earns more than most Sri Lankans but are well-organised and are backed by the country’s leftist and left-leaning parties.

Srinivasan also noted that Sri Lanka was a quintessential case of a country running twin deficits.

“You had a large increase in the fiscal deficits, putting pressure on the external accounts, reserves falling, exchange rate falling,” he said, adding that this prompted the country to approach the IMF for a fresh programme.

The IMF programme also relies on Sri Lanka reining in inflation and addresses governance and corruption issues, he said.

“It’s the first country in Asia which has had a deep diagnostic on the issue of governance and corruption and that will feed into the programme going forward,” said Srinivasan.

In early April, Sri Lanka gazetted a new anti-corruption bill in a bid to address corruption vulnerabilities, a prerequisite for the much-needed 2.9 billion US dollar extended fund facility that came with the IMF programme.

Srinivasan said the programme will see a floor established on how the country should support its poor and vulnerable and to “make sure that the fiscal support they provide is temporary and targeted to the people who need it most.”

“It’s a very comprehensive programme and fiscal consolidation by itself will not be enough,” he added.

On inflation, which is on a downward trend and is predicted by the Central Bank to reach a single digit level by year end, the IMF official acknowledged that inflation has come down but from high levels.

“So this is again a work in progress. Inflation has to come down durably because – let’s not forget, inflation is the worst kind of tax on the poor and the poor and the vulnerable are hurting the most. So you want to get inflation under control. That’s something which, again, in terms of monetary policy, with support of fiscal policy – [that the authorities have] to bring inflation down to levels which are reasonable,” he said.

Sri Lanka must also make good-faith efforts to reach a debt agreement with its creditors, whether bilateral or private, said Srinivasan.

The country’s foreign minister, Ali Sabry, told Channel News Asia on Wednesday that the government is optimistic (“fingers crossed”) that the South Asian nation, still recovering from its worst currency crisis in decades, is on track to completing its debt restructuring programme before the IMF reviews its programme in September.

“We’re confident that just like we managed to secure debt restructuring assurances from our friend and creditors, we should be able to restructure it,” said Sabry.


Sri Lanka confident of debt restructure, will no longer borrow for wasteful infrastructure

Commenting on Sri Lanka’s growth trajectory, Srinivasan said the country has made a mild recovery after a contraction of 8.7 percent in 2022 followed by a 3 percent contraction in 2023.

“But the issue will be for Sri Lanka to implement the programme well so that debt can be made sustainable, which is a big difference from previous programmes, and the country can be put on the path to prosperity,” he said.

Recalling that Sri Lanka’s debt was assessed by the IMF to be unsustainable, Srinivasan said before the programme could be approved by the IMF board, Sri Lanka had to embark on a “path towards restoring sustainability”, which includes restructuring debt to all creditors – private creditors, official creditors, and to some extent, domestic debt, for the simple reason that debt sustainability is quite a big challenge in Sri Lanka.

“But when you restructure domestic debt, you have to make sure that you also safeguard financial stability. These are issues on which the government is currently working and [unclear whether he said ‘will’ or ‘we’ll’] flesh out a strategy on that, hopefully very soon. That’s the next step,” he added. (Colombo/May03/2023)

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Sri Lanka bank bad loan expansion slows in June quarter

ECONOMYNEXT – Bad loans at Sri Lanka’s banks, measured as ‘Stage 03’ loans to total loans and advances expanded by 0.5 percent to 13.7 percent in the second quarter of 2023, central bank data shows, which is a slower pace than the previous three quarters.

Bad loans went up 1.9 percent in the September 2022 quarter, and 1.0 percent in the December quarter and 1.3 percent in the March quarter, as debt moratoria also ran out.

In Sri Lanka and other countries, large spikes in bad loans are usually ‘hangover’ of macro-economic policy deployed target growth.

Amid a stabilization effort, credit can also contract, making the bad loans bigger.

Sri Lanka’s bad loans usually spike after period of credit growth re-financed by printed money (reverse repo injections made to artificially target a call money rate), and not real deposits, which then trigger balance of payment deficits which require steep spikes in rates to restore monetary stability.

Sri Lanka economic bureaucrats cut rates with the printed money in the belief that there is a growth shortcut by cutting rates to target real GDP, which has led to external crises since a central bank was set up in 1950.

However, policy worsened after 2015 when the International Monetary Fund taught the country to calculate potential out and dangled the number in front of a central bank which had taken the country to the agency multiple times after running down reserves.

In December 2019, inflationists also cut taxes on top of rate cuts, deploying the most extreme Cambridge-Saltwater macro-economic policy ‘barber boom’ style with predictable results.

When rates are hiked to restore monetary stability, bad loans rise and a currency collapse destroys purchasing power of the consumers and sales of firms which had taken loans.

When central banks cut rates with liquidity injections bad loans also go up in floating rate regimes (the housing bubble), but balance of payments are crises are absent. (Colombo/Sept29/2023)

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Sri Lanka expects restructuring decisions from all creditors: Minister

ECONOMYNEXT – Sri Lanka is engaging positively with all foreign creditors State Minister for Finance Shehan Semasinghe said this week as an International Monetary Fund review hangs in the balance on restructuring.

“All creditors are engaging positively with us,” Minister Semasinghe said. “We expect decisions from all our creditors. For us earlier the better.”

Sri Lanka is negotiating with Paris Club creditors and several non-Paris Club creditors like India and Saudi Arabia together and China separately. China is an observer in the Paris Club meeting.

The Paris Club held a meeting on Sri Lanka on September 22 with China as an observer.

Though Paris Club creditors have a well-oiled mechanism to give a quick decision on countries that default, the entry of China which had earlier not been willing to restructure debt, but was willing to give fresh loans to repay instalments, have complicated matters.

“Let me say again that we support Chinese financial institutions in actively working out the debt treatment with Sri Lanka,” China’s Foreign Ministry spokesman Wang Wenbin told reporters on September 26.

“We are ready to work with relevant countries and international financial institutions to jointly play a positive role in helping Sri Lanka navigate the situation, ease its debt burden and achieve sustainable development.”

There are expectations that Sri Lanka may be able to wrap up a preliminary deal with official creditors as early as October 2023 around the time IMF’s annual sessions take place in Morocco.

Sri Lanka President Ranil Wickremesinghe is to make an official visit to China October.

Sri Lanka is expected to finalize a refinery deal in Hambantota among other investments during the visit, according to reports.

Completing Sri Lanka’s external debt restricting is key to completing the first review of the island’s reform and stabilization program with the International Monetary Fund, which is expected in October or November.

Without completing a review Sri Lanka will not have formal IMF economic targets for December, and no disbursement of the second tranche.

World Bank and IMF with the G20 group, which include India and China has formed Global Sovereign Debt Roundtable has been trying to fine tune debt restructuring going beyond the Paris Club.

IMF’s Senior Mission Chief for Sri Lanka Peter Breuer said Sri Lanka’s debt is ‘spread around quite a bit’ to a question whether an IMF review could progress without China, possibly indicating that the lender would prefer to have the country on board.

“This is a process that we have that applies in the case of Sri Lanka to both official creditors, meaning other countries that have lent to Sri Lanka on a bilateral basis as well as commercial creditors, for example, bond holders,” Breuer told reporters in Colombo.

“And as you know, the government is in discussions with all of these groups. In Sri Lanka’s case, the debt is spread around quite a bit externally and domestically.”

READ MORE Sri Lanka’s external debt restructure ‘progress’ decision by IMF exec board

Out of Sri Lanka’s 36.59 billion US dollars of central government debt, multilaterals held 29.8 percent or 10.9 billion US dollars which will not be restructured.

Bilaterals held another 29.9 percent of which Paris Club was 12.1 percent and China 12.7 percent.

Of the commercial debt which was 40.3 percent, China Development Bank held another 6 percent, relating to a monetary instability loan it has given as a bailout without asking for rate hikes to stop output gap targeting.

China without AIIB held 6,850 million US dollars or 18.7 percent of central government external debt. (Colombo/Sept29/2023)

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Sri Lanka can build strong tourism ‘eco-brand’: UN official

ECONOMYNEXT – Sri Lanka can build an ‘eco-brand’ catering especially to younger tourists who feel strongly about the environment, United Nations Resident Representative to Sri Lanka, Azusa Kobota said.

About 70 percent of global travellers prioritise sustainability in their holiday choices, marking a ten percent increase from 2021, while around 30 percent of travellers feel guilty about flying, due to carbon emissions, she said.

“As the world embraces green thinking during this time of economic recovery efforts, the objective of the tourism sector cannot simply be about increasing the number of inbound tourists,” Kobota said at an event marking World Tourism Day in Colombo.

“It has to be about enhancing their experience through green lenses, by implementing a responsible, eco-conscious paradigm for the sector and building a stronger eco-brand around the sustainable agenda for Sri Lanka,”

“This is no longer about reducing the trade offs between growing the industry and protecting the environment.

“We must see nature as our asset and solutions to be obtained for the exponential growth for our future generations.”

The sustainable tourism market is estimated to have earned 195 billion US dollars in 2022, and is expected to reach about 656 billion US dollars in 2032, she said.

“Tourists, particularly the younger generations from gen X,Y,Z are deeply, deeply conscious about the long term choices of their actions, and the adverse impact of tourists on the environment.

“Statistics show that a significant proportion of global travellers, about 30 percent, feel guilty about flying due to the environmental impact and 22 percent say they actively prefer public transport and bicycle rental options, over renting a car.”

Sri Lanka welcomed one million tourists by September 26 and is expecting more that 1.5 million tourists by the end of the year. (Colombo/Sept29/2023)

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