Economist highlights 3 key prerequisites to resolve economic crisis

• Verité Research chief Dr. Nishan de Mel says a locally agreed plan to implement with IMF backing is a must
• Points out need for Sri Lanka to have analysed options for debt restructuring negotiations 
• Highlights needs for political stability and a legitimate govt. when IMF signals its willingness for programme support

By Shabiya Ali Ahlam
Authorities need to expedite the process of finding solutions to the country’s economic issues if the hardships faced by people currently are to be eased at the earliest, according to Verité Research chief Dr. Nishan de Mel.
He listed out three key requirements Sri Lanka should pay attention to in its attempt to resolve the prevailing economic crisis.

The first is to have a locally agreed plan to implement with the International Monetary Fund (IMF). Regardless of whatever the plan it might be, de Mel stressed it is imperative to ensure that the plan is analytically discussed, explored, and evaluated utilising the expertise available within Sri Lanka.

“As widely as possible, it is important to get the most robust, implementable, and agreeable plan going forward,” de told a webinar hosted by the Nepal Institute for International Cooperation and Engagement (NIICE) this week.
Although Sri Lanka had gone to IMF for 16 times in the past, none of the plans presented to the IMF for programme support were discussed or shared with local experts for inputs. 

The second requirement, according to de Mel, is to have analysed options for restructuring negotiations given that Sri Lanka has already got into a disorderly process of defaulting on its debt. Having taken that direction already, the negotiation can get “quite tough” with the IMF and creditors, de Mel said.

Global experience in the past 10 years has shown that when countries get into a disorderly process of suspending debt repayment, the average time taken to restructure the post disorderly default will be about 22 months. Whereas countries that opt for an orderly process of defaulting take about 8 months to reach an agreement for restructuring.

“We need to get this done quickly, and to do so we must get the analysis early,” stressed de Mel.
One of the elements that is likely come up a lot during negotiations is the restructuring of local debt, which is well above 50 percent of the total debt portfolio.

At present, Sri Lanka has taken a position not to restructure local debt. While staying away from that space does bring in benefits, the decision comes with a set of consequences as well.

According to de Mel, the only way to make the local debt sustainable without restructuring is to run very high inflation. Sri Lanka is already running 30 percent food inflation, and nearly 19 percent general inflation. The Central Bank expects inflation to peak at 28 percent within the next couple of months. 

Global experience shows that inflation tends to double during restructuring, de Mel pointed out. 

“The decision to restructure is not about just allowing others to propose what to do and take it up in political debates, but it requires a lot of economic analysis. It needs to be rigorous and there needs to be many different positions that need to be evaluated,” noted de Mel.

The third and final requirement needed for Sri Lanka going forward is political stability and legitimacy, highlighted de Mel.

 “When Sri Lanka is closing the deal and when the IMF wants to engage in a stabilization programme, they need to know that there is a legitimate and stable government,” he remarked.