Columns

• Top expert says Extended Fund  Facility could be given even if  China does not give financing assurance
• Controversy and confusion over who  did what to delay local council polls
• President accuses PUCSL chairman of delaying the IMF package; otherwise the  country could have got it six weeks ago
• Concern that European Union’s GSP Plus concessions may be withdrawn as   commitments have not been met

By Our Political Editor

A tumultuous week saw uncertainties becoming realities one after another. A raise in power tariffs, now effective, will add to the woes of Sri Lankans. It became clear this week that the increase was the last of the 15 conditions to be met for the International Monetary Fund’s (IMF) Extended Fund Facility of US$ 2.9 billion.

Professor Shantha Devarajan, one of the advisors to the government on matters related to the IMF told the Sunday Times, “If they (the IMF) receive financing assurance from China, as they have already from India and the Paris Club creditors, then the IMF management will likely present the Extended Fund Facility (EFF) programme to the IMF Board of Directors. If they don’t receive financing assurance from China, it may still be possible, under the IMF’s Lending into Official Arrears (LIOA) policy, to present the programme to the Board because the LIOA requires that 50 percent of the official creditors should give financing assurance, which is the case now, since China constitutes less than 50 percent and is the only creditor that has not yet given financing assurance.” A Q & A with Prof. Devarajan appears in a box story on this page.

“I think the prospects are good,” declared Professor Devarajan to a question of whether the EFF is now confirmed to be received by Sri Lanka from the IMF. He said, “The two-year moratorium from China is of course welcome but Sri Lanka will need more than that in order to reduce its debt burden.”

The IMF, on the other hand, has been saying since reaching the staff-level agreement in September that debt restructuring or debt sustainability has to be achieved prior to any board approval for EFF, he pointed out.

Looking at these statements collectively, unless there is a shift in the Chinese position with an up-front debt treatment pledge or clarity regarding what happens after two years, receiving IMF Executive Board approval for the EFF in the next few weeks seems unrealistic — unless the US and the remaining western powers which hold the largest voting share underwrite the Chinese debt just as the US did for Suriname. It may seem like apples and pears as the Suriname debt burden was only a small fraction of what Sri Lanka holds and the proximity to the US and its strategic interests in that region are incomparable.

The IMF shareholders could accept that an official creditor would consent to let the debtor run arrears during the programme, yet that would raise the risk that, afterwards, the recalcitrant creditor could be repaid with IMF and other creditors’ funds disbursed during the programme. Most of these concerns have played out in Suriname’s IMF programme. Therefore, it is unlikely that a repeat could be expected in the Sri Lankan situation. China, on the other hand, does not want to set a precedent that could hurt it in many other ‘yet to default’ countries. Unless the IMF invokes its lending into official arrears policies and deals with the consequences and risks, for Sri Lanka a boost to its foreign reserves seems too close, yet too far.

PUCSL chairman blamed

A delay in the EFF going for approval of the Board of Directors of the IMF, President Ranil Wickremesinghe, said on Thursday was due to “one person in this country.” He was alluding to the opposition from the Public Utilities Commission of Sri Lanka Chairman Janaka Ratnayake. Explained President Wickremesinghe: “The government started talks with the IMF last August. Accordingly, it was possible to agree on the staff-level agreement in September. It assigned us fifteen tasks to complete. The IMF gave us until December 31 to implement them. But we couldn’t do it before that day. Then we made plans to get time until January 31st. Even at that time, we were unable to complete those 15 points. Finally, the deadline was pushed back to February 15. By 06:00 pm on February 15th, we completed all that was expected of us and sent them to Washington.

“Only one of these fifteen issues was being delayed. It is related to the increase in electricity tariffs. The Electricity Board incurs Rs.230 billion each year in losses. According to the IMF, government taxes should not be used to support institutions. It was informed that if this occurs, the IMF will not provide assistance. However, one person in this country opposed the decision to increase the electricity tariff.

“As a result, receiving assistance from the IMF was delayed by six weeks. Alternatively, we could have completed this by the end of January. All 15 tasks assigned to us have been completed. Now it is up to the IMF. This is being discussed further. The IMF also suggested that everyone should get on one platform and discuss. However, as China is a world power, its procedure is different…” In making the remarks, President Wickremesinghe had confirmed that the raise in electricity tariffs, for a second time, came on the recommendation of the IMF.

Jathika Hela Urumaya (JHU) Leader and former Power and Energy Minister Patali Champika Ranawaka, said in a letter to Sarwat Jahan, the IMF Resident Representative in Colombo, that the Ceylon Electricity Board’s formula for the increase in electricity tariff increase is “flawed on the distributional effects, and lacks awareness” of its operation. He adds:

President Wickremesinghe makes use of every public meeting to insist that his priority is ecnomic recovery. Here he is seen addressing the Kandy district business community last week and discussing with them his econmic plan to salvage the country from the abyss it has fallen into

“When the electricity tariff was increased on August 10, 2022, the CEB had an already projected annual income of 253 billion rupees in 2022. However, the tariff increase on August 10, 2022, is projected to have raised CEB’s income by 79.8% to 455 billion rupees. With the tariff increase on February 15th this year, the projected income of the CEB has increased up to 722 billion rupees, which is an increase of 285% from February 2022. Due to this price hike, the consumer is subject to an approximately three-fold increase in tariffs.

“The total generation of electricity in Sri Lanka was 15,865 GWh in 2022. The total consumption for the same year was 14,415 GWh and therefore 1,450 GWhs (9.5%) of the power generated was wasted. The unserved portion of energy due to power cuts was 798 GWhs (Gigawatt hours)  which is 5% of the generated amount. The CEB’s total income was 332.1 billion rupees in 2022. The total expenses were 470.9 billion rupees. This included a financing cost of 38.1 billion rupees, which is not an expense incurred due to the direct operations of the CEB. The depreciation cost was 33.1 billion rupees, which was also not a direct operational or cash flow-related cost. The sum of direct generation costs (CEB fuel, CEB coal, IPP, NCRE) was 315.1 billion rupees, which was approximately 79% of the direct operations cost….” Ranawaka pointed out that these went against the clauses included in the news release issued after an IMF delegation reached staff-level agreement with the government of Sri Lanka on September 1, 2022.

Another issue is the conduct of the local council elections which, it is now confirmed, will not take place on March 9. While making arrangements for such polls, the Election Commission has been dogged with many issues. In essence, the main one centered on the Finance Ministry’s position that it had no funds to allocate for the polls. The Government Printer has not been able to print the ballot papers.

President’s take on polls

Adding to this controversy, President Ranil Wickremesinghe declared in Parliament on Thursday that the elections had not been postponed. He said “There is no election to be postponed. I have so far not got into this debate on elections as I kept out of it on the grounds that I will not get involved in politics. However today (Thursday), we hear that the Election Commission will inform Courts that the election cannot be held since an affidavit has been submitted. I will speak on it, as otherwise it will be unfair on the part of the Treasury Secretary (Mahinda Siriwardena). The Commission has been informed by the Treasury Secretary that they are unable to provide necessary funds to conduct the elections. That is not true. It was I who first informed the Election Commission in December that due to the economic situation, it was not possible to hold elections.

“I needed to inform them, particularly because this is only a caretaker Commission. The 21st amendment passed in Parliament says all members holding positions in the Election Commission prior to the passing of the amendment will cease to hold office. This became effective from October 31, 2022, after it was signed. However, there was provision for members to hold office until the new Commission is appointed. Therefore, this is a temporary Commission. This Commission is responsible to parliament. Therefore, there should be a discussion in parliament and a decision taken on how to proceed. That was the first mistake.

“I informed the Commission members when I met them. As the President I conveyed this position and the Secretaries do not need to explain that. Again, on January 5, I met the Commission members with the Prime Minister and the Attorney General. I met them not to discuss the postponement of elections – that was when the Commission had a division. They said on December 23 they decided to call for Elections. On that occasion, two members had not agreed on a date. One said that they decided while the other was speaking to both sides. The fifth was at the Kandy general hospital. Therefore, the AG called for the notes and minutes of the meeting. They said no records were maintained. The AG said if they reach consensus, he could advise them.

“Instead, the Commission selected Saliya Peiris. Some government members told me how Saliya Peiris can be retained when he is a political lawyer and that a person who is not involved in politics should be selected or the AG should be retained. I said the AG cannot be provided under the situation. I told them if this was about retaining a lawyer, I accept the EC should select a lawyer not involved in politics. It selected a lawyer who has been saying this Government has no power. It would have been better if it got an SJB or a JVP lawyer. Thereafter, there was no discussion. An estimate of Rs. 10 billion was given when the budget proposals were being prepared. A letter had been sent on the 9th by the Elections Commissioner General asking for an advance of Rs. 5600 million.

“Earlier they said Rs 10 billion and due to the inflation, we thought it would be around Rs 10 billion. Now they say about Rs six billion. The Ministry would have to look at these estimates. There is a question – what was estimated to be Rs 10 billion that has later dropped to Rs five billion. Police say the money is not sufficient. Other departments did not send a full estimate. The Commission should say what the exact amount is.

“The letter sent by the accountant requesting for funds also does not say that it is on the powers vested by the Commission that he was requesting for the funds. The Commissioner General subsequently writes saying that the required funds have not been released. If funds were released action could be taken against the officers. They could have been punished by the Public Service Commission. On February 3, the Chairman wrote a letter, In the letter, too he does not refer to the fact that the Commission has vested him with powers.

“On February 10, there was another statement that the Supreme Court has ruled that the EC could go ahead with the election arrangements. But the Supreme Court has not given such ruling. Counsel Sanjeewa Jayawardena drawing attention to the Journal entry said that in the light of the undertaking given by Saliya Peiris issuing of a writ does not arise and therefore he moved that the proceedings be terminated. There was nothing for the Court to rule.

“The final issue is about the date of the election. Legally no date for the election has been declared. Some talk about March 9. To my knowledge there is no legal decision on that. The Quorum (of the Commission) shall be three members. The Sunday Times of January 22 quotes the Chairman of the Election Commission saying that three of the members were contacted via zoom and their consent was obtained. The fifth Commissioner M.M. Mohamed was present at the Commission. Therefore, the decision had been taken by the Chairman and Mr Mohamed. What the Chairman says is he spoke and got the approval and the decision had been taken by two members. The three members, if contacted now may take a different position. I will produce the evidence for that, if necessary.  No official decision has been taken about the elections….”

The Supreme Court (SC) on Thursday re-fixed for May 11 the Writ petition filed by retired Army Colonel W.M.R. Wijesundara seeking an order postponing the local government election. The petitioner is asking the Supreme Court to issue the order to postpone the election due to the prevailing economic crisis.

A three-judge SC bench comprising Justices S Thurairaja, A.H.M.D Nawaz and Shiran Gooneratne postponed the hearing to May 11, giving time for the Election Commission and other stakeholders to study the affidavit submitted by the Finance Ministry Secretary, who has been named as a Respondent in the case.

Saliya Pieris, PC who appeared on behalf of the Election Commission told court that though his clients had given an assurance that they would hold the local government election as per the law, they were now finding it difficult to honour that assurance. This situation has arisen due to the Treasury Secretary’s failure to release funds needed for the election and due to the refusal by the Government Printer to print ballot papers needed for the polls, Pieris, PC told court.

Responding to a query made by the Bench, Additional Solicitor General (ASG) Nerin Pulle, appearing for the Treasury Secretary, said that currently, the country was facing a serious economic crisis and therefore the government’s income flow had reduced. He added that as a result, the Finance Ministry had issued a circular in line with a Cabinet decision made to reduce state expenses. As such, he pointed out that the Treasury Secretary had submitted a sworn affidavit to court explaining that it was difficult to release funds needed to hold the local government elections.

The ASG mentioned that nevertheless, the Treasury had so far released Rs. 30 million and Rs. 70 million for the EC, Rs. 25 million for the Police and Rs. 40 million for the Government Printer. In answer to a query by one of the Judges, Pieris PC stressed that the EC needed at least Rs. 8 billion to hold the elections.

Justice Nawaz at this point, queried from the ASG when the financial situation about funding would get better. The ASG replied that he was unable to make a statement on the subject at this point and that he had to seek advice from his client on the matter.

Pieris, PC pointed out that the local government election was an essential poll and that state institutions were legally bound to facilitate it. Given this situation, the Treasury Secretary and the Government Printer are committing a serious offence by obstructing the holding of the election, he charged. “The Treasury Secretary claims funds for the local government election cannot be released due to the circular issued by the Treasury restricting state expenditure. This cannot be accepted. I request the court not to allow the Cabinet or the finance minister to obtain powers to hold elections. If that happens the finance minister or the Cabinet will have power to control elections. If this is allowed, it will pave the way for them to postpone other elections including presidential and parliamentary elections. This is not a good situation,” he told court.

In response, the three-judge bench Chairman Justice S Thurairaja, said the court agreed that the elections should be held properly and in accordance with the law. But finance is not within the court’s purview. As such, there is limited space for the court to intervene in this matter, the Justice said. He said complaints related to the funding issue should be submitted to the relevant agencies. The Counsel appearing for the People’s Action for Free and Fair Elections (PAFFREL) stated that if the Treasury had no money to hold the election, there was a possibility of holding the election by collecting the funds from the people.

Justice Thurairaja stressed that the court could not approve holding an election after collecting funds from the people, given how badly they were suffering at present.  The judge also stated that if anyone was willing to donate money to the Treasury, he or she could do so. The Court thereafter re-fixed the case for May 11. Pieris, PC objected to postponing the hearing and pointed out that the case was of national importance. Therefore, he requested the Court to take up the matter sooner.

With the election scheduled for March 9, it would be inappropriate to postpone the hearing in this manner, the President’s Counsel said.

In response, Justice Thurairaja said that according to the court diary, May 11 was the earliest court date which could be given. Therefore, the bench ordered the petition to be fixed for May 11. The motion submitted by the EC stating that there is a lack of facilities to hold the election was also taken up by court on Thursday. Making his submissions, Romesh De Silva, PC, who appeared for a group of Opposition MPs including Prof. G.L. Pieris, said that while the EC had given an assurance that the election would be held, the move by the Treasury Secretary not to release funds required by the EC and the refusal of the Government Printer to print ballot papers had made this impossible.

The President’s Counsel appearing on behalf of stakeholders and other opposition MPs told court that the EC could not carry out its pledge as the Treasury Secretary was not releasing funds and the Government Printer was refusing to print the ballot papers. He requested the court to issue notices and summon both the Treasury Secretary and the Government Printer to court to question them about the matter. However, the court did not make any order regarding the request.

With an electricity tariff hike in place and the local council elections not taking place, the government’s attention in the coming weeks will be focused singularly on the IMF approving the Extended Fund Facility. Former UN Secretary General Ban Ki-moon in a personal note to President Wickremesinghe has noted “I understand very well the great challenges the GOSL must be going through in the current negotiations with the IMF having been directly involved in Koreean government’s negotiations in 1997”. He is now President and Chair of the Global Green Growth Institute which will hold a meeting on March 13 in Colombo. The former UN Secretary General was in Colombo early this month.

GSP Plus

Another serious cause for concern is the fear that the GSP plus tariff concessions may be withdrawn from Sri Lanka. The Generalised Scheme of Preference Plus (GSP+), grants Sri Lanka favourable trading terms with the EU. It is thought to be worth over $US 500 million to Sri Lanka.

In October last year a delegation from the EU came to Sri Lanka to evaluate whether the commitments made by Sri Lanka when GSP plus tariff concessions were granted back to Sri Lanka in 2016, after being withdrawn during the Mahinda Rajapaksa Presidency had been met. These commitments include repealing of the PTA and introducing laws in accordance with international standards and commitments on human rights. Recent adoption of a new resolution 51/1 at the Human Rights Council in Geneva made it even more difficult for Sri Lanka to qualify to enjoy these concessions.

In the past few days German Ambassador Holger Seubert has raised the uncertainty even more by saying Sri Lanka is in danger of losing the GSP+ concessions. The final report on the assessment conducted last year is due in the coming weeks. Although the final decision on any withdrawal of these concessions will be announced during second half of this year. It has been reported that the German Ambassador recently said that “Sri Lanka has several times promised to the EU and Germany that it will bring the PTA in line with international standards. This phase of GSP+ is coming to an end and there is a risk that Sri Lanka might lose it – a matter which Sri Lanka cannot afford to lose at this juncture.” It is also noteworthy that EU parliament adopted a resolution on Sri Lanka in June 2021, proposing to temporarily withdraw GSP plus with 628 delegates out of 705 voting in favour, 15 against and 40 abstaining.

Therefore, winning the EFF from the International Monetary Fund is not the only concern. More serious challenges lay for the government.

Expert says if IMF deal is worked out, Lanka may receive aid from WB, ADB alsoShanta Devarajan is a Professor of the Practice of International Development at the Edmund A. Walsh School of Foreign Service of the Georgetown University.He is one of the advisors to the Government of Sri Lanka on matters relating to the dialogue with the International Monetary Fund. In a Q & A with the Sunday Times, he commented on the prospects of the much-awaited Extended Fund Facility (EFF) and other connected issues. Here are edited highlights: ON THE PROPOSED IMF BOARD OF DIRECTORS MEETING TO DECIDE ON THE EFF FOR SRI LANKA:If they receive financing assurance from China, as they have already from India and the Paris Club creditors, then the IMF management will likely present the Extended Fund Facility (EFF) programme to the IMF Board of Directors.  If they don’t receive financing assurance from China, it may still be possible, under the IMF’s Lending into Official Arrears (LIOA) policy, to present the programme to the Board because the LIOA requires that 50 percent of the official creditors should give financing assurance, which is the case now, since China constitutes less than 50 percent and is the only creditor that has not yet given financing assurance. However, given the risks associated with going ahead without China’s financing assurance, there is no guarantee that the IMF’s Board will vote to approve the programme in this case. Prof. Shantha Devarajan: WHAT HAS BEEN GOING ON BETWEEN THE GOVERNMENT OF SRI LANKA AND THE IMF SO FAR: In April 2022, Sri Lanka sought an IMF programme (the EFF) and a debt restructuring.  They reached a staff-level agreement on the policies to obtain an EFF in September 2022.  All the prior actions contained in the staff-level agreement have now been achieved.  To submit the EFF to the Board of the IMF, not only does Sri Lanka have to have completed the prior actions but it should also have received financing assurance from the official creditors so that they can begin negotiating the debt restructuring after the EFF has been approved by the Board. They (the government) have received financing assurance from all major official creditors except China. If they receive that financing assurance from China, then the IMF management will submit the programme to the Board which, if approved, will provide $2.9 billion to Sri Lanka from the IMF.  It will also likely open up about $5 billion from the World Bank and the Asian Development Bank.  Most importantly, Sri Lanka can then begin restructuring its official and private external debt, which would help put the country on a sustainable debt path. WHETHER THE PROSPECTS OF SRI LANKA RECEIVING THE EFF IS NOW CONFIRMED:  I think the prospects are good, since almost all the prior conditions have been met. The IMF loan will bring in much-needed foreign exchange to the economy, enabling Sri Lanka to purchase imports and relieve some of the shortages that people have been experiencing over the last year.  However, to resume economic growth, the country will need to restructure its debt, so that foreign investments can start coming back in. CHINA’S ROLE AND THEIR DECLARATION OF A TWO-YEAR MORATORIUM:  The two-year moratorium is of course welcome but Sri Lanka will need more than that in order to reduce its debt burden. [The moratorium does not reduce the stock of debt; it postpones the date at which you must pay it back]. THE ROLE OF UNITED STATES – IS IT GOING OUT OF ITS WAY TO HELP: The United States is trying help Sri Lanka.  Since it is not one of the creditors, it can be most helpful in supporting Sri Lanka at the IMF Board, where it has the largest vote share. THERE IS A NOTION AMONG SECTIONS IN COLOMBO THAT THE US MAY BE EXPECTING A QUID PRO QUO FOR ALL THE HELP IT IS OFFERING: No comment. ON THE ECONOMY RETURNING TO ‘NORMALCY’ IN AN YEAR:  It will depend on what you define as “normal”.  I think in a year’s time, you will see the shortages relaxed and some modest growth returning.  However, it will take longer for the economy to resume the high levels of growth that Sri Lanka has seen in the past. ON BRIBERY AND CORRUPTION AT ALL LEVELS:  As part of the EFF programme, the IMF is conducting a corruption diagnostic of the country.  In addition, one of the structural reforms of the programme is that Sri Lanka brings its anti-corruption regulations to the levels required by the United Nations Convention. THE IMMEDIATE OUTCOME OF THE EFF APPROVAL:  A relaxation of the import restrictions which, in turn, will enable exports to start growing (or at least stop contracting) and a modest uptick in growth. HOW THE COUNTRY’S ECONOMY HAS PERFORMED:  The economy has performed as you would expect an economy that has defaulted on its foreign debt and run out of foreign exchange reserves. CONDITIONS AND RESTRICTIONS BY THE IMF AND DIFFICULTIES IMPOSED ON INCOME EARNING CLASS:  First, these are not “restrictions placed by the IMF.”  They are policies agreed upon by the Sri Lankan authorities with the IMF to bring the fiscal deficit down to a level where the debt will be sustainable.  The only thing that is required for the IMF programme is that the fiscal deficit is reduced.  How to achieve this target is something the Sri Lankan government can decide upon, provided it is a credible set of policies.  That is what the staff-level agreement is about: it is a set of policies, including tax increases and subsidy cuts that both the IMF and Sri Lankan authorities, at the staff level, agree will reach the targets.  Secondly, taxes are being increased to the levels before the 2019 tax cuts by the Gotabaya Rajapaksa government.  Recall that it was these tax cuts that caused the fiscal deficit to balloon to 13 percent of GDP, resulting in Sri Lanka being cut off from capital markets and inflation reaching 70 percent.  So, it follows that to stabilise the economy and restore debt sustainability, you need to reverse the policies that de-stabilised the economy and rendered the debt unsustainable.  Third, all these reforms are aimed at protecting the poor and vulnerable, who have been suffering enormously.  If we are to protect the poor and still restore macroeconomic stability, then the austerity will fall disproportionately on the middle and upper middle classes. WHETHER THE IMF LAYS DOWN CONDITIONS OVER ELECTIONS: No.  The IMF does not have any conditions on the politics of a country. WHETHER THE GRANTING OF THE EFF PRECEDES ANOTHER AGREEMENT: The granting of the EFF will then lead to negotiations between Sri Lanka and its creditors—both official and private—about restructuring the debt.  It will also likely lead to financing from the World Bank and the Asian Development Bank.  The EFF is a four-year agreement and will be the main agreement with the IMF for those four years.