ECONOMYNEXT – Sri Lanka has already started its debt restructuring in its own way that is not painful to creditors without any foreign or International Monetary Fund (IMF) experts, Central Bank Governor Ajith Nivard Cabraal said.
Sri Lanka is facing an external economic crisis amid two years of loose monetary policy which accommodated a tax cut in December 2019, though some policy tightening has happened in recent months.
Liquidity injections and low rates had fired an import boom amid an economic recovery and budget deficits of over 10 percent of gross domestic product, making it difficult to repay foreign debt with current inflows (domestic savings).
Sri Lanka has not gone to the International Monetary Fund but has sought government-to-government loans to repay maturing debt as well as central bank swaps.
Sovereign bonds falling due in 2020, 2021 and in January 2021 as well as other government debt has been repaid and the country has promised not to default.
Cabraal, an accountant by profession, said the country is re-structuring debt though there are no hair cuts imposed on bond holders.
“When we told you that we are having the payments of our bonds with other inflows, what does that mean? That’s the restructuring. Because we have settled one loan,” Cabraal told reporters on January 20.
“Earlier lots of people believed that restructuring means you have to stop paying and you default and then you have to ask the creditors to take a haircut.”
“But if you ask any accountant who is advising banks, everyday restructuring occurs when you take one loan from a different bank which is at a lower price and you settle another loan which you have to settle, that is also restructuring.”
“So restructuring is being looked at as something painful. If it is not painful, people think it is not restructuring.
“They think it has to be painful, it has to put the creditor into trouble, it has to ensure that a foreigner has to come and advise, and it has to be done by some institution globally, and then only it will be restructuring.
“If you have new inflows, you can change that. That is what meant by restructuring,” he said.
Several minister from the ruling Sri Lanka Podujana Part and its main ally Sri Lanka Freedom Party has urged the administration to go to the IMF, as had others economists.
Many are advocating a pre-emptive re-structuring (a distressed debt exchange). Fitch Ratings has downgraded Sri Lanka to CC and Standard and Poor to CCC.
Cabraal said Sri Lanka has enough expertise to overcome the current crisis.
“At the central bank, we have 25 PhDs,” he told reporters. “We have more than 350 people within these buildings who have Masters degrees, who have been at the best universities in the world and they have had professional qualifications as well,” he said.
“So I think that’s a vast talent we have. We sometimes think to get an expert, we have to get from abroad and then only he is an expert. Or we think that some other person who is on the television who is giving speeches is an expert.
“There are a lot of silent experts who are working here and we rely on them. We appreciate their services.”
He said he was looking forward to the experts at the central bank to provide guidance and the Monetary Board has been advised by all these people.
“We have more than 870 people who are qualified in this establishment. We also have those people not only qualified, they have been trained at the state expense and they are serving this country for a period of time – all because the central bank itself has provided them with scholarships to do that.”
“So I think after doing all these investments if we still have to get from somewhere else, because people still have this mentality, I think it’s time to shed that.”
Cabraal was speaking after the monetary board raised policy rates by 50 basis points to 6.50 percent.
However inflation hit 12.1 percent in December and up to October there was a 3.2 billion US dollar balance of payments deficit as reserves were exchanged for new liquidity injected. (Colombo/Jan21/2021)