Look at options to meet debt obligations - Advocata Report | Sunday Observer

Look at options to meet debt obligations - Advocata Report

19 September, 2021

An independent policy think tank launching its latest publication; “A Framework for Economic Recovery” in Colombo last week called on policymakers to pay serious attention to consider all  options available to meet the country’s debt obligations which is in the tune of around US $25 billion in foreign debt between now and 2026.  The report by the Advocata Institute presents a framework for macroeconomic stabilisation and emphasises the need for urgent economic reforms. The panel comprising well-known economists and heads of think tanks urged policymakers to look at all options to meet the obligations as there could be a possibility of defaulting on debt obligations which would reflect badly on the country.

The urgency to seek ways and means to meet the obligations or restructure debt was underpinned due to the fast depleting  foreign reserves estimated at US $ 2.8 billion as at the end  July this year, foreign inflows affected by the pandemic and negative investor sentiments. 

The author of the report and Senior Research fellow of Advocata, Dr. Roshan Perera said debt restructuring  is not an easy task and added  that the possibility of resuming a  program with the International Monetary Fund should be looked into.

The publication underpins the importance of completing the Extended Fund Facility (EFF) program entered into with the International Monetary Fund (IMF) in 2016 would be imperative to restoring macroeconomic stability. 

It stated the objectives for the EFF were to structurally increase revenues to facilitate fiscal deficit reduction, reverse the decline in foreign exchange reserves, reduce the public debt to GDP ratio and lower Sri Lanka’s risk of debt distress, enhance public financial management and improve the operations of State-Owned Enterprises (SOEs), transition to flexible inflation targeting and a flexible exchange rate regime and promote sustainable and inclusive economic growth.

It noted that if the current administration is unwilling to enter in to an agreement with the IMF, the Central Bank of Sri Lanka (CBSL) and the Ministry of Finance (MOF) needs to come up with their own strategy to ensure macroeconomic stability.

Given the current debt situation the report notes that fiscal consolidation is a major priority for Sri Lanka.

As a part of this process, the government should commit to reducing the fiscal deficit to 5% by 2024 and the next two budgets must indicate the path to reaching this target.

Such a fiscal consolidation process would enable the generation of a surplus in the primary balance which would lead to a reduction in the public debt to GDP ratio to a more sustainable level over the medium term. 

However, the study noted that Sri Lanka faces an imminent debt crisis. The compounding effects of debt service requirements are beginning to surface and the long term viability of being able to efficiently finance these payments is being questioned. 

The  key focus of policy makers should be on addressing macroeconomic imbalances. Priority should be given to correcting the twin deficits; fiscal deficit and the external current account deficit, stimulating economic growth and improving competitiveness while building buffers to strengthen the resilience of the economy to shocks, the report states. 

Based on the experience of other countries that have faced similar debt sustainability issues the publication notes that there are several options available for Sri Lanka to address its debt issue such as  fiscal consolidation, revenue mobilisation, public financial management reform, state enterprise reforms,  enhancing monetary policy effectiveness and maintaining exchange rate flexibility and supporting trade and investment.

These priorities still remain. In the current context, a major component of any macro stabilisation programme would also need to include a debt restructuring plan. This report was prepared by a core team led by Dr. Roshan Perera, including Naqiya Shiraz, K.D. Vimanga, Tehani Rassool, and Aneetha Warusavitarana.

Additional research support was provided by Hiruni Daberera, Mithara Fonseka, Deveen Harischandra, Ali Jafferjee, Sathya Karunarathne, Sumhiya Sallay and Thiloka Yapa.