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Thursday April 18th, 2024

Sri Lanka hikes Treasury guarantees to 15-pct of GDP

ECONOMYNEXT – Sri Lanka is hiking Treasury guarantees to 15 percent of gross domestic product, or about 330 percent of the original limit set by a fiscal responsibility law in 2003, which sought to limit fiscal profligacy and make it more difficult to understate and hide budget deficits.

A Treasury guarantee allows the government support a loan from a bank or other lender to a state corporation or private entity without passing the cash through the budget as a direct allocation in capital or current expenditure.

Prime Minister and Finance Minister Mahinda Rajapaksa told parliament in prepared remarks that the Treasury guarantee limit would be raised to 15 percent of GDP and another 180 billion rupees would be added to the borrowing limit for 2020, in a delayed presentation of a budget for the year.

Sri Lanka is now under a Coronavirus crises. Sri Lanka’s central bank has guaranteed some loans to private borrowers amid a Coronavirus crises in 2020, to reduce the risk to depositors of banks and the erosion of their capital.

Ultimately however any losses would be off-set against its capital and profits if any.

In theory a Treasury guarantee is a contingent liability which will fall on the government only if the ultimate borrower is unable to repay it.

In practice guarantees have been given to agencies like the Road Development Authority, to build roads on which there are no fees charged and here is no doubt that they have to be repaid out of budget allocations.

Guarantees have also been given to state enterprises on which there are going concern cautions by auditors, instead of making a direct budget allocation.

The original 2003 law set a limit of 4.5 percent of GDP for Treasury guarantees for a year and a 65 percent of GDP national debt by 2013 and deficit of 5 percent.

In 2020 Sri Lanka’s deficit in 2020 is expected to be around 10 percent of GDP and central government debt over 90 percent.

Analyts say the fiscal responsibility law, which has been amended repeatedly to permit greater fiscal profligacy, was part of a set of strategies similar to those adopted by then Malaysia Finance Minister Tun Daim Zainuddeen in 1984/85, backed by monetary stability.

In 1987, 1988 and 1989 he repaid Malaysian foreign debt ahead of schedule.

In 2016, Sri Lanka’s Socialist-Keynesian Sirisena-Wickremesinghe administration, which taxed private citizens to give higher salaries to state workers, followed unusually severe monetary instability by targeting a real effective exchange and a perceived output gap and set up a new price control agency, raised the limit to 10 percent in 2016.

By that time the Treasury guarantee limit was already raised to 7 percent.

The law also intended to reduce regime uncertainty from frequent changes in tax rates by mandating the “adoption of policies relating to spending and taxing, as are consistent with a reasonable degree of stability
and predictability in the level of tax rates in the future.”

Regime uncertainty discourages domestic and foreign investment and as result, kills growth and future jobs.

Sri Lanka is currently in a fiscal crisis after taxes were cut in December 2019 without going to the parliament and Coronavirus crises, worsened output.

Sri Lanka also has a midnight tax gazette, where taxes are literally slammed while the population is sleeping.

The original Section 03 of the Fiscal Management (Responsibility) Act, No. 3 of 2003 is reproduced below:

3. The objectives underlying responsible fiscal management which need to be adhered to, by the Government
in outlining the fiscal strategy of the government are as follows :—

(a) reduction of government debt to prudent levels, by ensuring that the budget deficit at the end of the year 2006, shall not exceed five per centum of the estimated gross domestic product and to ensure that such levels be maintained thereafter ;

(b) prudent management of the financial risks faced by the government, having regard to the changing
economic circumstances ;

(c) adoption of policies relating to spending which do not increase government debt to excessive levels;

(d) adoption of policies relating to spending and taxing, as are consistent with a reasonable degree of stability
and predictability in the level of tax rates in the future ;

(e) ensuring that the sum which is calculated as the guarantee and given as a percentage of the gross domestic product for the current financial year along with the two preceding financial years, does not in the aggregate exceed 4.5 percentum ;

(f) ensuring that at the end of the financial year commencing on January 1, 2006, the total liabilities of the Government (including external debt at the current exchange rates) do not exceed eighty-five per centum of the estimated gross domestic product for that financial year ; and that at the end of the financial year commencing on January 1, 2013, the total liabilities of the Government (including external debt at the current exchange
rates) do not exceed sixty per centum of the estimated gross domestic products for that financial year ; and

(g) ensuring that the policy decisions of the Government have regard to the financial impact of such decision
on future generations.

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Sri Lanka’s discussions with bondholders constructive: State finance minister

ECONOMYNEXT – Sri Lankan authorities continue to engage all debt restructuring negotiations in good faith, within principles of equitable treatment among creditors, and with maximum transparency within the norms of such negotiations, State Minister of Finance, Shehan Semasinghe has said.

“It is standard practice, when a representative group of bondholders is formed, to entertain confidential discussions with such group and its appointed advisors. In the case of Sri Lanka, the Ad Hoc Group of Bondholders represents holders controlling more than 50% of the bonds, which make them a privileged interlocutor for Sri Lanka,” Semasinghe said on X (twitter).

“It is well understood that given the price sensitive nature of the negotiations, and according to market regulations, discussions with the Group and its advisors are to be conducted under non-disclosure agreements. This evidently restricts the ability of the Government to unilaterally report about the substance of the discussions.

“The cleansing statement, which was issued on the 16th of April, at the conclusion of this first round of confidential discussions with members of the Group, aims at informing the Sri Lankan people, market participants and other stakeholders to this debt restructuring exercise, about the progress in negotiations. It provides the highest possible level of transparency within the internationally accepted practices in such circumstances.

“As informed in this statement, confidential discussions held in recent weeks with bondholders’ representatives proved constructive, building on the restructuring proposals presented by both parties. During the talks both sides successfully bridged a number of technical issues enabling important progress to be made. Sri Lanka articulated key remaining concerns that need to be addressed in a satisfactory manner.

“The next steps would entail further consultation with the IMF staff regarding assessments of the compatibility of the latest proposals with program parameters. Following these consultations, we hope to continue discussions with the bondholders with a view to reaching common ground ahead of the IMF board consideration of the second review of Sri Lanka’s EFF program.”

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Sri Lanka rupee weakens at 301.00/302.05 to the US dollar

ECONOMYNEXT – Sri Lanka’s rupee closed at 301.00/302.05 to the US dollar in the spot forex market on Tuesday, from 299.00/10 on Tuesday, dealers said. Bond yields were broadly steady.

A bond maturing on 15.12.2026 closed stable at 11.30/35 percent.

A bond maturing on 15.09.2027 closed at 11.90/12.05 percent up from 11.95/12.00 percent.

A bond maturing on 15.12.2028 closed at 12.10/20 percent down from 12.10/15 percent.

A bond maturing on 15.07.2029 closed at 12.25/40 percent.

A bond maturing on 15.03.2031 closed at 12.30/50 percent. (Colombo/Apr17/2024)

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Sri Lanka Treasury Bill yields down across maturities

ECONOMYNEXT – Sri Lanka’s Treasuries yields were down across maturities at Wednesday’s auction with the 3-month yield moving down 7 basis points to 10.03 percent, data from the state debt office showed.

The debt office sold all 30 billion rupees of 3-month bills offered.

The 6-month yield fell 5 basis points to 10.22 percent, with 25 billion rupees of bills offered and 29.98 billion rupees sold.

The 12-month yield dropped 4 basis points to 10.23 percent with 18.01 billion rupees of bills sold after offering 23 billion rupees. (Colombo/Apr17/2024)

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