COLOMBO — Even as Sri Lanka teeters on the brink of bankruptcy, the government is determined to pay foreign creditors and delay a return to global capital markets as part of a strategy to uphold the South Asian nation’s financial responsibilities, despite dwindling foreign currency reserves.
This resolve has opened a fresh chapter in Sri Lanka’s debt-diplomacy, paving the way for India to step in with offers of multibillion dollar financial relief. New Delhi’s largesse counters geopolitical rival China’s long-held position as Sri Lanka’s lender of last resort.
Championed by Nivard Cabraal, the governor of the Central Bank of Sri Lanka, the blueprint seeks to appease foreign lenders and investors, hoping to keep the strategically located island country creditworthy. “I am determined to pay,” Cabraal said during an interview with Nikkei Asia. “That is my job.”
Foreign investors appreciate that “we are having their interest at heart, that we have a genuine interest in making our repayments. [And] if you ask them, nobody is talking to go and default,” the veteran central banker said, in response to a rising chorus of domestic critics urging the government to reschedule its 2022 foreign debt obligations of $6.9 billion. The payment includes a $1 billion International Sovereign Bond scheduled for settlement in July. “Have you ever heard of an ISB holder say they would like if Sri Lanka defaults?” Cabraal asked.
The bid to keep foreign investors and lenders on board comes at a precarious time for the debt-strapped country. It has been shut out of global capital markets after three ratings agencies downgraded the country’s sovereign ratings to junk, making it difficult to bolster dwindling foreign reserves through another ISB offer.
Sri Lanka’s $81 billion economy began this year with only $1.6 billion in usable reserves — in addition to a $1.5 billion swap from the People’s Bank of China — with the government sticking to its promise to settle a $500 million ISB in January. In addition to paying lenders, the country needs an estimated $3 billion annually to bridge its current account deficit, according to analysts.
Cabraal, who is in his second stint as head of the central bank, is undaunted. He prefers to nix Sri Lanka’s return to the international capital markets as part of his plan to bring the country’s foreign debt — an estimated $35 billion soon after the current ultranationalist government came to power in late 2019 — to manageable levels.
ISBs, which account for the largest share of external debt, stood at $15 billion at the start of President Gotabaya Rajapaksa’s administration.
“My long-term goal is to bring stability by ensuring that we get our parameters right, that we ensure that the totality of our debt is sustainable,” said Cabraal, who criticized the previous, right-of-center government for pushing up external debt with a $10 billion ISB binge, despite weak economic growth during its five-year term. “We have another $1 billion to pay, which would mean our ISBs would be $11.5 billion by the end of 2022.”
Cabraal is betting on non-debt foreign exchange inflows, such as the sale of state assets, a revival of the COVID-hit tourism sector, and remittances from migrant workers. “Sri Lanka’s challenges stem from the fact that tourism receipts that were generating $4.5 billion a year for us have been interrupted [because of COVID-19],” he said. “Once that comes back to normalcy, these problems will be a lot less acute or visible.”
Pitting hope on tourism stems from the record tourism receipts in 2018, which drew an unprecedented 2.3 million visitors and boosted foreign earnings to $4.5 billion, becoming the third-highest source of foreign currency. But since then, tourism has slumped due to the deadly Easter Sunday suicide bombings in 2019 and the onset of COVID-19 in 2020.
The country’s gross domestic product was 3.3% last year and is expected to shrink to 2.1% this year, according to the World Bank.
Till then, Sri Lanka’s debt diplomacy will take priority, as the government desperately seeks bilateral assistance to secure dollars to pay for necessities — including food, medicine and fuel in the import-dependent economy. Local media reports of government ministers and other officials visiting foreign missions in Colombo, the country’s commercial hub, to seek assistance convey the mood.
By mid-February, India stood ahead of its geopolitical rival China in throwing a neighborly lifeline. New Delhi’s assistance has included a $400 million currency swap, a $500 million deferred payment to the Asian Currency Union, and a $500 million credit line for fuel. A further $1 billion credit line for Sri Lanka to purchase food and medicines from India is also in the cards, bringing the relief package to $2.4 billion.
The payments have given the Rajapaksa government some breathing space to ease the economic pain felt locally, with food inflation rising to over 20% year on year in January, as dollars are used to pay for essential imports.
“We may have a certain period that is challenging, but we have to tide through that period with proper strategies so that we will emerge stronger after some time, which is what we are doing,” Cabraal said. “And if you have to curtail certain types of activity, which can be somewhat challenging, that is up to the government to handle.”
The pro-China Rajapaksa government has openly expressed its appeal for a more generous relief package from China, which is Sri Lanka’s fourth-largest lender and holds $3.38 billion in debts. This includes loans of $119 million from the China Development Bank Corporation, $232 million from the China Development Bank and $327 million from the Export-Import Bank of China, all of which Sri Lanka has to repay this year, according to estimates by the Advocata Institute, a Colombo-based think tank.
But in response to recent public statements by the Sri Lanka government for China to give Sri Lanka a break on its loan repayments, Beijing appeared noncommittal, stating that Sri Lanka “will surely overcome the temporary difficulties as soon as possible and usher in renewed and greater development.”
Cabraal suggests otherwise. “We have never discussed debt relief with any country,” he said. (Courtesy NIKKEI Asia)
