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Borrowing plans undermined due to political uncertainty, as major institutions await crucial court rulings
Lending institutions that had initially pledged money to Sri Lanka are now holding back till court decisions offer some clarity on the political situation, authoritative Government sources told the Sunday Times. “If we get the borrowing requirement to a manageable level, this situation can be managed,” said one senior finance official on condition of anonymity. “However, what has happened in the past month is that it has been made more difficult.”
“We had a plan to service the next 15 months’ debt, and also a medium-term debt strategy,” he said. “But those plans have been undermined. They haven’t been totally thrown out the window. What people who initially indicated they would give us money are now saying is that, ‘We want to see what happens in the court decision’.”
The Supreme Court is expected to rule this week on the legality of President Maithripala Sirisena’s dissolving parliament and calling snap elections. A Court of Appeal judgment is also expected in the near future on the authority of Mahinda Rajapaksa to hold the post of Prime Minister after two No Confidence motions were passed against him in Parliament. The new Cabinet’s legitimacy is also in question.
The Government has said it has already made arrangements to repay international bonds worth US$ 1.5bn maturing in January and April next year. Of this, US$ 1bn is owed by January 15. One of these measures is to negotiate a further US$ 500mn loan from the China Development Bank (CDB). But this, too, is on hold. Sri Lanka has already borrowed US$ 1bn from the CDB.
“We have negotiated the money there, but we’re waiting for the Courts,” the official said. “Until that, nobody is going to give us money. They want to see whether they have clarity on the political situation. They say, ‘We’re not saying we’re not going to give you the money, but we want to see clarity first’.”
Sources close to Mr. Rajapaksa said he had indicated he would keep the International Monetary Fund (IMF) on board and to stay within a framework of fiscal consolidation initiated by Prime Minister Ranil Wickremesinghe. This refers to policies undertaken to reduce deficits and accumulation of debt, such as cutting expenditure.
“If they want to do it,” the official said, “they will have to increase taxes or cut expenditure, or a combination of the two so that the borrowing requirement is manageable.” The IMF, too, has suspended discussions on Si Lanka’s next loan tranche over the political crisis. It has so far disbursed US$ 1bn out of a US$ 1.5bn three-year extended fund facility it agreed to in 2016. “The IMF is waiting till there is a clear Government,” he said.
During the period they were in control, Mr Rajapaksa’s cabinet introduced a series of tax cuts and slashed price on fuel. The Finance Ministry also received orders to reduce the sugar tax. And there are fears of fiscal indiscipline should an election be announced. “What you have to tell the people is that, whatever goodies that are handed out, within six months they will take back more than they’ve given you…because we will have a serious payments crisis,” the official warned. “We won’t be able to pay.”
Loans will also come at a price now. “Even if the money comes, it will be more expensive,’ he said. “It will be shorter tenure. So we will be re-pricing the debt we are rolling over at a higher interest rate than we would have done if October 26th hadn’t happened. Equally, we’ll have to keep rolling over faster, and possibly re-pricing at higher level than we would have done without the last five-six weeks.”
Debt rollover essentially means borrowing again to settle debt. Owing to a resolution under the 2018 Active Liability Management Act passed in Parliament on the morning of October 26, borrowings up to Rs 310bn may be raised by way of loans in or outside Sri Lanka for debt settlement without fresh approval of the legislature.
The fiscal consolidation programme initiated by Mangala Samaraweera, who held the Finance Ministry portfolio, envisaged the budget deficit (when Government expenses exceed revenue) coming down to 3.5 percent of gross domestic product (GDP) by 2020. It was 5.5 percent last year.
Targets were set to increase revenue from about 14 percent of GDP to 16 percent because expenditure was running at 19 or 20 percent of GDP. “Our revenue is extremely low,” the official said. To raise it to desirable levels, taxes also have to be increased.
Meanwhile, the Central Bank has been intervening to stabilise the rupee against the dollar, informed Government sources said. It was putting a bit of money into the market, they said. “For the last few days, the Bank was putting between US$ 3mn and 5mn, not a big amount. But it is supplying from reserves, so that’s the problem.”
The regulator anticipates more stability in December, when remittances increase. “Tourism receipts are at a peak,” one source said. “Oil imports now will hopefully ease off a bit. So, given all that, the pressure could come down.” Global oil prices have dropped to US$ 60 a barrel, a 20-month low, while Sri Lanka’s reserves are also full at present. This will require fewer imports.