• Stresses recent negotiations with bondholders have been unfairly pessimistic

By Nishel Fernando

Possible delays in reaching an agreement (in principle) with private bondholders is unlikely to impact the disbursement of the third tranche under IMF’s US$ 3billion bailout package,  given negotiations are moving ahead in good faith,  Former Governor of Central Bank (CB) and renowned economist,  Dr. Indrajit Coomaraswamy said.

“My understanding is that in terms of conditions attached to this particular (2nd) review, there should be demonstration of progress and continuing negotiations in good faith. I feel that those conditions are met,” he told a webinar themed ‘Crisis to Stability - Sri Lanka’s Economic Restructuring Journey’ organised by CT CLSA this week.

On 21st of last month, IMF and Sri Lanka reached a staff level agreement to conclude the second review. Upon approval of the IMF Executive Board in June, IMF is set to release US$ 337 million of funding.

Dr. Coomaraswamy stressed that the country has made some progress with bondholders in the recent negotiation round held in London and it should not be viewed over pessimistically as seen in the recent news cycle.  

“It’s very important not to be pessimistic about the news flow that has come out last few days about external debt .If you unpack it very carefully, I don’t think there are grounds to be very pessimistic about, it is certainly a little road bump, but I don’t think it’s a barrier,” he added.

He pointed out that the IMF Executive would only delay approval for the staff report in a case of complete breakdown in negotiations.

“Of course, if there’s a breakdown in negotiations, things will change. As things are progressing now, I don’t think it will hold up approving the staff level agreement and disbursing money. I have seen very pessimistic reporting coming out, I don’t think that’s justified,” he said.

Dr. Coomaraswamy noted that there are four points of contention in terms of negotiations with private bondholders. However, he pointed out that none of them are related to the core of the restructuring package, which includes maturity extension, coupon reduction or a haircut.

“So, I am assuming that there was no problem in terms of the basic structure that the government has put forward in its proposal,” he added.

While the IMF has stated that the government’s proposal is in line with its Debt Sustainability Analysis (DSA), it has yet to give the same recognition to the private bondholder’s proposal.

In terms of applications of upward and downward adjustments in the proposed Macro-Linked Bonds (MLBs), he noted that there are disagreements.

“There seems to be disagreements as to what the test should be and how it should be applied, and if Sri Lanka outperforms how the benefits should be shared. Hopefully, those things can be resolved fairly quickly,” he said.
Having said that, he emphasised  there’s indication of progress in two of those contention points in terms of baseline and whether it should be more aligned with the IMF programme.

The government remains confident it will reach an in principle agreement with private bondholders in June.

Meanwhile, Dr. Coomaraswamy stressed on appropriate comparability between agreements with bilateral creditors and bondholders.  While MOUs are being drafted up to sign final agreements with bilateral creditors, he noted that bilateral creditors are unlikely to sign anything until they see the in-principle agreement with bondholders.