5 September 2022 12:06 am Views - 530
The International Monetary Fund has tentatively offered Sri Lanka a US$2.9 billion (£2.5bn) loan to help the country recover from the worst economic crisis. The funding is meant to provide some breathing space for Sri Lanka, which is scrambling to restructure billions of dollars in debt to creditors including China, India and a string of international banks.
The deal still requires the final approval of the executive board of the IMF, but is dependent on our country’s ability to reach debt restructuring agreements with our main creditors whom we were unable to repay in April this year. Resultantly creditors were weary of lending to us. In turn, it led soaring inflation 64%, leading to food, fuel and medical shortages that led to nationwide protests earlier this year.
The bailout plan with the IMF hinges on Sri Lanka following through on a range of rules imposed by the IMF and an ability to prove its financing capacity to restore debt sustainability to creditors - which will hopefully reopen these markets to us again.
The country’s economy has suffered as a result of the Covid-19 pandemic, which caused a collapse in tourism - Lanka’s main foreign currency earner, a fall in repatriate worker earnings as well as a drop in tea and rubber production (the number two foreign currency earner). The losses triggered a drop in foreign currency income and rising debt levels – a situation made worse by the surge in global commodity prices.
“The staff-level IMF agreement is only the beginning of a long road for Sri Lanka,” the senior IMF official Peter Breuer told reporters in Colombo. The Sri Lankan authorities will have to commit to a four-year programme involving significant tax changes, including broadening the scope of corporate income tax and VAT, and making personal income taxes more progressive, he added.
The programme is also meant to give greater independence to Sri Lanka’s central bank, introduce new fuel and electricity tariffs, increase spending on social projects and rebuild its depleted foreign currency reserves. However, as mentioned earlier, the country still needs to strike deals with international banks and asset managers that hold the bulk of its sovereign bonds, which are now in default.
In the aftermath of the staff-level IMF agreement, the ‘Paris Club’ - an informal group of creditors, one of whose aims is to find workable solutions to payment problems by debtor nations, issued a statement welcoming the recent IMF-SL agreement. The group said it remained available for discussions as to the next steps which need to be taken.
Lanka’s chief creditor nations are China, India and Japan. Japan’s Finance Minister also called on creditor nations to help in restructuring Sri Lanka’s debt.
However a fly in the ointment is China, which has avoided giving a direct reply to Lanka’s request for restructuring its debt and indicated it is not in favour of debt restructuring. It is estimated that Sri Lanka owes debt payments of US$ 1.5 to 2 billion this year to China. Overall China’s loans and investments in Sri Lanka were estimated to be more than US$ eight billion. In the event of China’s unwillingness to participate in the restructuring process, the IMF loan will be stalled.
However, China’s latest approach to Zambia’s debt repayment – where it joined the restructure talks of that country and in fact co-chaired the creditor committee with France – could be an encouraging sign for our country’s own efforts at debt restructuring.
In 2020, Zambia became the first African borrower to default since the pandemic when it stopped making payments on US$17 billion of external debt. China was Zambia’s biggest creditor with US$6 billion in loans to build airports, roads and other infrastructure, many of which became white elephants. In Zambia, as happened here, corruption mounted.
It took two long years for China to finally agree to restructure Zambia’s debt. With that experience behind it, perhaps China will be willing to help in the restructuring of Sri Lanka’s debt in a shorter space of time.
However, another major problem faces our government in the here and now. The IMF plan includes a clause calling for the removal of subsidies.
The UN has pointed out that around 25% of pre-school children in our country are suffering from malnutrition. A large section of school children are unable to attend school because of a rise in transport costs. Over 500,000 lost employment during the pandemic.
Unplanned subsidy cuts could give rise to another ‘Aragalaya’ which needs to be avoided at all costs.