ECONOMYEXT – Sri Lanka is in the final stages of a debt re-structuring plan prepared with international experts and which will be presented to the International Monetary Fund and negotiations will begin with creditor nations, President Ranil Wickremesinghe said.
Negotiations would begin with state creditors first.
“The finalization of the debt restructuring plan has commenced in collaboration with Lazard and Clifford Chance, who are international financial and legal experts,” President Wickremesinghe told in his inaugural address to a new session of parliament.
“We would submit this plan to the International Monetary Fund in the near future, and negotiate with the countries who provided loan assistance.
“Subsequently negotiations with private creditors would also begin to arrive at a consensus.”
He said an economic planning framework would be presented in an interim budget for the rest of the year and in the 2023 budget.
IMF discussions will continue in August.
“It is our expectation to conclude the staff level negotiations expeditiously and successfully,” he said.
“We are also looking at formulating necessary policies, rules and regulations, and programmes, to strengthen the export economy,”
“Our economic legacy is based on foreign trade. From the ancient times, Sri Lanka was known worldwide as a major economic hub located on the Maritime Silk Road (MSR), and was identified as the ‘Granary of the East’.
“Sri Lanka was the center that distributed rice from the entire region across the world.”
Sri Lanka however lost the ability engage in international trade after a central bank was set up in 1950 which printed money to suppress rates, created forex shortages and broke the currency peg and triggered trade and economic controls.
As domestic credit surged with liquidity injections and sterilized interventions the country lost reserves and ended up as a top customer of the IMF, repeatedly.
Sri Lanka went to the international bond markets with bullet repayments in 2005 and sovereign bond holdings ratcheted up sharply from 2015 under flexible inflation targeting with output gap targeting (printing money for stimulus).
In 2022 Sri Lanka defaulted for the first time. Soft-pegged Latin American nations, default repeatedly.
Sri Lanka is now in the worst currency crises in the history of the central bank with the rupee down to 360 to the US dollar from 200 at the beginning of the year.
Sri Lanka now has a budget deficit over 10 percent of GDP with taxes cut in 2019 for stimulus on top of money printing.
Wickremesinghe said Sri Lanka aimed to have a primary surplus in the budget by 2025.
National debt which had soared to 140 percent of GDP was expected to be brought down below 100 percent by 2032.
“If we build the country, the nation and the economy through the national economic policy, we would be able to become a fully developed country by the year 2048, when we celebrate the 100th anniversary of independence,” he said.
“When I draw long-term plans in this manner some ridicule me. Yes, I am not like other politicians. I have long term plans.
“My planning in not for my own betterment, but for the young generation of today. I clearly know that I would not eat the fruit of the tree that I plant. But tomorrow, our children of the future generations will enjoy the fruit.”
He made no mention of plans to tame the domestic operations of the central bank and bring back the monetary stability lost in 1950 through ‘independent monetary policy’ with a peg, now called flexible inflation targeting with a peg.
Sri Lanka is planning to institutionalize flexible inflation targeting and flexible exchange rate and extreme form of a reserve collecting peg with a high 6 percent inflation targe, from 2015 to 2019 through a new monetary law. (Colombo/Aug03/2022)