Mismanagement or Wheeler-dealing: Where did all bond money go?

• However, one thing is starkly clear. The government’s decision to repay the ISB in January effectively emptied the country’s razor-thin foreign reserves
•  The country descended into darkness as thermal plants ran dry. Sri Lanka’s monthly oil bill is around US$ 400 and would go higher as crude oil hit US$ 110 a barrel due to Russia’s war in Ukraine
• Ceylon Electricity Board had requested US$ 150 million for the oil imports to run the power plants for the next two months. Power plants regularly grind to halt as the oil stocks run out

Can the government share with the public the list of bondholders who were paid in the January repayment of the US$ 500 million International Sovereign Bond, so that the people might peruse it and know how we got there? 

That bond repayment is the straw that broke the camel’s back of the country’s foreign reserves.  The eagerness on the part of the Central Bank governor to pay the bond against all advice was equally striking. Sri Lanka is a rare gem where the government keeps insisting on honouring bond repayments against all advice, including the IMF, while its foreign reserves are in a net negative against this year’s projected debt payment of US$6.7 billion.  Since the country’s credit ratings have already been downgraded to C or C+, and therefore considered as entailing a heavy default risk, and depriving it the access to the international financial markets, that is no longer about defending non-existent creditworthiness. The government abandoned the issuance of ISB after several previous ones were severely undersubscribed. 

The bond repayment in January smacks as a decision guided by the personal calculations, to reward a few henchmen who had bought the coupons in the secondary market at a hefty around 50% discount after the original owners dumped fearing a default.  

These concerns can be allayed if the government submits to Parliament a list of bondholders who were paid in January. Still, it could cite the bank secrecy laws not to do so. There are innovative ways to empty the public coffer at its weakest hour and get away scot-free.

However, one thing is starkly clear. The government’s decision to repay the ISB in January effectively emptied the country’s razor-thin foreign reserves. 

Foreign reserves dropped to US$ 2,361 million in January, which included a US$ 1.5 billion worth Yuan swap from China, which can only be utilized for payments denominated in Yuan, basically imports from China. Effectively, the active foreign reserves were around the US$ 800 million.  During the same month, the government received a US$400 million swap from India and repaid the US$ 500 million of International Sovereign Bond.

The result was the further squeeze of the available foreign reserves to pay for essential imports: oil, gas, medicine, milk powder and construction materials.  Last week, the government struggled to pay US$ 35 million for an oil tanker. The country descended into darkness as thermal plants ran dry. Sri Lanka’s monthly oil bill is around US$ 400 and would go higher as crude oil hit US$ 110 a barrel due to Russia’s war in Ukraine. 

Sri Lanka is risking a complete economic collapse due to the mismanagement of its limited foreign reserves, and the misplaced and unsustainable peg on the Rupee that had curtailed the foreign remittance.

In the meantime, a copious amount of wheeler-dealing and rent-seeking is taking place. A proposal for emergency power purchasing from handpicked private providers has been submitted to the Cabinet, while the primary drag on the power generation itself has been the absence of hard currency to pay for oil imports. Those deals come with hefty commissions.

Ceylon Electricity Board had requested US$ 150 million for the oil imports to run the power plants for the next two months. Power plants regularly grind to halt as the oil stocks run out. Rolling power cuts of 7.5 hours is an extreme manifestation of the mismanagement of the economy, and would further increase as the ensuing dry weather limits the power generation capacity of hydro powerplants. 

Fuel shortage is threatening to bring public transport to a standstill. Only 50% of the buses are currently operating and the shortage at the pumps would drive the rest off-road. 

Gotabaya Rajapaksa’s ‘Saubagyaye Dekma’ is one full of long queues and daily ritualistic humiliation for citizens. He decimated the local agricultural sector with one overnight decision to ban the chemical fertilizer. Now the regular power cuts and shortage of essential supplies are destroying the livelihood of the rest. 
The once-thriving construction industry is at a standstill and hundreds of thousands of construction workers are made unemployed due to the shortage of cement, not to mention the skyrocketing of the prices of construction materials due to hoarding. Banks have run out of dollars. 

 
The two local gas companies have warned of a new bout of shortage due to the inability to find hard currency to pay for the imports.  Bakeries and small-time eateries have taken the brunt of multiple shortages. The regular supply of Bread is now a luxury.  Wheat flour is rationed to the backers in most areas. 

All this is a bad advertisement for the tourism industry which the government’s financial czars have deemed the lifeline. That has been an over-optimistic and premature take on the reality of the tourism market, which is still reeling from various mutations of Covid. 

War in Ukraine and sanctions on Russia have made things worse. Russians have been the main market for Sri Lankan tourism in the absence of Chinese whose overseas travels are curtailed by the zero covid policies of Beijing. Yet, tourism at the current status would bring a fraction of around the annual  US$ 4 billion it earned pre-covid era.

The debt crisis had been developing over decades and was not the fault of this government. However, the elephantine mess up of the mismanagement of the crisis is solely its fault.

A few commonsensical fixes can still alleviate a great deal of the strains on the foreign reserves.  Float the Rupee that is pegged to 198 a US$ while it is trading in the parallel market for around Rs. 250-260 per US$. That would prompt the migrant workers to remit their earnings through the formal channel and exporters to bring back Greenback parked in foreign banks. No one wants to take a 25% haircut from their hard-earned money to prop up a personal-political agenda of the government.

Foreign remittance from the Sri Lankan workers (around US$ 6.7 billion in pre covid era (2019) is large enough to cushion the strains in the foreign reserves. 

Second, suspend debt payments and restructure foreign debt under an IMF facilitated programme. The Central Bank has also proposed a set of measures, including some salient ones such as pricing fuel at the market rate.  But it has stopped short of the sine qua non: floating the Rupee.

In not-so-distant history, a television channel owned by a Rajapaksa acolyte provided SMS updates on rupee depreciation under the previous government.  The current administration simply does not want to accept the reality and is struggling to maintain an artificial exchange rate, effectively draining the country’s foreign reserves. Its callous choices of self-interest have unleashed untold hardships,  recurrent shortages and are leading to a complete economic collapse. All that is to serve the petty personal interests of the ruling coterie. 

If the plight of the places misgoverned by equally incompetent and rent-seeking elites - such as  Venezuela, Nicaragua, Mugabe’s Zimbabwe, etc.-  is any guide, this is only the beginning.  The worse is yet to come if the government does not change its course. Or the government itself is changed.

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