Restructuring the domestic debt is a red line - EDITORIAL

In an overview of our country’s economy the World Bank reports ‘Sri Lanka faces unsustainable debt and significant balance of payments challenges. The economic outlook is highly uncertain due to the fiscal and external imbalances. Urgent policy measures are needed to address the high levels of debt and debt service, reduce the fiscal deficit and restore external stability.

In February 2022, year-on-year inflation had accelerated to 17.5 percent mostly due to high food inflation at 24.7 percent. A foolish decision by the president during the period May to November last year to ban on agrochemical imports led to reduced agricultural production. 

The subsequent increase in prices of domestically produced food items (rice veges etc) adversely affected the ability of households to cover living expenses. 
At the same time cuts in wages from the time of the Covid-19 pandemic and the subsequent collapse of many small and medium enterprises led to thousands of workers losing employment. Additionally thousands of persons involved in the tourist trade also lost their means of living. 

In turn, it led to a deterioration of welfare measures and caused major food insecurity. Worsening an already bad situation, yesterday’s increase in the cost of kerosene oil by a whopping Rs, 250/- per litre, will see prices of fish increasing way beyond the means of even the middle income groups. What is worse is that the the new price increase adds more burdens on the poorest sectors of the community, who depend on kerosene for cooking and lighting purposes. 

The pandemic also saw the drying up of exchange earnings and reserves. Strapped of cash, government was unable to even make interest payments on foreign loans. Resultanty the country defaulted on its foreign debt of USD 51 billion in May 2022, making it impossible to make further borrowings to import much need supplies of food, medicines, fuel and other basics.. 

After suspending all debt payments, government which had earlier dithered over approaching the International Monetary Fund (IMF) for a debt restructuring facility, was forced to eat humble pie and apply for the facility to that organisation.

To win this restructuring facility, government will be forced to agree to terms and conditions laid down by that organisation and its Breton Wood twin -the ‘World Bank. 
Whether we like it or not, government will be forced to restructure firstly, its loss-making ventures like the national airline, the Ceylon Electricity Board (CEB), and the Ceylon Petroleum Corporation (CPC) to name a few, if we are to receive .the IMF facility. 

Already trade unons of the CPC have taken up cudgels, protesting the expected restructuring. Yet, the CPC had made an operating loss Rs 64.95 billion rupees, up from Rs15.7 billion a year earlier. It has also lost 628 billion rupees in the first four months of 2022, driven by un-hedged dollar loans.

According to the ‘Ceylon Daily News’ the CPC pays three bonuses every year and pays between Rs. 250 million to Rs. 300 million as overtime payments to its workers each month. Obviously, the organisation like many other government ventures is badly in need of restructuring. A continuation of the same will mean the country will never be able to get out of its indebtedness.

The Lankan people deserve better and the sooner these white elephants are turned into profitable concerns the better. In the meantime, certain international organisations are making waves -demanding debt restructuring should not be limited to foreign creditors alone. They demand debt restructural adjustments should be applied to domestic lending institutions as well. Three such organisations have already made this demand. It is reported that one among them has already raised the issue in US courts.

Funds of local banks both state as well as private banks, the local pensions fund (EPF, ETF) have all been involved in shoring up government over-expenditure sometimes under compulsion.
They are in no position to absorb default in payment of interest or full payment.. Ordinary people stand to lose their hard earned savings and there is a very real danger the entire local banking sector could collapse if a restructuring move is implemented.

Our government needs to stand firm on this issue. There can be NO RESTRUCTURING of the local debt. President Wickremesinghe and his team need to negotiate with the IMF and the creditor organisations on this issue very, very forcefully. They need to emphasise, the dangers of local debt restructuring.
Through restructuring the foreign debt, foreign creditors will be able to ultimately recover their finances... but the restructuring of the domestic debt would lead to a chaotic collapse of the Lankan financial sector and they (creditors) stand to lose their total investment.