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Sri Lanka cannot alienate other creditors and solve debt problems with only China: Harsha

ECONOMYNEXT – Sri Lanka’s cannot alienate other creditors and solve its debt problem by banking on China alone, with sovereign bond investors now taking about what would happen in the event of a credit event, Harsha de Silva, an opposition legislator said.

Opposition legislator Harsha De Silva said the administration had created a big problem with Japan and one minister has openly berated the Indian Prime Minister in Parliament, the day before a Chinese delegation came to Sri Lanka.

“Countries don’t do that,” he said. “The belief I always have is that we cannot develop the local economy by building a wall around Sri Lanka.

“If we want to develop the local economy we have build bridges from Sri Lanka.

“If we had our government this problem won’t come to the point where it had come now, because we know how to take it forward in a friendly manner with the international community.

De Silva said the Chinese embassy in Sri Lanka through their official twitter.com page has said that the country’s debt problem was bigger than the loans to China.

“China cannot save Sri Lanka from the debt problem completely,” De Silva said.

Morgan Stanley, a global investment bank, had done an analysis of what would happen if Sri Lanka will not be able to repay debt.

While Morgan Stanley said the possibility of its happening was low, it was the first time in history that such an analysis had been done.

“We never miss our debt repayment, so the confidence the international community had in us was high,” he said.

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“But that confidence has now crashed quickly.”

He said they had commented on a funding gap of 9 billion US dollars during the year ending August 2021.

Sri Lanka’s bond prices which started to pick up after steep fall during March and April, tumbled again after a new 20th amendment to the constitution was published in early August.

Moody’s, a rating agency then downgraded Sri Lanka’s credit to Caa1 (CCC+).

De Silva said JP Morgan, another global investment bank has also commented on debt problems.

Their opinion mattered because they dealt with key investors, he said.

Sri Lanka’s bonds had also been hit after reports that Sri Lanka would not go the International Monetary Fund.

De Silva said that a country does not go to IMF merely to ask for money but also to build up the confidence of the international investors to invest in that particular country.

But to build confidence the administration will have to reverse tax cuts and get more revenue, De Silva said.

Countries with soft-pegged exchange rate regimes, where the central bank prints money to control interest rates and leading to exchange rate collapses, go to the IMF. Analysts have called for central bank reform to avoid a sovereign default.

In 2018, Sri Lanka’s rupee collapsed despite tax hikes and an IMF program as the central bank printed money, analysts have said. (Colombo/Oct15/2020)