Economic woes
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I was woken up at 7 a.m. this Thursday by the phone’s incessant ringing. Groggy, after watching a late night movie, I woke up, looked at the time and picked up the phone. It was Ruwan putha, a young economist whom I met last year at an economic event and thereafter have had a few conversations on a variety of topics.We also share a common interest – music! You will hear more about this bright, young man in these columns in the next few months.
“Hello…hello, I hope I didn’t wake you up,” he said, warmly. “Not really, I had to wake up early to write my column. What’s cooking?” I asked.
“Well I was discussing with some friends about Sri Lanka repaying the US$1 billion International Sovereign Bond (ISB) on Tuesday. There were some concerns that this might not happen or get delayed,” he said.
“I don’t think so because Sri Lanka has always settled its debts on time over many decades. I think the problem is about the foreign cash flows – though State Minister Ajith Nivard Cabraal says there are enough cash flows for the rest of the year to service import bills and other trades requiring dollars,” I said.
“While I share some of the concerns of others that Sri Lanka has a foreign cash flow situation with reserves only at $3 billion (after deducting the $1 billion ISB payment), I believe $300 million from the $1 billion which was subscribed by banks will return to the market in the coming weeks. It will then ease pressure on the Sri Lanka rupee vis a vis the dollar,” he said, adding that with swap arrangements and loans with China (loan), India and Bangladesh totalling $950 million, the funds will start trickling in and ease pressure on foreign reserves in the coming months. There are no other major foreign debt payments to be made this year.
According to Minister Cabraal, inflows over the next three months in the pipeline are from a swap with India – $400 million; swap with Bangladesh – $250 million; loan from China Development Bank – $300 million; Special Drawing Rights from the IMF – $800 million; Central Bank purchases from the forex market in the next three months – $200 million; inflows from ISBs held by local banks – $300 million; and expected inflows from the utilisation of underutilised assets – $400 million.
I paused for a moment, after completing the call from Ruwan putha and looked out of the window where the trio had gathered under the margosa tree. “Sisunta me davas wala hari prashna, iskola wahala thiyenawata amatharawa. Egollange online panthi kerenne ne guru-waru udgoshana karana nisa padi gena saha wenath prashna gena (Students are facing many problems these days apart from schools being closed. Their online classes have been affected due to protests by teachers across the country over salaries and other issues),” said Kussi Amma Sera.
“Lamai godakata online panthi karanna be ne salli nethi hinda. Dushkara palaath wala inna lamai gas ho kandu naginna one signal ganna (There are many students who don’t have access to online classes as they cannot afford it while some students in rural areas have to climb trees or mountains to get a proper mobile phone signal to follow these classes),” added Serapina.
“Guru-waruntath egollange prashna thiyenawa ne. Egollange phone-wala Internet bawithayata gevanne na-ne. Aanduwata biliyana dekak viyadam karanna puluwannam nagara seeyak diyunu karanna, ei guru-warunta mudal tikak denna beri [Teachers also have their share of problems. For example, they are not paid for using the Internet through their mobile phones to conduct classes. If the government can spend Rs. 2 billion to develop 100 cities (Rs. 20 million per city), why can’t they channel some of the funds to pay deserving teachers],” asked Mabel Rasthiyadu.
Even though the government scraped the barrel and paid off the $1 billion ISB on Tuesday, the foreign exchange crisis is not over. Talk to the banks and they tell you that letters of credit (LCs) have been rationed and they are mostly servicing their best customers.
Some importers who opened LCs on 6-month credit terms are struggling to get the dollars from banks to settle the payment even though the government encouraged importers to resort to not-less-than 180-day credit terms on imports. Many importers have been told by their banks to find dollars from other banks, compelling traders to find their own foreign exchange sources and run around seeking funds.
While the Central Bank has kept the US currency rate in check at Rs. 200-202 per dollar under the practice of ‘moral suasion’ (persuading banks to stick to one rate), the currency has been trading in the open market at Rs. 220-230. If it were allowed to float it would have reached Rs. 217-220 by this time but would have settled down once exporters began converting their export earnings. Another problem is that some banks have not permitted some account holders of US dollar deposits to withdraw their money in dollars, permitting withdrawals only in local currency.
According to the rating agency Fitch Ratings, the debt repayments due in the period 2021 to 2026 are over $6 billion in 2021, $6.5 billion in 2022, $5 billion in 2023, $4.8 billion in 2024, $5 billion in 2025 and $3.8 billion in 2026. This includes ISBs, Sri Lanka Development Bonds and bilateral loans. ISB repayments alone total $14 billion until 2030.
Sri Lanka is entitled to free money from the IMF via a $780 million SDR (Special Drawing Rights) facility that is being offered to help countries battle the pandemic. On March 23, 2021, the IMF announced an SDR allocation of $650 billion to benefit all member countries and support the global recovery from the COVID-19 crisis. However, it’s not easy to get this facility, as explained clearly by eminent economist W.A. Wijewardene, who is familiar with international monetary trends.
He says that the facility is available in SDR (an international currency created by the IMF) terms (and would have already been credited to Sri Lanka’s Central Bank account) and normally is sold to the US government in return for US dollars. SDR cannot be used as a currency and is tradable only within the IMF. The US government is in the midst of a $500 billion economic stimulus package and is in no position to be converting the new SDR facility for Sri Lanka and other countries at this point. “Without such a conversion, this money cannot be used,” he said, adding that the US Government might not be able to buy these SDRs this year.
So that source is also unlikely to come into Sri Lanka’s coffers this year to ease the foreign exchange burden.
While winding up the column, Kussi Amma Sera walked in with my second mug of tea and a t-bun which I accepted gladly, wondering whether the foreign cash flow crisis will get exacerbated in the coming months if the swap deals get delayed.