An Echelon Media Company
Thursday September 21st, 2023

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)

Leave a Comment

Your email address will not be published.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

Leave a Comment

Leave a Comment

Cancel reply

Your email address will not be published.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

Sri Lanka government to develop Arugam Bay tourism sector

ECONOMYNEXT – The Arugam Bay Tourism Development Plan, which focuses on challenges to infrastructure development in the area and obstacles hindering the growth of the tourism sector, was discussed by government officials and key stakeholders yesterday (20).

Participants from heads of relevant organizations, the Police and district officers met at the Presidential Secretariat to discuss how each institution could contribute to finding solutions to these challenges, the president’s media division said in a statement.

The main tourism plan for Arugam Bay, prepared by the Urban Development Authority (UDA) was presented by chief of presidential staff, Sagala Rathnayaka.

904,318 tourists visited Sri Lanka from January to August 2023, an increase from the 719,978 tourists that arrived in the country during the whole of 2022, statistics provided by the Sri Lanka Tourism Development Authority show.
“A tourist will spend an average of 185 -195 dollars a day,” Sri Lanka Tourism Development Chairman, Priyantha Fernando, told EconomyNext.

Sri Lanka’s government aims to attract five million tourists a year, and has mooted the establishment of an Investment Infrastructure Corporation, a decision-making council and regional committees under provincial tourism boards. (Colombo/Sep21/2023)

Related stories
Sri Lanka plans to attract five million tourists; new investment body proposed

Sri Lanka to urgently adopt new permanent tourism policy: minister

Continue Reading

Sri Lanka gets 19.23 mn US dollar grant from USA

ECONOMYNEXT – The United States yesterday (20) announced the commitment of more than 19 million US dollars in additional funds to further the development of Sri Lanka.

The 19.23 million US dollar (6.2 billion rupees) is obligated through the Development Objective Grant Agreement between the United States Agency for International Development (USAID) and the Sri Lanka government.

“This development assistance will support economic growth and democratic governance activities and demonstrates the ongoing US commitment to its partnership with Sri Lanka and in building lasting people-to-people ties,” a statement by the Embassy of the United States of America read.

“This investment demonstrates the United States’ ongoing commitment to our partnership with Sri Lanka and our steadfast support to the people of this stunning, opportunity-filled country, as USAID Administrator Samantha Power and President Wickremesinghe discussed in New York,” said Gabriel Grau, USAID Sri Lanka and Maldives Mission Director.

“With these funds we’ll continue to work with the government of Sri Lanka to improve economic growth and democratic governance and advocate for vulnerable populations.”

USAID is an independent agency of the United States government responsible for administering civilian foreign aid and development assistance.

The United States has provided more than 2 billion US dollars (nearly 720 billion rupees) in assistance to Sri Lanka since 1956. (Colombo/Sep21/2023)

Continue Reading

Sri Lanka’s 2022 EPF returns falls to lowest, single digit in near two decades – CB data

ECONOMYNEXT – The 2022 annual average return on Sri Lanka’s largest contributory pension scheme, the Employees’ Provident Fund (EPF), has fallen to its lowest in nearly two decades, Central Bank data showed.

The annual average return in the last year fell to 9.52 percent from the previous year’s 11.40 percent, a central bank response to a Right to Information (RTI) request showed.

Returns on EPF has raised concerns among contributors after the government decided to include EPF investments in the government treasury bonds under the domestic debt optimization (DDO) process.

Last year’s lower return has been recorded despite market interest rates being more than 30 percent towards the end of the year. In contrast, the fund has given a double digit return in 2020 when the market interest rates hovered in single digits.

Analysts have predicted the returns to be further low with the central bank opting for the government’s DDO option.

A central bank analysis on DDO showed the return on EPF could fall to as low as 6.79 percent if the DDO option was not chosen within the next 12 years as against 8.02 percent if opted for DDO.

Trade unions and some politically motivated fractions opposed the government move to include the EPF investments under the DDO. However, parliament approved the move early this month.

According to the data made available from 2005, the central bank, which is the custodian of the EPF, has given the highest return of 16.03 percent in 2009.

The island nation’s largest pension fund has almost 21-million member accounts including 18.3 million non-contributing accounts due to some members having multiple number of accounts.

The 3.38 trillion-rupee ($10.6 billion) worth fund as of end 2022 is managed by the central bank, including its investment decisions.

As of end 2022, the central bank has invested 3.23 trillion rupees or 95.7 percent of the total EPF in government securities, while 84.1 billion rupees has been invested in listed companies in the Colombo Stock Exchange, the central bank said quoting the EPF audited financial statement. (Colombo/September 21/2023)

Continue Reading