Author: TELO Admin

Investors are betting that Sri Lanka will win final approval for about $2.9 billion bailout from the International Monetary Fund on Monday, a key step for the bankrupt nation to revive its economy from the worst crisis in decades.

The South Asian nation’s dollar bonds have returned 20% this year, the top performers in the world. The local currency surged 8% and stocks climbed 5% this month, beating their Asian peers on anticipation of billions of dollars in financing trickling in. The rupee fell 45% last year, while the CSE All-share index declined more than 30% in 2022.

The funds are crucial to restore stability and debt sustainability for an economy mired in a recession. Through 2022, shortages of essential goods from fuel to medicines loomed large, stoking Asia’s fastest inflation and depleting funds.

Since defaulting on its dollar debt in May, Sri Lanka has taken tough measures to put its economy back on a steadier path, including cutting subsidies, raising taxes and loosening its control on the currency. It also increased borrowing cost to the most since 2001.

Sri Lanka also secured debt assurances from bilateral creditors including India, China and Paris Club nations and initiated good-faith negotiations with private bondholders as pre-requisites to getting the bailout.

“The pathway appears to have been gradually cleared for the IMF board to sign off on the program,” said Esther Law, senior investment manager for emerging-markets debt at Amundi SA in London. “One would expect the bonds move up slightly in price the moment the IMF program is announced.”

Debt due in 2030 has risen to about 36 cents on the dollar from 21 cents in November. The IMF bailout will help support bond prices at current levels while more gains will depend on how successful the nation is in raising revenue, said Edwin Gutierrez, London-based head of emerging-market sovereign debt at abrdn plc.

Foreign investors are also expected to boost their holdings of Sri Lanka’s government bonds on bets a bailout would unlock more funding to stabilize the nation’s finances. “You can’t wait until the debt restructuring is over, after that the price points will be very different,” said Bingumal Thewarathanthri, the chief executive officer for Standard Chartered Plc in Sri Lanka.

The island nation has a long track record with the IMF. It secured 16 bailouts since the 1960s with the last one in 2016. Disbursements by the Washington-based lender are spread across the duration of the program and tied to reviews, while an initial amount is released subsequent to board approval.

Debt Talks

Focus will turn next to the debt talks, which Fitch Ratings said may drag on for a long time as creditors debate on whether to include local-currency sovereign borrowings in the restructuring. The rating company cut its score on rupee debt in December, as it viewed a default probable.

“The prospects for a deal with creditors remain unclear for now,” said Sagarika Chandra, Hong Kong-based associate director. Fitch cited the case of Zambia, which received an IMF bailout in August and where debt restructuring talks are still ongoing.

Tellimer expects the recovery value of Sri Lanka’s bonds to be at 40 cents, with some upside possible as the nation’s debt targets imply less need for small haircut, said Patrick Curran, a senior economist.

Sri Lanka is showing some signs of a turnaround. Reserves rebounded 29% to $2.2 billion in the four months through February, inflation is easing and daily power cuts have ended.

“IMF aid will be a relief for the country, but the road ahead is not easy,” said Ankur Shukla, an economist at Bloomberg Economics in Mumbai. “Debt restructuring could take time to complete and this will keep the country locked out of markets. It will also not be politically easy to continue with harsh reforms demanded by the IMF.”

Source – Bloomberg

Sri Lanka’s central government debt has risen to 115.2 percent of gross domestic product by end 2022 from 104.5 percent a year earlier based on the latest national account estimates by the island’s statistics office.

Sri Lanka’s central bank’s gross debt was about 4.66 percent of gross domestic product. The central bank has also spent special drawing rights, on which it has to pay interest.

However, the central bank holds government rupee Treasury bills which can be sold for dollars to rebuild reserves and repay the external debt as long as domestic credit is moderate and forex problems are not re-started under flexible inflation targeting, as credit recovers.

The government was also responsible for another 5.62 percent of guaranteed debt in state enterprises, taking the total to 125.7 percent of GDP.

Sri Lanka’s nominal GDP exploded 16.8 trillion rupees in 2021 to 24.1 trillion rupees in 2022 in a classic Latin America style ‘inflationary blow off’ boosting nominal tax revenues and reducing the rupee debt to GDP ratio.

Central government rupee debt fell from 66 percent in 2021 to 55 percent in 2022 as a result, in a High Inflation and Financial Repression (IFR) haircut, despite new debt being raised to cover deficits.

Sri Lanka’s domestic interest rates are around 20 to 30 percent amid fears of a domestic debt re-structure as there is no cut-off date for domestic debt re-structure under the IMF debt resolution framework.

Remarkably, domestic creditors are expected to keep financing the government as ‘senior creditors’ despite the threat of default.

Central government foreign debt meanwhile rose from 39 percent to 61 percent of GDP as the rupee fell, despite most new disbursements being halted.

The other so-called senior creditors like the World Bank and ADB, whose debt is not re-structured, redirected approved loans to help urgent and humanitarian needs during 2022.

The US, Japan and several European countries, China and India gave grants which will not add to debt.

Sri Lanka’s rupee appreciated in March 2022 amid a moderation in domestic credit and consumption, but fell back amid an ad hoc peg where central bank purchases appeared to have exceeded the excess dollars available from credit developments.

When year end debt is valued at 337 to the US dollar, the spot market value on March 16, government, government guaranteed debt was 118.7 percent of GDP with central bank’s foreign debt also counted.

COLOMBO — Sri Lanka is counting the minutes to Monday, when the International Monetary Fund’s executive board is expected to approve a $2.9 billion bailout for the bankrupt island nation.

For the first time in months, many are hopeful that the IMF’s decision will kick-start the country’s recovery from its worst economic crisis since independence from Britain in 1948.

Faced with deepening poverty under high inflation, scarce foreign reserves and dire shortages of essentials, Sri Lanka is on the cusp of the bailout after China offered additional financing “assurances” required by the fund, following months of tough negotiations. Beijing’s apparent hesitance to extend support drew comparisons to a more obliging India. But Sri Lanka’s ambassador to China, Palitha Kohona, strongly defended the country’s key bilateral lender, telling Nikkei Asia, “The Chinese bureaucracy works according to its own rhythm.”

Experts stress just how crucial the final IMF approval is for stabilizing Sri Lanka’s economy, after the turmoil that brought down President Gotabaya Rajapaksa last year.

“Without fresh dollars to import essential goods, an economic turnaround is impossible,” said Sergi Lanau, deputy chief economist at the Washington-based Institute of International Finance. “In the medium term, implementing reforms under the IMF program and successfully restructuring debt should improve Sri Lanka’s outlook.”

In February, the country’s foreign reserves increased to $2.2 billion thanks to various factors such as higher remittances from overseas workers, though the sum is still far from sufficient. Talal Rafi, an economist at the Deloitte Economics Institute, believes that if Sri Lanka receives the IMF loan, it will allow the country to unlock more capital from the World Bank, the Asian Development Bank and bilateral partners.

“IMF approval certifies to the world that Sri Lanka is on the right path,” he said. However, he cautioned, entering an IMF program is “just the beginning.”

The reforms that come next will not be easy. Sri Lanka has gone to the IMF before, completing only nine of 16 such programs. “So, implementing the right reforms is most important, or we would be at the IMF again, like Argentina,” Rafi said.

Dhananath Fernando, chief executive of the independent Advocata Institute policy think tank in Colombo, is skeptical in light of Sri Lanka’s track record. But he is also hopeful because, he said, the severity of the crisis leaves little space to deviate from the program.

“When we went to the IMF during the past 16 times, our debt was sustainable, but this time … our debt is not sustainable,” Fernando said, saying it would be “next to impossible” to deal with those obligations without the IMF. “We need growth and we need to grow out of the crisis, and growth will take place only when we implement economic reforms,” he said.

In focus are Sri Lanka’s state-owned enterprises (SOEs), many of which have racked up huge losses. SriLankan Airlines’ loss in the first half of the 2022-2023 fiscal year came to over 100 billion Sri Lankan rupees ($295 million), more than twice the amount the government spends on support for the most vulnerable citizens.

“Sri Lanka has a bloated public sector, where salaries and pensions took up 86% of government revenue in 2021, and many SOEs are making massive losses and do not even have annual reports for public reference,” Rafi said.

Analysts said that the country needs to redirect more money to the poor, and that SOE reforms are also essential in order to make doing business easier. Sri Lanka is ranked 99th in the World Bank’s index on the ease of doing business.

But Fernando noted that many of Sri Lanka’s leaders have backpedaled away from promised reforms in fear of consequences at the ballot box. “SOEs have been used as a political weapon by most political parties to provide employment for supporters to get more votes,” he said.

While President Ranil Wickremesinghe’s government attempts to put its own house in order, there are lingering questions about the potential geopolitical fallout of the crisis.

India and China, strategic regional competitors and key lenders to Sri Lanka, have been in the spotlight lately. Last week, Sri Lanka asked the State Bank of India and the Indian High Commission in Sri Lanka to extend a $1 billion credit line by half a year beyond the scheduled expiration later this month. Informed sources close to the Indian government told Nikkei Asia that the two sides are discussing the matter.

Last year, India extended around $4 billion worth of support to Colombo. In mid-January, it offered assurances to the IMF that it was willing to support Sri Lanka’s debt restructuring.

China, for its part, was seen as more reluctant to offer a similar pledge. Beijing did send help, but it mostly came in forms other than financial assistance. In 2022, China donated 10,000 tons of rice for more than 1 million students across 7,900 schools, along with 5 billion Sri Lankan rupees’ worth of medicine and health equipment.

But when the Export-Import Bank of China followed India by sending a letter to Sri Lanka’s Finance Ministry in late January, offering a two-year debt moratorium, it was met with disappointment. “China was expected to do more,” Reuters quoted a Sri Lankan source as saying. “This is much less than what is required and expected of them.”

In February, U.S. Treasury Secretary Janet Yellen criticized Beijing’s approach to distressed countries more broadly, saying, “China’s lack of willingness to comprehensively participate and to move in a timely way has really been a roadblock.”

In early March, the Ex-Im Bank sent another letter, promising to expedite debt treatment and finalize the terms in the coming months. This moved Sri Lanka over the line with the IMF.

George I.H. Cooke, a Sri Lankan former diplomat, stressed that India and China had different priorities. He said a continued collapse in Sri Lanka would have been a bigger immediate problem for India, risking a refugee influx.

On the other hand, Cooke noted that China lends to many countries, and that easily granting concessions could have led to “many others tapping on their doors [saying], ‘Give us the same thing you gave Sri Lanka and help us too.'”

Ambassador Kohona insisted that China has always been helpful, from countering terrorism to supplying COVID-19 vaccines. On debt, the envoy acknowledged that obtaining approvals was time-consuming but said, “We had no doubt that China would take its time but would stand by Sri Lanka in its time of dire financial need.”

He added, “Undoubtedly, we are also grateful that, as major bilateral creditors, India and Japan also have provided the requisite assurances.”

The Bar Council of England and Wales in a press release stated that it hopes “parliamentary authorities in Sri Lanka will reconsider most carefully the appropriateness of questioning Supreme Court Judges before a parliamentary committee, and we similarly hope that the Sri Lankan government will consider most carefully whether it can be ever be right to encourage disobedience to court orders.”

The release refers recent statements made by State Minister of Finance Shehan Semasinghe and Premnath Dolawatte MP, referring to an ongoing case in the Supreme Court pertaining to the Local Authorities elections.

The release, quoting the Chair of the Bar Council of England and Wales, Nick Vineall KC, said: “An independent judiciary is an essential and integral part of the rule of law. So too is the principle that governments comply with court orders.”

The UN Basic Principles on the Independence of the Judiciary state that “it is the duty of all governmental and other institutions to respect and observe the independence of the judiciary” and “there shall not be any inappropriate or unwarranted interference with the judicial process, nor shall judicial decisions by the courts be subject to revision”, the release added.

FULL STATEMENT: https://www.barcouncil.org.uk/resource/bar-council-statement-on-judicial-independence-in-sri-lanka.html