Following the economic downturn in Sri Lanka last year, the initiation of debt restructuring became essential in light of the country’s economic collapse. The question remains, how should this restructuring process unfold, and what path should the nation’s economy follow?
This article is compiled from statements provided by Prof. Wijitapure Wimalarathana Thera, President of the Sri Lanka Economists Association, Minister of Transport, Highways, and Mass Media, Dr. Bandula Gunawardena, and Prof. Priyanga Dunusinghe from the Department of Economics at the University of Colombo during a recent panel discussion telecast over ITN.
Minister Dr. Bandula Gunawardena contributed to the discussion as an economic analyst.
The following are excerpts from the discussion: “Borrowing as a country is not inherently problematic. However, issues can arise if those loans are not invested in high-yielding sectors.
The country’s economic situation has deteriorated to the point where it is struggling to meet its debt obligations due to several factors. Despite past reliance on tourism, rubber and coconut exports, and the garment industry, the economy’s dependence on these sectors has posed challenges, especially with changing global dynamics. While there has been income from the export of spices, it has not been sufficient to offset other economic challenges.
The reluctance of Sri Lankan expatriates to return and invest in the country poses a challenge to addressing the debt situation. Encouraging investment from retired individuals and those working abroad could alleviate the need for debt restructuring.
Efforts are under way to restructure the loan in collaboration with the lending parties, dividing it into three main categories. Firstly, loans sourced from the market; secondly, bilateral loans from countries such as Japan, India, and China; and thirdly, multilateral loans from institutions like the World Bank, Asian Development Bank, and the International Monetary Fund.
Given this situation, it is crucial to determine whether we want to bolster our country’s economic standing or not. The agreement we have entered into with the International Monetary Fund (IMF) has given Sri Lanka a respite. We must remember the dire economic conditions we faced two years ago, in 2022.
When our foreign reserves dwindled to zero, it became evident that we were unable to meet our debt obligations. In response to this crisis, former President Gotabaya Rajapaksa initiated a call for international applications aimed at fortifying the country’s economy and seeking solutions to our financial woes.
Amidst the global trend of countries grappling with debt repayment, Sri Lanka faced a similar challenge. Consequently, 28 applications were submitted to address the country’s economic woes, with 20 of them meeting the criteria. A Cabinet sub-committee, chaired by Prof. G.L. Peiris was tasked with selecting the most suitable company to tackle the issue. Following careful deliberation, France’s Lazard Company was chosen after a thorough examination of the facts.
At that juncture, we geared up to implement the recommendations for debt restructuring in the country. However, complications arose when a lawsuit of US$ 250 million was filed in the Hamilton court in the United States due to non-payment of debt. Given our lack of experienced legal representation in handling such cases, we enlisted the services of the seasoned law firm, Clifford Chance Company, to navigate through these challenges. These were the hurdles we encountered during that period.
President Ranil Wickremesinghe engaged in discussions with the President, Prime Minister and the Finance Minister of India regarding the outstanding debt obligations. Similar talks were held with the Prime Minister of China. Multilateral lenders such as the World Bank and the Asian Development Bank (ADB) are facilitating loan repayments. Efforts are under way to address other outstanding loan payments as well.
Outstanding
Under the current agreement with the IMF, approximately 37 percent of the outstanding loan amount deemed unpayable will be settled within the initial 5-6 years of commencing loan repayments.
Subsequently, around 51 percent of the loans are slated for repayment over the following 20 years. The remaining 12 percent of the loan balance will be addressed after the initial 20-year period.
Thus, by the year 2048, regardless of Presidential or Governmental changes, these agreements remain unalterable. Any attempt to deviate from these agreements could impede the country’s progress. This sentiment was underscored by the head of the IMF Sri Lanka program chief Peter Breuer, who stated before departing that “Sri Lanka’s future trajectory is now on a well-defined path.”
Given our country’s inability to generate vast wealth, initiatives like the Port City, valued at US$ 1.4 billion, and the sale of the Hambantota Port, which earned only US$ 1.4 billion, represent significant but limited sources of revenue. In light of this, gradual measures must be implemented to alleviate the country’s debt burden over time.
Highways are undeniably convenient and essential for our infrastructure, yet they also represent a substantial debt burden. Consequently, the responsibility for highways was transferred to the Sahasya Investment Company. While highways can yield significant profits, amounting to Rs. 5 billion annually, the loan obligation for highways stands at a staggering Rs. 800 billion. At this rate, using the Rs. 5 billion profit per year to repay the debt would require another 160 years to settle it fully.
With tea exports yielding a maximum of Rs. 1.3 billion and rubber and coconut exports potentially earning Rs. 2 billion each, it is evident that innovation and technical advancements should guide our actions.
The restructuring of bilateral and commercial debt should adhere to a systematic approach to avoid scenarios like deforestation seen in Latin American and African nations. Learning from countries affected by credit crises can offer valuable insights into effective measures.
Over the 32-year span from 1980 to 2022, there were 433 debt restructurings involving 95 countries. Some nations underwent debt restructuring multiple times, with certain countries undergoing the process up to four or five times. Notably, only Mexico and Chile managed to stabilise their economies following their initial restructuring efforts.
Restructured
Argentina has undergone debt restructuring on five occasions, while Brazil has restructured its debt twice. Venezuela has gone through the process six times, and Ecuador has restructured its debt five times. Given this reality, it is imperative to prioritise methods that enable us to navigate the debt crisis independently of the conditions set by the IMF, basing our approach on sound economic principles.
Continuing to carry balance of payments arrears is not sustainable. Once a country falls into a credit crisis, its entire economy suffers. This affects not only imports and exports but also the overall economic landscape. Difficulties arise in opening letters of credit, as foreign countries lose confidence in the banking system of the debtor nation. Companies within the country face challenges in making overseas investments, further exacerbating the economic downturn due to the lack of investor confidence.
Hence, tackling the debt crisis requires an economic approach. It is a course of action that cannot be reversed. Attempting to do so would plunge us into a deeper abyss than the one experienced in 2022. We risk becoming another Argentina within the next five years. It’s crucial to understand that in such dire circumstances, the nation stands to lose its workforce, compounding the economic challenges we face.
Currently, the youth of our nation are steadily migrating abroad. Eventually, what we will be left with is a population that lacks opportunities both domestically and internationally. This scenario mirrors what has occurred in Latin American and African nations.
Our nation’s economy has suffered greatly due to several factors, including the substantial size of the public service, the distribution of fuel at subsidised rates, and the relatively low Government revenue. For instance, in 2022, while the Government’s total tax revenue amounted to Rs. 1,751 million, a significant portion of Rs. 1,265 million was allocated to the public service and Rs. 506 million to subsidies, resulting in a budget deficit.
In 2023, the Government’s total revenue from various sources amounted to Rs. 3 trillion, while its expenditure reached Rs. 4 trillion. Given this scenario, any subsidies provided should be supported by a corresponding source of income.
While anyone can advocate for relief measures, the challenge lies in the reluctance of individuals to contribute from their personal wealth. To address this, there is a proposition to increase tax revenue. For instance, there’s a suggestion circulating in society that senior citizens should receive a 15 percent interest rate, akin to previous years.
To achieve this VAT should be raised by 1 percent. It is crucial for the population to grasp this reality. In other nations, tax revenue can reach up to 25 percent of GDP, but our country has not achieved this. Throughout history, promises like “I’ll offer bread at Rs. 3.50,” “I’ll raise salaries by 10,000 rupees,” or “I’ll deposit 25,000 rupees into fixed accounts” have been made, leading to potential bankruptcy.
Even with maximum effort amidst the credit crisis, it is improbable to elevate the Per Capita Income to US$ 13,000. India is currently striving to double that figure to US$ 26,000 as part of its plan. Hence, the notion of “Indian people coming to this country for low wages” should be dismissed. What we truly need is the right leadership and a cadre of intelligent individuals.”
Translated by Maneshka Borham
