IMF cash on its way, tough road ahead for CB
The freshly secured International Monetary Fund (IMF) bailout package by Sri Lanka has given the country some breathing space to put its house in order but the Central Bank is bracing for a tough balancing act in the ensuing months.
The bailout granted on Monday comes with a structured 4-year programme that demands Sri Lanka achieve debt sustainability, bolster more foreign exchange to buffer its reserve and improve state revenue by raising taxes and cutting utility subsidies.
At a media conference on Thursday to explain the bailout package, President Ranil Wickremesinghe said the country that was bankrupt a year ago has got a new chance to emerge out of the crisis.
He said the best anti-corruption law in the region will be passed in Parliament this year.
Central Bank Governor Dr. Nandalal Weerasinghe said the country will also engage in good faith with foreign creditors through a debt-restructuring process to reduce annual debt service payments, which is now a significant US$ 6 billion per year.
Questions are looming large on the impact of an impending haircut, debt profiling, or maturity extensions on the banking sector.
Responding to a question by the Business Times on domestic debt restructuring, Dr. Weerasinghe said, “In terms of sequencing, we haven’t got there yet. The first step is for initial negotiations with foreign creditors and then decide on domestic debt restructuring depending on the outcome.” He added the next step is to come to an agreement with them and based on the negotiation the government will look at bringing down the debt to GDP ratio.
Some economists predicted that banks might be excluded from haircuts to maintain system stability. Others said that it may not be a haircut, but maturity extensions or debt reprofiling. “It can even be a coupon reduction,” one banker said.
The government is committed to maintaining financial system stability despite any kind of debt restructuring, Dr. Weerasinghe added. “We want to share details of this process as soon as possible which will also settle the markets.”
Bankers believe that the local investors have already got a haircut. The banker said that at the time of investing, the dollar was at Rs. 200 and now it is at Rs. 340 and they have got more than 50 per cent haircut.
“Therefore, it is important to not burden them with further haircuts. There will also be repercussions in terms of political and social unrest if National Savings Bank and superannuation funds are given haircuts. Moreover, it can also create panic in the markets,” Sanath Manathunga, Managing Director / CEO, Commercial Bank told the Business Times recently. Noting that haircuts are complex exercises, he said the country should have a stable financial sector even after debt restructuring and the economic revival should be sustainable. He also said that debt restructuring will not have a direct impact on the depositors as it will only be an accounting entry on the banks’ books. “The banks have the resilience to take a dip in those investments. In the event of a debt restructuring, there will be an adjustment in IFRS accounting policy.”
Mr. Manathunga added that there should be some regulatory forbearance to absorb this day-one impact over a period so that banks’ capital adequacy won’t be impacted. “All banks, the central bank, and the government should manage miscommunications to the depositors and, stress upon the banking sector being resilient.” He also noted that IMF’s base case scenario is relatively mild on the domestic debt restructuring. “For example, restructuring the T-Bill holding of the Central Bank into long-term bonds is an option. A selected pool of other domestic debt can also be considered for some sort of restructuring. If this happens, the impact on the financial sector and EPF will be minimal.”
Certain economists said that the newly secured loan is good. Saying it will unlock the borrowings to the private lenders and fund other projects coming from multilateral and bilateral agencies, they said that continuing with the IMF programme will improve government revenue, domestic utility prices etc.
“We are officially in a better position now that we have secured the required IMF loan package. Restructuring attempts for public enterprises will improve our internal finance position. We can also witness the stable macroeconomic fundamentals in the coming months, such as exchange rate stability, lower inflation, and lower interest rates,” Sirimal Abeyratne, Professor in Economics, the University of Colombo told the Business Times. However, he pointed out that all these are temporary. “The ability to misuse these by those in power and by those manipulating public opinion for their political gain are important determinants in the past and will play a significant role now as well. If such a situation arises, we may get into the same trap.”
Meanwhile, Secretary to the Ministry of Finance Mahinda Siriwardana pointed out that the IMF was not forced to come here, and it is important to get out of the ‘entitlement culture’ that has been the ethos for decades.
Dr. Abeyratne also noted that the loan package is not a panacea to bring the economy out of the rut as the country is faced with foreign debt and the forex crisis. “We need to get our export earnings in order. Without aggressive export promotions, Sri Lanka will not be able to achieve its growth target. It is critical to establish the required environment for the export promotion that’s not in the IMF policy package.”
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