Sri Lanka on Thursday succeeded in arriving at a staff-level agreement with the IMF for an Extended Fund Facility of US$ 2.9 billion spread over a four-year period. This facility was given following the submission of a credible plan for a thorough reform of the ruined economy by the Ranil Wickremesinghe government.
But, as the IMF team made it clear, the actual realization of the loan will be tied to the willingness of Sri Lanka’s external creditors to take haircuts and restructure the terms of repayment in a mutually agreed way. Herein lies the problem. The creditors are a mixed bag of bilateral donors, international funding organizations, and a very large number of private owners of Sri Lanka’s international bonds. All of them should agree to a common formula based on transparency. It is not an easy task for the two international companies charged with the responsibility to work out such a deal.
More importantly, the bilateral donors are not on the same page. China says that it is ready to help Sri Lanka at the IMF but it has also indicated that is against accepting a haircut. It wants Sri Lanka to take a further loan from it as a refinance facility. But this is not acceptable to India and the Western world, which want China to be a part of an internationally agreed haircut scheme. They also want Chinese loans to be transparent, because in their view, Chinese funding is not transparent.
While Sri Lanka has requested Japan to organize an international creditors’ conference, Japan wants Sri Lanka to do that. Some recent issues Japan had with the Sri Lankan authorities have dampened Tokyo’s enthusiasm to be proactive in saving Sri Lanka. In a written statement given to The Hindu, all that the Japanese embassy said was that it is assessing the progress and the situation in Sri Lanka and that Japan will further consider appropriate responses in consultation with the Government of Sri Lanka and other donor countries and organizations.
Even if Sri Lanka organizes a meeting of creditors, will China attend it? China is key because it is the single largest bilateral creditor. Beijing is still insisting on a bilateral arrangement even as it promises to help Sri Lanka at the IMF. The signals from China are confusing. Asked if China is agreeable to a debt restructure program with Sri Lanka to make the island nation eligible for IMF support, a spokesman at the Chinese Embassy in Colombo said that China will help Sri Lanka with the IMF but added that Colombo should discuss the plan Beijing had proposed earlier, namely, a bilateral arrangement.
The embassy spokesman said: “Shortly after the Sri Lankan government announced suspension of international debt payments in April 2022, Chinese financial institutions reached out to the Sri Lankan side and expressed their readiness to find a proper way to handle the matured debts related to China and help Sri Lanka overcome the current difficulties. We hope Sri Lanka will work actively with China in a similar spirit and work out a feasible solution expeditiously.”
India’s stand, as stated by the Ministry of External Affairs’ spokesperson Arindam Bagchi, is that New Delhi seeks “creditor equitability and transparency”. But this puts New Delhi in opposition to Beijing. Sri Lanka owes to India US$ 960 million in addition to a credit line of US$ 4 billion given this year during the current economic crisis.
While it is true that the ball is now in Sri Lanka’s court and not in the IMF’s, the international community too has to change its approach to Sri Lanka says Sri Lankan economist Prof.Sirimal Abeyratne. He told this writer that Sri Lanka’s creditors should realize that the world is economically highly integrated and that geopolitical conflicts will only disrupt economic integration which is vital for the survival of all.
The US is tied up with Chinese investments in US bonds and China is dependent on US technology. Europe is dependent on Russia for energy as much as Russia is dependent on Europe. The Sri Lankan economic crisis casts a responsibility on the shoulders of all major countries and it is time they stopped looking at the crisis through geo-political spectacles and delaying Sri Lanka’s recovery, Prof. Abeyratne said.
Domestic Issues
In addition to the problems with external creditors, Sri Lanka has an internal problem of equal gravity to face, namely, political opposition and potential instability. The current President, Ranil Wickremesinghe, is firmly in the saddle with assured support from the Sri Lanka Podujana Peramuna (SLPP) helmed by the Rajapaksas. His writ runs across the country because of his ability to use the instruments of power. But the opposition and the media consider his Presidency to be lacking in political legitimacy if not in constitutional legitimacy.
Wickremesinghe had not entered parliament as a popularly-elected member but as a nominated one in the National List. He became Prime Minister and President on the basis of support from the SLPP led by the discredited Rajapaksas. He is constantly derided for being in power only to shield the Rajapaksas from the law. But his opponents forget that Wickremesinghe had dared to present a growth-oriented interim budget, outlined a liberal reform program and secured the help of the IMF and the West. He has kept a lid on disruptive agitations and brought some relief to the common man.
The opposition wants immediate elections which they feel will oust the Ranil-Rajapaksa regime. The recent defection by 13 MPs from the Rajapaksa party gives them hope of more defections. Wickremesinghe’s bid to form an all-party government failed due to obstacles placed by the opposition which did not want a government led by Wickremesinghe or which included the SLPP led by the Rajapaksas.
Elections could be held (albeit at a high cost), but there is no guarantee that a stable government will be formed after the polls, because the opposition is highly fragmented both ideologically and politically.
If there is no political stability, if the Wickremesinghe government hangs by a thin thread in parliament, and if parliament is also divided, the difficult economic structural reforms sought by the IMF may not take place. The trade unions will become vociferous in opposing any measures to privatize loss-making and inefficient State-run institutions. Higher taxation and higher tariffs, suggested by the IMF, will be opposed tooth and nail.
If reforms are abandoned or implemented half-heatedly, Sri Lanka might not get the US$ 2.9 billion expected from the IMF and the creditors would not agree to take a haircut. India might have come to Sri Lanka’s again. But will India be in a position to do so? It is already at the end of its tether having shelled out US$ 4 billion this year alone, a sum which it has never extended to any other country in the past.
If Sri Lanka does not unite and Sri Lankans of different political hues do not declare a moratorium on confrontational politics as President Wickremesinghe has been pleading for, and if they do not put their shoulders to the wheel as one nation with one goal, the future is indeed grim.
The current crisis should be seen as an opportunity to change Sri Lanka radically and put it on the high-road to growth and modernity. Politicians should turn a new leaf in political behavior, in economic policy and in international relations so that Sri Lanka does not get stuck with the image of being a nation with a begging bowl as its symbol.
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