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The country is looking forward to an improvement in what is popularly known as the “dollar hingaya” (dollar shortage).The billion dollar question is: Are we getting the IMF’s Extended Fund Facility (EFF) of US$ 2.9 billion? Also, will there be an improvement in the country’s external finances this year?

CBSL statement

Last week’s statement by the Central Bank of Sri Lanka (CBSL) that “The IMF facility is expected to materialise soon,” once again raised hopes of receiving the Extended Credit facility of US$ 2.9 billion from the International Monetary Fund (IMF).

However this optimistic statement made no mention of how the impasse of ensuring foreign debt sustainability could be achieved with China not agreeing to a rescheduling a reduced debt.

Other efforts

A significant development mentioned in the CBSL release was; “Measures are also underway to secure financing assurances from official creditors for the debt restructuring process aimed at ensuring medium term public debt sustainability.”

China

The inability to get China to agree to reschedule its debt makes the prospect of receiving the IMF credit facility uncertain. How will this impasse be resolved?

Other countries

A pertinent issue is whether other countries would find a creative and innovative resolution to this impasse. For instance, is it possible or likely that an aid consortium consisting of Japan, India, USA, Australia, the EU, Britain and Canada, and any other country could provide a concessional loan of around US$ three billion?

Such an arrangement would be more than the IMF’s EFF of US$ 2.9 billion in four tranches. If each nation contributes equally, each country would be contributing only about US$ 250 million, an affordable amount for these countries. Alternately, is there a similar programme of assistance contemplated by friendly countries that have expressed their concern and willingness to rescue the country’s ailing economy? 

Geopolitical

The determining factor for such an aid consortium would not be economic, but geopolitical.

IMF

The IMF’s EFF of US$ 2.9 billion in four tranches is not in itself a large amount. However, it brings international creditability and would change the nation’s ability to borrow from international capital markets and enable the economy to function at its potential capacity. Even the aid consortium suggested above may not be possible without the IMF agreement.

Guardian article

Meanwhile, an article in the Guardian newspaper says that 182 eminent economists are of the view that powerful hedge funds and investors are an obstacle to the IMF granting the EFF credit facility by its insistence of their pound of flesh in debt-relief negotiations.

The Guardian reported that 182 eminent economists and financial analysts told the newspaper that only debt cancellation offers Sri Lanka a chance of recovery, but “private investors are “playing hardball.”

Furthermore, it said “Some of the world’s most powerful hedge funds and other investors are holding up vital help for crisis-hit Sri Lanka by their hardline stance in debt-relief negotiations.”

According to 182 economists and development experts from around the world said extensive debt cancellation was needed to give the economy a chance of recovery and Sri Lanka would be a test case of the willingness of the international community to tackle a looming global debt crisis.

They said: “Private sector creditors such as investment companies and hedge funds were preventing a deal.”

“All lenders – bilateral, multilateral, and private – must share the burden of restructuring, with assurance of additional financing in the near term,” they added.

Creditors

Private creditors own almost 40 percent of Sri Lanka’s external debt stock, mostly in the form of international sovereign bonds, although the higher interest rates levied on the bonds mean they receive more than 50 percent of external debt payments.

High interest rates

It contended: “Such lenders charged a premium to lend to Sri Lanka to cover their risks, which accrued them massive profits and contributed to Sri Lanka’s first ever default in April 2022. Lenders who benefited from higher returns because of the ‘risk premium’ must be willing to take the consequences of that risk.”

Incorrect

Dr Sharmini Cooray, formerly of the IMF, has said the Guardian article and the statement by the 182 economists/signatories are unfortunately highly misleading and factually incorrect. This article and statement are totally misinformed and damaging to Sri Lanka, she added.

It is hard to believe that 182 such eminent economists can issue such a statement without checking their facts: First, it is the official process and official bilateral creditors that are holding up the approval of Sri Lanka’s programme with the IMF Board. The policies of the IMF do not require the consent of private creditors, leave alone a debt restructuring, for Board approval—but it does require financing assurances from official creditors which have so far not been forthcoming.

Global recession

There are severe threats this year to the country’s balance of payments and external finances. The impacts of the global recession that has raised its ugly head on the country’s exports could be severe.

Export manufactures that performed well in the first nine months of last year has had a severe setback since then. Export orders for apparel has shrunk and will make a significant dent in export earnings.

Tourism

The expected revival in tourism too may have a setback. The resurgence of COVID-19 too would impair travel.

Unemployment

Apart from export earnings, the retrenchment of workers from the affected industries would aggravate the already high unemployment and low real incomes of the population.

Remittances

In this context, the increase in remittances are a valuable contribution to the external finances. At the end of last year, the usable external reserves had increased somewhat to around US$ 500 million. It would be a relief from the dire straits of the external finances if this could be improved somewhat by increased remittances, earnings from tourism and international assistance.

Conclusion

Despite the optimism of the President and the Central Bank that the IMF credit facility will be forthcoming soon, there does not appear to be any progress in achieving foreign debt sustainability. With no progress in getting China to agree to a rescheduling of its debt, there should be an alternative programme of international assistance such as an aid consortium. Such assistance is urgently needed as the adverse impacts of the global recession could aggravate the country’s external finances.