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Thursday June 20th, 2024

Sri Lanka debt re-structuring: opinion divided among think tanks

ECONOMYNEXT – Sri Lanka should start talking to the International Monetary Fund at least as a second option head of a think tank based in Colombo said, but opinion was divided on whether or not a debt restructuring with hair-cuts imposed on bondholders was needed.

However, there was agreement that an outright default was damaging.

Nishan de Mel head of Verite Research said to reduce the pain on the Sri Lankan economy and Sri Lankans the best path is to restructure the debt.

“Because an eventual painful disorderly default, which is where the current path is, is the worst possible outcome for Sri Lanka,” de Mel told an economic forum organized by Sri Lanka’s Ceylon Chamber of Commerce.

“The current path is based on increasing pain to the local economy.”

He forecasted that it may take up to 5 years for Sri Lanka to get its rating back up but restructuring will get the country on a faster path of recovery.

He said Ecuador did pre-emptive restructuring quickly, he said.

Ecuador, however, is now a dollarized country and the problems Latin America and Sri Lanka has with soft-pegged central banks and currency instability no longer applies, analysts have said. The IMF program is also funding the budget directly.

Depreciation also cannot be demanded in Ecuador based on Mercantilist/Keynesian dogma to destroy domestic private savings and salaries of the poor and the pensions of the aged in a dollarized area, analysts say.

However, a float is generally required to end the sterilized forex sale trap and convince dollar holders to sell.

In countries with soft-pegs and currency collapses the IMF funds the central bank and the impact on the budget is indirect from a front-loaded drawdown, coming through lower interest rates required to sterilize inflows and re-build reserves.

De Mel said the fiscal correction in the budget did not appear to be enough and at least 3 percent primary deficit is required.

De Mel said sovereign bonds were already trading at a steep discount and under a re-structure, they would get more.

“A haircut would still leave with a good enough yield,” he said. “I think Sri Lanka should get on the path as a Plan B.”

De Mel said Sri Lanka should start negotiating with a credible economic plan instead of waiting for it to come up with one.

Dushi Weerakoon, head of the Institute of Policy Studies, said it was advisable to go to the IMF, but a debt restructuring perhaps had cost.

“If the short term credit lines, swap arrangements all these things are not materializing it makes sense to have a safety net of some sort,” Weerakoon said.

“The option is the IMF program. You can tag on debt restructuring to it. But I think debt re-structuring we can avoid with an IMF program.

“For me, when you take the overall risk and cost-benefit analysis of a debt restructuring costs outweigh the benefits at this point.”

For an IMF program to be approved, the agency has to decide that the debt is sustainable in the medium based on the program which is politically acceptable to domestic decision-makers.

Sri Lanka’s foreign reserves have fallen steadily from August 2019 as the central bank started to inject liquidity under ‘flexible inflation targeting’ and liquidity injections were ratcheted up in February 2020 in so-called Modern Monetary Theory.

Outright injections have since been ended, but the agency is now sterilizing partial convertibility provide. There are also forex shortages due to partial convertibility.

Sri Lanka does not need to go on bended knee to outside agency over debt: Cabraal

Sri Lanka authorities have resisted going to the IMF and have been trying to get credit lines, swaps and also raise money through swaps. (Colombo/Dec 07/2021)

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Sri Lanka shares debt management experience at global forum

ECONOMYNEXT – Sri Lanka has shared its experiences at a forum on debt management to “provide lessons for others”, State Minister of Finance Shehan Semasinghe has said.

Semasinghe spoke on “The Role of Debt Management in Navigating Crises” at the 14th Debt Management Facility (DMF) Stakeholders’ Forum, in Livingstone, Zambia.

“I shared the experiences of Sri Lanka which can provide valuable lessons for others and explored the critical elements of capacity building and sound institutional practices in managing debt, particularly in the context of economic challenges,” Semasinghe said on X (twitter).

“Sri Lanka’s experience demonstrates that effective debt management is not just about managing numbers but also about building robust institutions and capacities.”

The journey underscores the importance of transparent, accountable governance and the need for international support and cooperation in times of crisis, he said.

“Sri Lanka prioritized addressing gaps in public debt management by drafting a consolidated Public Debt Management Act, ensuring clarity and legal robustness and establishing a centralized Public Debt Management Office with operational autonomy.

“The role of debt management in navigating crises is multifaceted and critical. Further, by investing in capacity building, adhering to sound institutional practices, and strategically managing debt restructuring and liability operations, countries can better withstand economic shocks and pave the way for sustainable recovery.”

Developing countries face severe debt distress as they are more vulnerable to external shocks, Semasinghe said, and “managing global debt requires coordinated international efforts on debt restructuring where necessary, timely fiscal policy adaptation and help sustainable economic growth.”

The state minister also pointed out the financial impact of climate change was an emerging challenge, as countries need investment to mitigate and adapt to climate impacts, “especially through non-debt creating inflows, which would require private capital mobilization.” (Colombo/Jun20/2024)

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Sri Lanka rupee closes stronger at 305.10/30 to US dollar

ECONOMYNEXT – Sri Lanka’s rupee closed stronger ahead of the long weekend at 305.10/30 to the US dollar on Thursday, up from 305.40/55 to the US dollar Wednesday, dealers said, while some bond yields edged up.

A bond maturing on 15.12.2026 closed at 10.45/80 percent, up from 10.35/75 percent.

A bond maturing on 01.07.2028 closed at 11.20/45 percent.

A bond maturing on 15.09.2029 closed at 12.00/15 percent, up from 11.95/12.35 percent.

A bond maturing on 01.12.2031 closed at 12.05/25 percent.

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Sri Lanka stocks close up, JKH trade pushes turnover

ECONOMYNEXT – The Colombo Stock Exchange closed up on Thursday, data on its site showed.

The broader All Share Index closed up 0.19 percent, or 23.11 points, at 12,249; while the more liquid S&P SL20 Index closed up 0.15 percent, or 5.33 points, at 3,610.

Turnover was 2 billion. Nearly half of this (Rs980mn) came from a crossing on John Keells Holdings Plc. The share closed down at 202.00.

“There were several crossings today which pushed turnover,” market participants said.

“Institutions and high net-worth activity drove the market, while the retail investors we feel are still about uncertain and adopting a wait-and-see approach.”

Melstacorp Plc was among the companies that saw active volumes (Rs194mn) in the day. The share closed up at 87.10.

Top contributors to the index included TeeJay Lanka Plc (up at 41.70), Sampath Bank Plc (up at 79.50), Hatton National Bank Plc (down at 201.00). Hayleys Plc (up at 105.00) and its subsidiary Hayleys Fabric Plc (up at 46.60) were also positive contributors. (Colombo/Jun20/2024)

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