Debt deferred, yet, how are you going to repay?

• Sri Lankan leaders have created such a puzzle of the term bankruptcy with their inconsistent statements on the matter that people are bewildered as to what bankruptcy is all about
• Sri Lanka, in 2022 had to face a severe foreign exchange crisis that led to the collapse of the entire economy

The address to the nation by President Ranil Wickremesinghe on Wednesday after a huge poster campaign costing millions of rupees across the country with the message “Aranchiya Subai” (Good news) is an indication of declaration of his candidature for the forthcoming presidential election. 

During his speech, he posed a question to the people. “Will you move forward with me, who comprehended the problem from its inception, offered practical solutions, and delivered results? Or will you align with those grappling in the dark, still struggling to grasp the issues?” How can people move forward with him unless he contests and wins the election? At the end of his speech, he also says “I urge you to make the right decision”. 

Hours before the speech, Sri Lankan authorities signed two long-awaited agreements on restructuring of its bilateral foreign debts. On one hand, Sri Lanka reached a final agreement with its official bilateral creditors. Similarly, it signed another agreement with China’s Exim Bank in Beijing.  “With these agreements, we will be able to defer all bilateral loan installment payments until 2028. Furthermore, we will have the opportunity to repay all the loans on concessional terms, with an extended period until 2043” the President said.

It was rumoured days ago that the President was planning to announce that Sri Lanka is out of the status of bankruptcy with a poster campaign and the Opposition parties ridiculed it claiming that only credit rating agencies can decide whether a country has shed its bankruptcy status. 

Explicit expression 

However, the President did not make an explicit expression that the country is no longer bankrupt in his speech, but did it by implication. “In just two years, without a parliamentary majority, without my appointed government officials or ministers, I successfully elevated our country from bankruptcy and economic turmoil to a position that astonished the world,” Wickremesinghe stated along with his usual trumpeting that he accepted the challenge without any preconditions at the beginning. “I believed in my ability to save our country and its people from the economic abyss” he boasted.

Sri Lankan leaders have created such a puzzle of the term bankruptcy with their inconsistent statements on the matter that people are bewildered as to what bankruptcy is all about. It must be the then Prime Minister Ranil Wickremesinghe who used the term on the part of the government for the first time subsequent to the government’s announcement that Sri Lanka defaulted on its foreign debt on April 12, 2022.  “Sri Lanka is bankrupt and its unprecedented economic crisis is set to last until at least the end of next year,” he told lawmakers in Parliament on July 5 of the same year.

Nevertheless, the IMF Board on March 20, last year approved a 48-month arrangement under the Extended Fund Facility (EFF) programme of about US$ 2.9 billion to support Sri Lanka and Wickremesinghe who had by then been elevated to the Presidency told on the next day that Sri Lanka will no longer be treated as a bankrupt country. 

Then again on June 29, in the same year, while addressing the AGM of the Sri Lanka Institute of Directors (SLID) Wickremesinghe expressed hope that Sri Lanka will be able to shed its bankruptcy status by September. That September passed without any announcement on the subject but the President renewed hope again two months later. On November 25, he expressed optimism that the country could come out of its bankrupt status by the end of the year, according to a State- owned newspaper. Finally, he told the nation on Wednesday that he “elevated our country from bankruptcy to a position that astonished the world.”

Similarly, the Governor of the Central Bank, Dr. Nandalal Weerasinghe, in response to a news item titled ‘SL declares bankruptcy’ in the Daily FT of April 13, 2022 - the day after Sri Lanka announced its default on foreign debt - had told “The country is not bankrupt but the Government took a conscious decision to opt for a pre-emptive negotiated default in the largest interest of the country and its people.”

However, as if he has accepted the President Wickremesinghe’s 2022 stance, Dr. Weerasinghe during a multi-TV channel programme on January 17, last year observed that Sri Lanka had been hiding its bankruptcy which had actually occurred months before it was officially announced. The Chennai-based The Hindu quoted the CB Governor on March 17, in the same year as saying again that the exchange rate was fixed at Rs. 203 leading to the total loss of our reserves and bankruptcy. 

First stance 

The pendulum swayed again backward in December and the soft-spoken Dr. Weerasinghe went back to his first stance to reject the bankruptcy claims. He reiterated the position while testifying before the Parliamentary Select Committee that looked into the causes of the economic crisis on January 24, this year. “What actually happened last year was not the country becoming bankrupt, but a postponement of selected domestic and foreign loan repayments,” he contended. 

Whether the situation could be described as bankruptcy or not, Sri Lanka, in 2022 had to face a severe foreign exchange crisis that led to the collapse of the entire economy and to a political crisis that forced the country’s executive President to flee to another country to tender his resignation. 

It was the result of the decades-long mismanagement of the economy by the successive governments that failed to build an economy that would strengthen the reserves while fulfilling the domestic demands. The leaders of the UNP, SLFP and the offshoots of those two parties - the SLPP and the SJB - along with the minor and minority parties that were all part of the governments led by the main parties were responsible for the economic calamity. 

It was during the Gotabaya Rajapaksa administration that the country fast plunged into the abyss. No country was prepared to lend Sri Lanka with it being drained of its foreign reserves. Only the IMF was left to be approached, but President Gotabaya Rajapaksa was prevented from doing so by the then CB Governor Ajith Nivard Cabraal. Following the latter’s resignation in early April 2022 Dr. Weerasinghe took over. Mahinda Siriwardana replaced S.R.Attygalle as the Secretary to the Finance Ministry. 

In the meantime, Rajapaksa sought the assistance of the IMF in mid-March 2022. International finance and legal advisors for the debt restructuring process were selected. And in the heat of the economic crisis in April, 2022 President Rajapaksa appointed a new Cabinet. It was this setup that has been still acting as the mechanism that drives the programme involving the IMF forward. 

Whatever the local mechanisms they may be, IMF would impose its programmes on the countries that seek its assistance. Despite the Sri Lankan authorities having months-long discussions with the IMF officials, one can observe that it was a set of ready-made suggestions of the “IMF Staff Report for the 2021 Article IV Consultation” which was released on February 10, 2022 (before Sri Lanka sought IMF assistance) that have been implemented thus far. 

“Reforms should focus on strengthening VAT and income taxes, through rate increases and base broadening measures” while “fiscal adjustment should be accompanied by energy pricing reforms to reduce fiscal risks from loss-making public enterprises” the international lender had advised in it. The entire programme relied on the debt restructuring process from the beginning. Had Gotabaya Rajapaksa continued in office, the result would not have been otherwise. Hence, whether Sri Lanka was bailed out or not, the credit or the blame of the programme has to go to the IMF. 

Credible plan 

Though Sri Lanka expected a 10-year grace period for debt repayment under this programme it has to resume repayments in 2028. What the country lacks is a credible repayment plan. President Wickremesinghe during an address to the nation on June 1 last year presented a “National Transformation Roadmap,” but only to be unheard of thereafter.