Columns

The terms and conditions of the foreign debt restructuring that is expected to be completed by the end of next month will have significant implications for the country’s external finances. At present, we can only hope that there will be a large reduction of the outstanding debt to creditors (haircut) and extended periods for repayment of capital and interest.

Conditions

The country is hoping for a generous cut in the capital for the interest payable to be lowered and re-paid over a long period of time. This would enable more of the country’s resources to be utilised for its economic recovery. There are no indications of what the specific conditions would be. However, there has been the rhetoric of a favourable response by the creditors. This is especially so with respect to governments represented in the Paris Club. We can only hope that this rhetoric will soon be a reality.

Geopolitics

The plain truth is that much of the assistance to be given in the debt restructuring will be motivated by geopolitical considerations. It is no secret that the country has leaned towards the Western bloc and India has played a pivotal role in it.

The ultimate conditions of the foreign debt restructuring are likely to be on the basis of international considerations and, hopefully, these would enable a favourable restructuring of debt repayments and interest payments.

China

China, too, has said it will assist Sri Lanka generously. However, its mode of assistance may be different from those offered by the West, India and Japan. Hopefully, the debt relief given by China, though different from the others, would be generous and substantial.

The geopolitics influencing the debt restructuring implies that China, too, cannot be left behind and it would attempt to keep its influence and Sri Lanka’s dependence on China undiminished.

Favourable

There have been many statements by top Chinese officials that they would help Sri Lanka. Many of those statements implied that their assistance would be more favourable. One of the ways they have said they would assist Sri Lanka is by giving a large loan.

Expectation

In view of these statements, one could expect more generous assistance from China though the mode of assistance may be different. Yet, there is a degree of anxiety as the debt to China is huge.

China’s role in the restructuring is, of course, of utmost importance as the debt to China is about one-half of the total debt of about US$ 81 billion.

Other creditors

The Achilles Heal in the debt restructuring is the country’s debt to international banks and financial institutions. These institutions would no doubt ask for their pound of flesh. Apart from their unwillingness to take a haircut and reduction in interest repayments, they may well file legal actions in foreign courts, particularly in the US.

We hope that the conditions agreed on will ensure that there is no resort to judicial intervention.

External reserves

Currently, the external reserves of the country have risen to about US$ 5 billion. This is a reasonably adequate amount if there are no debt repayments. Unless the debt repayment conditions per year are small, the country’s foreign reserves would be depleted. This is why the foreign debt restructuring should have an annual repayment of debt and interest payments be a manageable amount.

Prospects

There are, however, prospects for the reserves to rise this year and in the coming years. If the current upward trends in tourism earnings and remittances continue then the balance of payments would be in surplus. Hopefully, there will be an increase in exports to reduce the trade deficit. This is not a realis-tic expectation given the global recessionary conditions aggravated by the Russian-Ukrainian war.

Foreign assistance

The expectation of higher amounts of bilateral and multilateral assistance is likely to be realised in the coming years. Already there are commitments of project loans from the World Bank, the Asian Development Bank and countries like Japan. These should boost the reserves significantly.

Summary

The terms and conditions of the foreign debt restructuring that is expected to be finalised by the end of next month are of crucial significance for the country’s external finances and economic stability. We hope that the rhetoric of generosity expressed by all friendly nations will be seen in the conditions of the foreign debt restructuring.

Although the external reserves are at a comfortable level and are increasing, they are inadequate to meet any large debt repayments. The promises of a generous reduction in debt and interest payments have to materialise for the country’s economic stabilisation and development. No doubt, geopolitics is an important factor in determining the conditions of the restructuring. This may be a determining factor in the conditions of repayment and the inflow of foreign developmental assistance.

Conclusion

In the event the terms and conditions of foreign debt repayment are not of much relief, then debt repayment will be a strain on the country’s annual balance of payments and the foreign reserves of the country. However, the prospects of an improvement in the country’s balance of payments and more importantly a substantial inflow of international assistance should strengthen the country’s reserves. Although the prospects of the country’s foreign finances seem good, the threat to this im-provement will be the politics of the country.

If the IMF reform programme is derailed by the forthcoming elections next year, then we may once again face a severe economic crisis. This is the severest threat to the country though at the time of writing what the outcome of an election would be is anybody’s guess.