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Thursday March 23rd, 2023

Sri Lanka’s IMF debt analysis includes domestic debt

ECONOMYNEXT – Sri Lanka’s domestic debt is included in the perimeter of an International Monetary Fund analysis on debt restructuring though some domestic creditors could be ‘ring fenced’ according to a statement by the Finance Ministry.

An IMF debt sustainability analysis has determined that Sri Lanka’s debt is unsustainable.

‘”…[I]n the case of Sri Lanka the perimeter of the IMF DSA includes all public and publicly guaranteed (“PPG”) debt, i.e., external debt (including USD denominated instruments issued under local law), domestic debt (the service of which represents a significant share of our Gross Financing Needs) and SOEs’ debt,” the statement said.

“For this reason, we shall not a priori exclude any particular category of debt from our debt treatment strategy, except as would be seen customary in such exercise.

“However, each category of debt should be looked at from different angles, bearing in mind the potential impact a specific treatment may have on our overall macroeconomic and fiscal framework, and without jeopardizing the capacity of the economy to rebound from the current social and economic crisis.

“Indeed, a deterioration of the overall framework would further deteriorate the debt dynamics, thus requiring a deeper relief to restore long term debt sustainability.”

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The value of domestic debt has already halved due to a collapse do the currency and high inflation and any other will subject them to a second re-structuring.

A key target in an IMF program is to get the annual Gross Financing Need (GFN) down. However the economy inflates, the GFN as well as the debt to GDP ratio falls automatically.

Unlike foreign investors who are unwilling to roll-over debt, domestic holders are rolling over debt. As the economy stabilizes and inflation and interest rates fall interest costs fall.

Outside of domestic currency holders, foreign holders who are denominated in foreign currency however have been promised equal treatment or inter-creditor equity.

The IMF, World Bank and Asian Development Bank would be exempted from re-structuring.

The IMF DSA perimeter also includes central bank swaps.

Sri Lanka is asking for emergency debt given since the beginning of 2022 to be excluded from re-structuring.

“…Authorities are proposing to exclude from the perimeter of debt treatment all emergency assistance credit lines provided since the beginning of the year as well as all swap lines.”

Sri Lanka defaulted on its foreign debt in April 2022. Sri Lanka ran out of reserves after printing money to keep rates down for two years after cutting taxes in 2019 to target an output gap (stimulus).

In five preceding years Sri Lanka’s international sovereign debt soared almost three times from around 5 billion US dollars to 14 billion as the country experienced repeated currency crises while operating flexible inflation targeting with output gap targeting (stimulus) and the country lost the ability settle foreign debt with current receipts.

The Ceylon Petroleum Corporation seperately ran up debts of around 3.0 billion dollars as the country lost the ability to pay for current imports under flexible inflation targeting with stimulus.

Sri Lanka experienced a currency crisis in 2018 despite taxes being hiked and the deficit brought down while operating flexible inflation targeting with stimulus.

Currency crises are problem associated with soft-pegs which are neither a hard peg nor a clean float (now called a flexible exchange rate) that use aggressive open market operation or other injections (mainly sterilizing outflows) to suppress rates despite operating a reserve collecting peg.

Sri Lanka used floating rate style open market operations while operating the flexible exchange rate.

Sri Lanka’s central bank set up in 1950 by a US money doctor in the style of Argentina’s with BCRA with extensive sterilization powers has a history of suppressing rates and triggering currency crises and going to the IMF for bailouts.

Sri Lanka has a long history of printing money to suppress rates and has gone to the IMF 16 times. Such countries can default on foreign debt soon after getting market access and continue to default every two Fed cycles.

Sri Lanka was targeting inflation as high as 6 percent during the last three currency crises, which is more than twice the rate used by more successful inflation targeting countries.

The IMF and Washington policy makers have tried to solve Latin America’s debt crisis – which started to get more acute from 1980 when monetary instability worsened – with various plans but failed as they were unable to contain monetary instability.

Argentina defaults after bouts of sterilized reserve sales and steep currency collapses with debt to GDP ratios of around 60 percent, deficits of 5 percent, while Mexico has defaulted with budget surpluses.

Sri Lanka is expected to meet bilateral creditors on November 03 virtually.

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  1. Rohan de Soysa says:

    Why are the IMF, World Bank and ADB, who are major creditors due to programs initiated by them, being excluded from debt restructuring?

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  1. Rohan de Soysa says:

    Why are the IMF, World Bank and ADB, who are major creditors due to programs initiated by them, being excluded from debt restructuring?

Sri Lanka establishes committee to investigate aircraft incidents

An aircraft lands at the Jaffna International Airport, which was opened in October 2019 and promises to push the tourism frontiers in Jaffna.

ECONOMYNEXT: Sri Lanka’s has established an expert committee under the state-run Civil Aviation Authority to investigate aircraft accidents and to implement precautionary methods in the Sri Lankan airspace, an Official said.

“Even if it is only one flight, there is a chance an accident may occur,” Civil Aviation Authority of Sri Lanka, Director General, P. A. Jayakantha said.

“This particular committee is there to investigate aircraft accidents and act as a mechanism to take over if something goes wrong”.

Sri Lanka has encountered around 2,700 minor aircraft accidents and incidents mostly on the ground in the 19 years through 2021, the CAA annual reports showed.

The new committee will analyze the past accidents and take precautionary measures while also conducting investigations and provide independent reports in the future, Jayakantha said.

The team is provided with required training and qualifications by the CAA along with an International organization, free of charge.

“Internationally also it is a requirement to have a team to investigate the aircraft accidents,” Jayakantha added.

“For a long time we have not fulfilled this requirement and that is why we established this team with the cabinet approval. Moreover, recently, Sri Lanka’s two aircrafts, one training aircraft and a commercial aircraft met an accident”

The committee will be on active duty, until the Accident Investigation Act is passed and a proper Aircraft Accident and Incident Investigation Bureau is established. (Colombo/ Mar23/2023)

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Sri Lanka bond yields steady, Rupee 319/325 at close

ECONOMYNEXT – Sri Lanka’s treasury bond yields closed steady on Thursday while rupee closed weaker, dealers said.

A 01.07.2025 bond closed at 30.60/31.00 percent on Tuesday, down from 30.25/75 percent on Wednesday.

A 15.09.2027 bond closed at 27.80/28.10 percent, steady from 27.90/28.00 percent from Wednesday.

Sri Lanka rupee closed at 319/325 against the US dollar depreciating from 318/320 from a day earlier. (Colombo/ March23/2023)

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Sri Lanka shares dive to two-week low on local debt restructuring fears

ECONOMYNEXT – The Sri Lanka market fell for a fourth session to a two-week low on Thursday, led by financials, as worries over domestic debt restructuring continued after the IMF loan was approved earlier this week resulting in investors adopting a wait-and-see approach until further clarity was provided, analysts said.

The main All Share Price Index (ASPI) closed down 1.38 percent or 131.07 points to 9,395.98, lowest since March 02.

Analysts said, majority of the banks have been on slower investment trends on fears of domestic debt restructuring after the IMF approval and waiting for more clarity on the local debt restructuring.

“The market is on muted sentiments despite the IMF loan being approved and is going through a period of consolidation,” Ranjan Ranatunga of First Capital Holdings said.

The market saw a net foreign outflow of 298 million rupees and the total offshore inflows recorded so far in 2023 to 3.3 billion rupees.

The most liquid index, S&P SL20, closed 1.64 percent, or 45.33 points, down at 2,722.94.

The market saw a turnover of 3.4 billion rupees on Thursday, above this year’s daily average of 1.8 billion rupees.

This is the highest turnover generated since March 08, which is when the market was driven off of positive sentiments from International Monetary Fund deal hope after Chinese assurances.

Top contributors to revenue was Agalawatte Plantations, on off board transactions of a stake change, contributing revenue of 1.6 billion rupees, Ranatunga said.

Top contributors to revenue industry wise was Food and Beverage and Telecommunications.

Sri Lanka Telecom has been seeing positive uptrends as the Secretary to the Treasury has informed the Board of Directors of Sri Lanka Telecom PLC (SLT) and Lanka Hospitals PLC that the Cabinet of Ministers has granted approval in principle for the divestment of the stakes held by the Treasury Secretary in the two companies.

Top losers were Sampath Bank, Hatton National Bank and Commercial Bank.

Sri Lanka is looking at options to re-structure domestic debt, or local law local currency debt (LLLC), without harming the banking sector and announce them the International Monetary Fund said in a report.

Banks have been witnessing profit taking and selling pressures after continuous uptrends prior to the IMF loan had been approved.

Analysts said, selling pressures is expected to ease as the IMF hopes to reduce inflationary pressures which will in turn lead to reductions in interest rates. (Colombo/Mar23/2023)

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