By P.K.Balachandran/Ceylon Today
Colombo, April 6: India and China have given beleaguered Sri Lanka a helping hand with a total of about US$ 5 billion in emergency help to meet an unprecedented foreign exchange shortage the country is facing. With this help, at the very least, Sri Lankans will be able to celebrate the Sinhala and Tamil New Year in April without shortages of essentials.
However, while the people see a light at the end of the tunnel, it may prove to illusory if the injection of Indian and Chinese aid and the probable assistance of the IMF are not followed up by a restructuring of the economy and a cleaning up the policy mess which has plagued the country for decades. The aid received or promised so far, is only a palliative and not the cure for Sri Lanka’s economic woes.
Earlier this year, India had extended US$ 1.4 billion support to Sri Lanka through a US$ 400 million Reserve Bank of India currency swap, deferral of a US$ 0.5 billion loan and another half a billion as a line of credit to sustain its essential fuel imports. More recently, as part of its “Neighborhood first” policy, India extended US$ 1 billion credit line for the supply of essential commodities, but this loan is a short term one. China’s US$ 2.5 billion is made up of a US$ 1 billion loan to settle previous loans and US$ 1.5 billion as buyer’s credit for imports from China.
India is disbursing the funds on an urgent basis said its External Affairs Minister S.Jaishankar in Colombo on Wednesday. “We are getting things done in days that would take weeks under normal circumstances. To see that the disbursal of US$ 1 billion for the import of essential commodities takes place quickly, the Managing Director of the State Bank of India has been summoned to work on the details,” Jaishankar told Indian correspondents here. He, however, denied news reports that Sri Lanka had requested a further US$ 1 billion.
As for the Chinese, they had refused to re-schedule repayment saying that China had no system of re-scheduling. They have instead extended a loan of US$ 1 billion to repay old loans and US$ 1.5 billion to finance imports from China.
But repayment is not going to be easy. Economist Deshal de Mel told The Morning that Sri Lanka settled the January 2022 US$ 500 million International Sovereign Bond (ISB) out of its reserves. “However, there is a further US$ 6.4 billion worth of liabilities that mature this year along with US$ 1.7 billion swaps maturing in 2022. These maturities include US$ 3 billion of liabilities coming due in the first three months of 2022. Usable reserves as at end December 2021 were US$ 1.6 billion (excluding the China Yuan swap that may not be used to settle US Dollar denominated liabilities). Adding the US$ 400 million swap from the Reserve Bank of India brings usable reserves for Q1 2022 to around US$ 2 billion – significantly outweighed by maturities during that period,” de Mel said.
“The debt repayments are not limited to 2022 since there are continuing sovereign debt maturities of US$ 4.5 to US$ 5 billion each year for the next four years at least. Over and above this Sri Lanka also needs to finance a current account deficit of around US$ 2-3 billion per year as well. Therefore, temporary solutions to balance short-term cash flows will not be sufficient to address the challenge at hand, and the country needs to undergo some form of external debt restructuring,” de Mel warned.
Though the international media has been blaming China for the Sri Lankan debt trap, China accounts for only 10 percent of the foreign debt. Japan accounts for 10.8 percent. 56 percent of the debt is due to the International Sovereign Bonds (ISB) issued by the government.
The ISB is a good source of money but payments have to be made on time in ISB’s case. Economist Umesh Moramudali, writing in The Diplomat says that ISBs provide financial autonomy but at the expense of high interest rates and short repayment periods. “The Sri Lankan government faces no restrictions on how it spends money lent through sovereign bonds. The government has freedom to use the money to carry out any project they would like. This financial autonomy, and the reduction of concessionary loans provided to Sri Lanka after its upgrade to middle income status, made ISBs a widely adopted method by successive Sri Lankan governments to obtain foreign loans. Sri Lanka issued its first ISB in 2007 and, as of the end of 2019, approximately 47 percent of its total foreign loans are ISBs,” Moramudali says. Financial discipline suffered as a result of this.
And to keep up its international credentials Sri Lanka has been honoring its commitments in regard to ISB repayments. But there has been widespread criticism of this practice in the current context when government has virtually no dollars to import essentials for the masses. Fuel and many food items are in short supply and prices have shot through the roof. Ships wait outside Colombo port for days to off load essentials because importers are unable to get the dollars needed. Economists have consistently appealed to the government to get these repayments rescheduled but to no effect.
President Gotabaya Rajapaksa had given the pandemic as the main reason for the economic collapse. But a closer examination will reveal that the pandemic was not the cause and the way it was handled was the cause. Frequent, longish and strictly enforced lockdowns brought the economy to a grinding halt for nearly two years. Tourism ceased. Exports dwindled. And the curb on imports affected customs duty collections. Revenue collection, already very low at 8.1 percent of GDP, was poorer.
On top of all this, President Gotabaya Rajapaksa, gave sweeping tax concessions when he came to power in 2019 fulfilling an electoral promise. In 2019, VAT concessions took out 72 percent of the entities which were paying VAT, according Deshal de Mel.
And cruelly, during the pandemic, the President ordered a 100 percent switch over to organic farming and banned chemical fertilizers. With the farmers hit below the belt, agriculture suffered and food shortages were the order of the day. By the time he removed the ban on chemical fertilizers the damage was done. With 70 percent of the work force in agriculture, the majority of Sri Lankans were suffering.
The government has entered into a dialogue with the IMF after resisting it for months thinking that IMF’s prescriptions on austerity will affect its chances in the coming local and provincial elections. But thanks to the widespread demand of the intelligentsia that government should implement the IMF’s prescriptions it’s talking to the IMF now. Government has also realized that following IMF’s prescription will help it get funds from other sources and secure higher ratings from the rating agencies.
Government will also have to cut on imprudent expenditure. The permanent bureaucracy of 1.5 million is too big and it’s also too inefficient and politicized. President Gotabaya Rajapaksa had recruited 100,000 more to government service as if the existing number was not enough. The country has an armed force of a size not needed now as the war got over in.2009.The new force should be leaner and meaner.
Sri Lanka has been seeking foreign investments but when investments come, the media and paranoid nationalists would raise the red flag. Government is loath to receiving investments from India and the West. China is welcome but China does not invest in industries. It only does infrastructure projects. Local entrepreneurs prefer to be in import and retail trade and not manufacturing. Domestic wealth generation is therefore minimal. There is much too much dependence on tourism and export of garments, tea and unskilled manpower.
Sri Lanka has to pause and think hard on recasting itself and bringing about fundamental changes in thinking and in the economic structure to prevent going from country to country with a begging bowl from time to time.
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