{"id":121240,"date":"2021-12-16T18:01:48","date_gmt":"2021-12-17T01:01:48","guid":{"rendered":"http:\/\/www.lankaweb.com\/news\/items\/?p=121240"},"modified":"2021-12-16T18:01:48","modified_gmt":"2021-12-17T01:01:48","slug":"pulling-back-from-the-precipice-a-pathfinder-perspective","status":"publish","type":"post","link":"https:\/\/www.lankaweb.com\/news\/items\/2021\/12\/16\/pulling-back-from-the-precipice-a-pathfinder-perspective\/","title":{"rendered":"Pulling back from the precipice: A Pathfinder perspective"},"content":{"rendered":"

Pathfinder Perspective <\/em><\/span><\/h2>\n\n\n

Sri Lanka is facing what is\narguably its most challenging external financing crisis. Gross Official\nReserves have declined to USD 1.6 bn as at end-November. Repayments over the\nsubsequent 12 months amount to about USD 7 billion. The authorities have\nresponded with import and capital controls as well as a fixed exchange rate\nbased on moral suasion by the CBSL and rationing of foreign exchange by the\ncommercial banks. This has resulted in a scarring of the economy which will\ninevitably have an adverse impact on growth, employment and incomes. Inflation\nis rising and is on the verge of reaching double digits and shortages\nconstantly emerge of essential goods and services.<\/p>\n\n\n\n

The Road Map, presented by\nthe CBSL, identified a number of potential sources of debt- and\nnon-debt-creating inflows to fill the external financing gap. The\nsecuritisation of remittance flows has been added to the menu of options\nrecently. However, to date there has been an alarming depletion of external\nreserves and an inexorable increase in the external financing gap.<\/p>\n\n\n\n

If the authorities have\nclear visibility of sufficient inflows to arrest the steady deterioration in\nthe country’s external position, one can be hopeful of a turnaround to avoid\nthe possibility of a debt default which would greatly amplify problems, such as\nrising inflation; pressure on exchange and interest rates; losses in the real\nvalue of incomes; decline in business confidence; and disruption to the\nsupplies of basic goods and services. If the anticipated inflows are not\nforthcoming in sufficient quantities to fill the external financing gap, there\nwill be no option but to turn to the IMF to avoid further scarring of the\neconomy and creating greater shortages of essential goods and services.<\/p>\n\n\n\n

It is extremely unlikely\nthat it would be possible to obtain IMF assistance without a debt rescheduling\nas the Fund does not support countries where the debt is considered\nunsustainable. Equally, it is not practical to reach agreement on debt\nrestructuring without an IMF programme. So, the twin pillars of the way forward\nwould need to be negotiating an arrangement with the IMF and agreement on a\npreemptive debt restructuring.<\/p>\n\n\n\n

Attempting to undertake\nstabilisation of the economy without the cushion of financing that can be\nmobilised through an IMF programme would be like performing on the high-trapeze\nwithout a safety-net. There needs to be a less painful blend of adjustment and\nfinancing. However, it must be highlighted that pain cannot be avoided. An IMF\nprogramme would impose significant burdens on the people. The main thrust of\nthis article is that this pain would be less than the severe dislocation that\nis already being caused by squeezing the economy to make up for the dollar\nilliquidity. The conditionality attached to IMF programmes are intended to\nstabilise the economy (contain inflation and balance of payment pressure) and\nimprove its creditworthiness.<\/p>\n\n\n\n

An IMF programme could\ninclude, inter alia, the following: strengthening the government’s revenue base\n(widening the tax base and improving tax administration); improving the primary\nbalance in the budget (revenue – (expenditure-interest payments)); proactive,\ndata-driven and non- interventionist monetary policy; a flexible and realistic\nexchange rate policy to assist in building up external reserves;\ncommercialisation of SOE operations, including full cost-recovery in the\npricing of electricity and fuel, restructuring of CEB and CPC, the\nimplementation of the Statements of Intent and addressing the losses being\nincurred by Sri Lankan Airlines. <\/p>\n\n\n\n

An IMF Extended Fund\nFacility can provide balance of payment financing of up to USD 1 bn per year\nfor three years. The amount made available would be calibrated according to the\nstrength of the reforms undertaken. An IMF programme would also unlock direct\nbudgetary support from the World Bank, Asian Development Bank and possibly a\nfew bilateral donors (over and above their usual project loans). Both balance\nof payments and budgetary support are most urgently required for the twin\ndeficit Sri Lankan economy. Based on indications in 2020, up to USD 2 bn in all\ncan be mobilised through these sources, depending on the strength of the\nreforms undertaken. Engagement with the IMF will also transmit positive signals\nto both investors and creditors, both at home and abroad. It can also pave the\nway for an eventual upgrading of the sovereign rating, which would improve the\nprospect of attracting foreign investment and credits.<\/p>\n\n\n\n

The second pillar,\npreemptive restructuring, must also be pursued concurrently with negotiations\nwith the IMF. Not only can this facilitate the obtaining<\/p>\n\n\n\n

of a Fund programme but it\ncan also create some leeway to stabilise the economy and place it on a path of\nsustained growth. Debt restructuring can be achieved through: extending\nmaturities; modifying coupon (interest) rates; and hair-cuts on the principal\n(write-downs). One or more of these modalities can be used to reach an\nagreement with creditors that places Sri Lanka’s debt servicing on a\nsustainable path. Ideally, about a 3-year window should be created where debt\nservicing is suspended. This can release a very substantial amount of scarce\nforeign exchange to finance imports. The impact on growth, employment and\nincomes would be materially positive. In considering debt restructuring,\nit is important to realise that the most significant usual downside is a loss\nof access to international capital markets. In Sri Lanka’s case, this has\nalready happened with the downgrading of the sovereign rating. So, the most\nimportant disadvantage is no longer a factor. Another concern relates to the impact\non domestic holders of USD denominated sovereign debt, mainly banks. A\nmitigating factor is that a significant share of these holdings have been\nbought at a discount from the secondary markets. In other countries, Central\nBanks have exercised regulatory forbearance to assist financial institutions\nwhich have required such support to repair their balance sheets.<\/p>\n\n\n\n

It must, however, be\nrecognised that it could take 4-6 months to negotiate an IMF programme and a\npreemptive debt restructuring agreement. The present trends in external\nreserves on the one hand and net drains on foreign currency on the other\nindicate that bridging finance is required to meet obligations over the next 6\nmonths to avoid a debt default. The package of assistance offered by India is\nan encouraging start and needs to be finalised as soon as possible. It has to\nbe supplemented by financing from other friendly countries, like\nJapan. There is scope for India and Japan to work together to support Sri\nLanka at this critical juncture. Their willingness to step forward is\nlikely to be greater, if it is known that Sri Lanka has taken a decision to\napproach the IMF. While our development partners will be wary of having to make\nan open-ended commitment, they are likely to find bridging finance more\npalatable.<\/p>\n\n\n\n

Time has almost run out.\nUrgent, focused and pragmatic attention to these pressing issues is of\nparamount importance. An IMF programme can be at the heart of a\nmedium-term strategy to overcome the current challenges and give Sri Lankans\ngreater hope about the future prospects of the economy. <\/p>\n","protected":false},"excerpt":{"rendered":"

Pathfinder Perspective Sri Lanka is facing what is arguably its most challenging external financing crisis. Gross Official Reserves have declined to USD 1.6 bn as at end-November. Repayments over the subsequent 12 months amount to about USD 7 billion. The authorities have responded with import and capital controls as well as a fixed exchange rate […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"closed","sticky":true,"template":"","format":"standard","meta":{"footnotes":""},"categories":[6],"tags":[],"class_list":["post-121240","post","type-post","status-publish","format-standard","hentry","category-politics"],"_links":{"self":[{"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/posts\/121240","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/comments?post=121240"}],"version-history":[{"count":0,"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/posts\/121240\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/media?parent=121240"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/categories?post=121240"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/tags?post=121240"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}