The following article is based on an interview conducted with Prof. Heenkenda.
Profile: Prof. Shiranta Hinkenda completed his schooling at Dharmaraja College, Kandy and graduated with an Honours Degree in Statistics and later a Post Graduate Diploma in Business Statistics.
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He received his PhD in Social Sciences from the University of Sri Jayewardenepura. He received his Master’s degree in public policy from the National Graduate Institute of Policy Studies, Tokyo, and his doctorate from Nagoya University, Japan. He is currently the Dean of the Faculty of Humanities and Social Sciences at the University of Sri Jayewardenepura.
The recent economic crisis in Sri Lanka exerted substantial pressure on the public financial flow, complicating efforts to secure support from multilateral institutions amid difficulties in obtaining foreign loans to address the budget deficit. Consequently, a formal decision was made to seek assistance from the International Monetary Fund (IMF).
The decision to seek assistance from the IMF was made collectively by the Government, the Central Bank of Sri Lanka (CBSL), and the Ministry of Finance, considering the imperative to fulfill and meet the needs of the entire populace amid the prevailing circumstances. Embracing a program agreed upon with the IMF, Sri Lanka is now navigating its path with the recognition of its commitment to the program.
The significance lies not only in adhering to the IMF program but also in the future uplift of the Sri Lankan nation, encompassing substantial transformations, reforms, and the establishment of new institutional structures for overall development. Moving forward, there is a need for effective public account management, cost reduction programs, and a comprehensive initiative to efficiently invest the cost benefits accrued from these measures.
There is an ongoing discourse concerning the economic crisis and the debt restructuring process. To elaborate, as of December 31, 2022, Sri Lanka had to settle a debt of US$ 36 billion with 37 percent of it scheduled for payment within the next 4-5 years, spanning from 2023 to 2027.
Following that, the remaining US$ 36 billion is slated for payment over the subsequent 20 years, from 2027 to 2047, with the obligation to settle 51 percent of this sum during that period. Subsequently, the outstanding 12 percent is designated for payment after 2048. A preliminary plan has been agreed upon to fulfill this debt obligation, and it is emphasised that regardless of the Government in power, the agreement must be honoured to repay this loan.
International Sovereign Bonds
In the interim, after 2027, there is the possibility of considering the redemption of certain debts, such as International Sovereign Bonds (ISBs). It becomes crucial to assess the severity of the crisis if additional loans are acquired during this period. Even by 2048, only 88 percent of the loans will have been repaid. The loans taken before 2048 contribute to the cumulative debt, signifying a compounding of debt upon debt. Hence, caution is imperative to avoid further indebting ourselves and to ensure that we do not enter into new debt obligations.
Furthermore, there is an expectation that the current situation will see some relief by the year 2027. Specifically, the foreign external financial gap may be alleviated, with the possibility of the IMF extending additional credit to address this deficit. To address this, a portion of the US$ 3 billion may be obtained for this purpose. Additionally, in 2027, the Extended Fund Facility is expected to provide US$ 329 million to resolve the crisis. The IMF has committed to supporting the budget with US$ 600 million, while the World Bank and the Asian Development Bank (ADB) have pledged US$ 300 million each for the same cause.
Currently, there is an outstanding debt, and it is anticipated that in 2027, the ability to raise US$ 1,500 million and issue US$ 1,482 million in ISBs will be available. This amounts to a total of US$ 3,911 million. Regardless of the Government in power in 2027, the responsibility to settle this deficit of US$ 3911 million will be incumbent upon them.
The IMF has committed to providing US$ 329 million under the Extended Fund Facility, covering a significant portion of the US$ 3,911 million deficit. The IMF has also pledged a similar amount for Budget support. The World Bank has promised US$ 600 million, and the ADB has agreed to contribute US$ 300 million.
Furthermore, there is a respite in addressing outstanding debts as we anticipate the issuance of a total of US$ 1,482 million in ISBs in 2027, followed by the potential acquisition of US$ 1,500 million. The challenge ahead is unmistakable. Regardless of the governing body, failure to navigate this debt repayment process successfully in the face of these harsh realities could inevitably lead our nation towards bankruptcy.
Thus, until the year 2027, a cautious approach is imperative before contemplating the issuance of ISBs. It is incumbent upon our nation to swiftly formulate a robust plan for financial discipline, ensuring prudent management in the interim.
The IMF has provided specific guidelines for Sri Lanka’s future borrowing, emphasizing the imperative of achieving sustainability. Following the IMF’s analysis of debt sustainability, Sri Lanka has outlined several crucial goals related to the ongoing debt restructuring process, guided by the need to attain a state of financial stability.
The initial advice is to keep the debt level below 95 percent of the Gross Domestic Product (GDP) by 2032. Additionally, during the Extended Fund Facility Phase, the Central Government’s gross financial requirement is recommended to be sustained at a level below 13 percent of the average GDP from 2027 to 2032.
Maintaining debt and loan repayments below 13 percent of GDP is advised, with a caution against exceeding this threshold. Furthermore, in the post-Extended Fund Facility Program period, the Central Government’s foreign currency debt servicing is recommended to be kept at less than 4.5 percent of the GDP annually from 2027 to 2032.
The requirement for periodic repayments is a challenge, especially with the recommendation from financial experts to limit it to a significant threshold of 4.5 percent, as expressed in the expert opinions of economic analysts.
They emphasise addressing the financial gap in the Extended Fund Facility program. Recommendations include mitigating external financing gaps to lessen debt servicing burdens in both 2023 and 2027. In essence, negotiations with creditors have been initiated to achieve this by reducing loan payments.
Extended Fund Facility
They specifically anticipate the continuation of public finance consolidation measures to meet fiscal targets. Emphasis under the Extended Fund Facility is placed on revenue-enhancing measures and further rationalisation of expenditure. Strong advice is given, foreseeing a reduced ability to finance the State Budget deficit through the CBSL in the future.
Regarding money printing, the new CBSL Act has reduced the possibility of printing money, so in the future, we will not be able to finance the printing of money and our Budget deficit. The State is expected to make necessary adjustments to avoid the necessity.
In essence, significant emphasis is placed on exploring alternative avenues and actions by the CBSL to address public finances without resorting to money printing. Explicit directives are extended to the Government. Concurrently, various State-Owned Enterprises (SOEs) are encouraged to implement comprehensive programs to mitigate unnecessary revenue losses in the realm of public finances income.
Once more, a thorough reassessment has been conducted within the domain of public finance, with a strong focus on transforming the SOEs into revenue-generating entities rather than mere custodians. Additionally, the emphasis is laid on the proposed CBSL Act, new regulations, amendments to banking ordinances, and existing laws, highlighting the need for institutional and regulatory fortification in alignment with the country’s economic management.
Certainly, the international perspective has played a crucial role in shaping the anti-corruption framework, particularly guided by the IMF. The focus on anti-corruption laws is a testament to the importance of maintaining financial discipline and efficient legal frameworks. Some elements of this framework are undergoing scrutiny. Economists scrutinise the Bill put forth by the CBSL, acknowledging its strength and its pivotal role in ensuring the financial health of the country.
These reforms, coupled with the establishment of new institutional structures, propel us forward along the criteria and strategies set by the IMF. It is imperative to adhere to financial discipline, ensure efficiency, and optimise financial utilisation as we navigate towards positioning Sri Lanka as a developed country. The effective implementation of these measures, coupled with support from the International Monetary Fund program, holds the potential to reinvigorate investor confidence in Sri Lanka. This, in turn, could result in an upswing in sovereign credit ratings and renewed market access for the country.
Global market
Under this program, Sri Lanka anticipates receiving significant budget support of US$ 3.75 billion from the World Bank and the ADB, with an anticipated transfer of US$ 900 million in 2023. Through the implemented reform measures, the country aims to establish robust foreign sector defences and gradually re-enter the global market, paving the way for fundraising via the issuance of ISBs in 2027.
These strategies for securing foreign finance and restructuring debt play a crucial role in addressing the foreign finance gap. Moreover, this approach holds significant importance in building foreign reserves and fortifying the economy against both external and internal shocks.
Translated by Maneshka Borham
