Colombo, July 8: Sri Lanka is currently engaged in a debt restructuring process as per a requirement of the IMF before the latter decides on a bailout for the “bankrupt” nation. But the challenge is humongous, as Prime Minister Ranil Wickremesinghe explained in parliament on July 5.
Giving an idea of the volume of foreign debt repayments due, Wickremesinghe said that US$ 3.4 billion is due between now and December 2022; US$ 5.8 billion in 2023; US$ 4.9 billion in 2024; US$ 6.2 billion in 2025; US$ 4.0 billion in 2026; and US$ 4.3 billion in 2027.
In April, the government had defaulted on instalment payments to the tune of US$ 7 billion and had decided to seek a restructuring of the debt that now totals US$ 51 billion.
The government appointed the French firm Lazard and the British firm Clifford Chance to advise on restructuring. Their recommendations are expected in August. Their report will be submitted to the IMF for a Staff Level Agreement prior to submission to the IMF board to get a bailout package.
Lazard is said to be an expert on Chinese debt and Clifford Chance on private investors. They have their work cut out: China is unwilling to restructure the debt owed to It. It is ready to refinance the debt but not to restructure repayment. Private bondholders are reportedly represented by Rothschild, which is known to be a tough negotiator. Already, one creditor, Hamilton Reserve Bank, has filed a suit in a New York court seeking full payment of US$ 245 million owed to it on July 25.
A most critical issue in debt restructuring negotiations is getting all creditors to agree on one formula. But these are very different entities. They could be governments, State-owned banks, international financial institutions as well as private investors. Then there are local banks that might have invested. Some of the countries would belong to the “Paris Club” for restructuring debts, and some like India and China would not. Their norms and expectations would thus vary. To knit all of them into one group will be a challenging task.
Literature on debt restructuring reveals that the process may take two or three years. It is said that it took Zambia 13 months to restructure loans totalling just US$16 billion. Sri Lanka’s debt is US$ 51 billion. However, Sri Lankan Opposition MP and economist Dr Harsha de Silva estimate that the IMF package might be finalized in about six months.
The debt restructuring process is delicate and fraught with dangers, says Dhananath Fernando of the Advocata Institute. He quotes a paper by Lee Buchheit et al., which says: “All sovereign debt workouts are painful for the debtor country, its citizens, its creditors and its official sector sponsors. If mishandled, a sovereign debt workout can be incandescently painful. A mangled debt restructuring can perpetuate the sense of crisis for years, sometimes even for decades.”
The IMF could insist that Sri Lanka tones up its economy by raising taxes and collecting them better; reducing the bloated and unproductive bureaucracy, and selling off stakes in unproductive and loss-making State-Owned Enterprises (SOEs). Sri Lanka might be urged to sign trade agreements and invite investments from various advanced countries.
India has been touting the idea of the Economic and Technical Cooperation Agreement (ETCA) and a Comprehensive Economic Partnership Agreement (CEPA) for years. And since 2015, China has been asking Sri Lanka to sign an FTA with it. An Institute of Policy Studies report of 2015 showed that Sri Lanka produces 566 products with Asian regional price advantages, of which, 243 items were or could be exported to China. There were an additional 299 products with trading potential with China. These included vegetable products, rubber, and plastics. And the Chinese market is huge and insatiable.
But Sri Lankan nationalists, both within and outside governments, and trade unions across the board, have fought these proposals tooth and nail. Thus, ETCA and CEPA could not be signed. The Sino-FTA was stopped by the Sri Lankan government itself, without any outside pressure, because it could not agree to China’s terms.
However, under progressive regimes, as under the 2015-2019 Good Governance regime, FDI had grown. In 2017, FDI into Sri Lanka grew to over US$ 1,710 million, including foreign loans received by companies registered with the BOI. This was twice the FDI (US$ 801 million) achieved in the previous year, points out Tatiana Nenova of the World Bank in her note on the FDI in Sri Lanka. But she does not fail to point out that the increase had largely been in infrastructure projects which take a long time to give returns. FDI has not yet gone into manufacturing, especially into high value-added global production networks which can rake in money, she notes.
Furthermore, policy uncertainty has proved to be a barrier for investors. There is a paucity of information on regulations. There is high fragmentation in policymaking. Policy changes are frequent and policy implementation is slow, Nenova points out.
Equally importantly, Sri Lanka’s basket of exportable goods has remained the same for decades. “Where innovation exists, it is limited to a handful of industries,” Nenova notes. Financial products have also remained inadequate, especially for Small and Medium Enterprises.
Sri Lanka has to change its outdated labour laws, the World Bank executive says. The termination procedure is lengthy and costly. Furthermore, Sri Lankan labor has to have the skills demanded by a modernizing and globalized marketplace. Opposition to the employment of skilled foreign personnel must be blunted. Local employers should be able to hire foreign expertise, and for this, the visa procedures should be made easier. Smaller ventures are particularly inconvenienced by the existing visa procedures.
Sri Lanka’s transport infrastructure, whether it is a road, rail or air, remains very poor. Rail infrastructure is outdated and limited, especially for the transport of goods, Nenova points out.
Therefore, even with debt restructuring, in the near or mid-term, Sri Lanka will not be free from the possibility of another major forex crunch and debt repayment default, if it does not tone up its economy and changes its mindset on modernization and globalization.
