SriLankan Airlines told to pay for jet fuel in dollars — or else

The Energy Ministry has officially informed SriLankan Airlines that it will not supply jet fuel if the payment is not made in dollars.

Energy Ministry Secretary K. D. R. Olga said the ministry officially conveyed its decision last week and told the national carrier to make the dollar payments to the Ceylon Petroleum Corporation (CPC) through the state bank network.

“If we are to supply jet fuel, we need dollars. We have been telling the airline about this for some time. But last week we informed it officially. The airline earns dollars. Therefore, if we are to clear shipments, we informed the company that it has to send dollars to the state bank system,” she said. The secretary said the airline and several state institutions such as the Ceylon Electricity Board (CEB) continued to buy fuel on credit and as a result the CPC’s financial burden was increasing.

Earlier in the week, a ship carrying 40,000 metric tonnes of jet fuel arrived in the country and the stock is sufficient to meet the demand only up to January 20, a top official of the Ceylon Petroleum Storage Terminal Limited (CPSTL) said.

Meanwhile, CPSTL sources said that since the country would run out of crude oil for refining, the Sapugaskanda refinery would once again be closed down from January 3. The plant remained closed from November 15 to December 7, for the first time in its history, due to non-availability of crude stocks.

When asked about this, Ms. Olga said a crude oil shipment was due after January 25 and until such time, they might have to close down the refinery.

“Petrol and diesel can be bought at short notice. However, to buy crude oil, the supplier has to secure the ship 90 days ahead and book the cargo. Moreover, due to the economic crisis in the country, the supplier demands the full payment upfront. The problem has arisen because a successful bid was not submitted in response to our recent tenders,” she said.

She said the Sapugaskanda plant had been designed to refine the Murban crude oil and therefore, there was a need to identity other types of crude oil which could be refined at Sapugaskanda and call for tenders. If this process succeeded it would be possible to operate the refinery continuously, she said.

China cultivates North Sri Lankan Tamil fishermen – newsin.asia

In a series of strategic moves aimed at getting the support of the Tamil-speaking fishermen of Sri Lanka’s Northern Province, China has set up a sea cucumber hatchery and a foodstuff factory, and gifted fishermen with fishing gear worth LKR 6 million, and food parcels and facial masks (of a total value of 20 million LKR) to 2,500 fisher families in Jaffna and Mannar.

The Chinese embassy tweeted that during his visit to the Northern Province (from December 15-17), Ambassador Qi Zhenhong took officials and reporters on a study tour of the “New Silk Road” Foodstuff factory at Mannar on Friday. The factory employs 100 plus local workers, 85% of whom are females from nearby villages. Every month it produces 300k fish cans and provides incomes to thousands of fisher families in the area, the tweet said.

On Thursday, Ambassador Qi and Sri Lankan Fisheries Minister Douglas Devananda, accompanied by dozens of media personnel, visited the Guilan Sea Cucumber Hatchery & Farm in Jaffna. The company has created thousands of jobs for local fishermen, brought millions of US Dollars income and transferred technology to Sri Lanka, the tweet added.

The Tamil daily Virakesari reported that while in Mannar, the Chinese Ambassador went into the sea with the help of the Sri Lankan navy to see the Rama Sethu or the series of shoals between Sri Lanka and India which, it is believed, were the little islands created by Hanuman to help Lord Rama’s army crossover from India to Sri Lanka in the epic Hindu Ramayana.

Clearly, China is making calculated inroads into the North Lankan Tamil fishing community, which faces many economic problems, including those created by the regular influx of bottom trawlers from Tamil Nadu in India. The bottom trawlers not only poach in Sri Lankan waters but also wipe out the other resources on the seafloor. Repeated appeals by the North Lankan fishermen to the Sri Lankan and Indian governments to stop the Indian fishermen from poaching and bottom trawling have failed.

The Indians keep promising to restrain their fishermen from crossing the International Maritime Boundary Line (IMBL) and bottom trawling in Sri Lankan waters, but have been unable to deliver because fishermen are a powerful political constituency in Tamil Nadu. Previously, the Sri Lankan navy used to shoot, and sometimes even kill the intruders, but this is no longer done on appeal by India to treat innocent intruders in search of fish “humanely”. The intruders are arrested and their boats impounded, but still, they would keep coming.

The governments of India and Sri Lanka have set up a Joint Working Group to meet periodically and discuss the fishing issue, but these meetings have not been productive. Efforts by the Tamil Nadu and Indian governments to divert these fishermen to deep ocean fishing have failed.

Political Angle

The North Lankan fishermen’s appeals to Lankan Tamil politicians and successive Lankan governments to take up the matter with India strongly, have fallen on deaf ears. While Colombo has not been sufficiently interested in the issue, which affects only the minority Tamils, Lankan Tamil politicians do not want to antagonize or alienate their counterparts in Tamil Nadu because the latter support the larger Lankan Tamil demand for provincial autonomy. Some recent incidents of Lankan Tamil fishermen attacking the Indian intruders have not got political support as such attacks would spoil fraternal ties with Tamil Nadu.

Economic Impact

Be that as it may, North Sri Lankan Tamil fishermen have suffered great economic losses and desperately need the help of Colombo, Chennai and New Delhi to alleviate their condition. The Jaffna-based Lankan economist Dr. Muttukrishna Sarvananthan, writing in 2019 in Daily News notes that the areas around the Gulf of Mannar, Palk Bay, and Palk Strait are home to large stocks of marine resources, mainly because of the wider continental shelf here, the mean depth of which is just three metres and runs up to the Indian waters. According to Scholtens, the average depth of this area is nine metres. The muddy bottoms of the Gulf of Mannar, Palk Bay, and Palk Strait areas provide rich grounds for high-value shrimp species. The shallow seabed of these areas is also known to possess large stocks of a number of unique, sedentary, demersal fish.

After the end of the war in 2009, Jaffna district experienced a 34% drop in fish catch between 2012 (32,400 metric tons) and 2013 (21,380 metric tons); The fish catch in Mannar declined by 17 % between 2012 (13,450) and 2013 (11,110) and by another 12% between 2014 (22,130) and 2015 (19,390). This could be attributed to increase in poaching by Indian trawlers, Sarvananthan says.

He points out that bottom trawling has also been “mass killing” the under-grown fish (called ‘by-catch’) as trawlers shovel the bottom of the seabed indiscriminately. The trawlers also irreparably damage or destroy fishing nets used by fisherpersons in Sri Lanka, thereby causing the latter to avoid fishing on the days that Indian trawlers are expected to poach in Sri Lankan waters, consequently incurring a livelihood opportunity cost.

In addition to the direct monetary losses incurred by the fishing communities in the Northern Province, there are indirect losses incurred by the entire supply chain of the fisheries sub-sector. Quoting Oscar Amarasinghe, Sarvananthan says that over a three-year period (2006–2008), five estimates of loss ranged from US$ 16 million (lowest) to US$ 56 million (highest) per annum. The average of these five different estimates is US$ 41 million or LKR 5,293 million per annum.

Going further, Sarvananthan says that the annual direct monetary loss to each member of the fishing households in the Northern Province is LKR 28,848. The indirect losses in terms of value addition (processing, canning, drying, etc.), wholesale and retail mark-ups, and losses in seafood exports due to poaching by Indian trawlers are estimated to be 50% of the direct losses. Hence, the indirect losses amount to US$ 20.5 million or LKR 2,646.5 million.

Suggested Solution

To prevent China’s entry into the Northern fisheries sector to the detriment of Indian interests, and to enable both Indian and Sri Lankan fishermen to fish in the narrow sea, India could consider a proposal made by a former Principal Scientist at the Madras Research Centre of the Central Marine Fisheries Research Institute of India, Dr. Mohamad Kasim.

According to Dr.Sarvananthan, Dr. Kasim envisaged the construction and deployment of artificial reefs for the restoration of the coastal ecosystems; improvement of biodiversity; and increasing the biological resources. The artificial reefs should complement the natural coral reefs as they doing in the coasts of Kerala, Tamil Nadu, Palk Bay, Pulicat, and various other places in India.

According to Dr.Sarvananthan, the biodiversity of the bottom living bio-foulers could be greatly increased by increasing the sea bottom substratum. He quotes Dr. Shinya Otake, a Marine Biologist at Fukui Prefectural University in Japan, to say that some of the artificial reefs built in Japanese waters support a biomass of fish that is 20 times greater than similarly sized natural reefs.

“A study undertaken at the Occidental College in Los Angeles confirmed the foregoing claim by revealing that the weight of fish supported by each square metre of sea floor by oil and gas rigs off the Californian coast was 27 times more than that supported by each square metre of sea floor by the natural rocky reefs,” he adds.

These steps would improve the livelihood of coastal fishing communities of both Tamil Nadu and North Sri Lanka as there would be enough fish for the fishermen of both areas.

Posted in Uncategorized

To IMF or not to IMF? By Skandha Gunasekara

Economic experts have called for the immediate activation of the proposed economic assistance package from India, insisting that an International Monetary Fund (IMF) bailout is the only viable next step, despite the Government continuing to remain divided on its policy on seeking IMF assistance.

Portraying the economy as a drowning individual, Senior Economist and Former Central Bank of Sri Lanka (CBSL) Deputy Governor Dr. W.A. Wijewardena said that India’s economic support, which comes at the potential cost of sharing the Trincomalee Oil Tank Farms, was vital for the country’s survival.

He explained the present economic situation through an analogy: “The water is up to our nose and we are about to drown, so somebody has to save us from drowning. It is too late to go to the IMF, because we will have drowned by the time their assistance arrives in about six months. That is why an immediate rescue package from India is necessary, since we know how we can survive the upcoming three weeks.

“According to reports, India has come to an agreement with Finance Minister Basil Rajapaksa to give us a line of credit to cover the import of medicines, food, and fuel, but that is combined with the modernisation of the unused oil tank farms in Trincomalee. It comes as a package. So this credit line must be used immediately, but it means that these products must be imported from India and not any other country,” Wijewardena noted.

Dispelling IMF myths

He asserted that seeking the help of the IMF was the only available avenue for Sri Lanka as time had run out, stressing that: “The next step is for someone to pull us out of the water. For this, the only option is the IMF.”

He then dispelled allegations and misconceptions arising from certain quarters of the Government, which claimed that obtaining financial assistance from the IMF would result in Sri Lanka submitting to “conditions” of the fund. He pointed out that it would be the Sri Lankan Government itself which would propose the steps that would be taken to revamp and stabilise the economy.

He explained that: “The Sri Lankan people, including Parliamentarians, must first be educated on the current economic conditions and how IMF loans operate, before introducing any reform programme in Sri Lanka. Otherwise, it will be a failure. We see some MPs making bold statements saying that they don’t want to go to the IMF and accede to IMF conditions; I think they have to be educated. It is not the IMF which imposes conditions: it is we who suggest to the IMF the conditions that we will implement ourselves.

“For instance, when you go to the bank to borrow money, the bank doesn’t impose conditions. You go to the bank with the project report saying that you are doing this kind of reform and improvement, and if it’s acceptable to the bank, then they will finance it. Similarly, with the IMF, the Ministry of Finance and the CBSL Governor have to submit a joint letter of intent to the IMF suggesting that we would be introducing the following reform programmes in the country, if we were to receive the IMF loan,” he said.

The former Deputy Governor then noted that there was international experience and precedence to show that a country trying to fix the exchange rate artificially without sufficient foreign reserves would experience failure.

He said: “Regarding the exchange rate, we will have to see how long the Central Bank will be able to hold on to the fixed rate. International experience has shown whenever a Central Bank has tried to keep it fixed at that level, the Central Bank has failed. It happened with Myanmar and Thailand, and it is happening now with Lebanon and Turkey. Without sufficient foreign exchange reserves in hand, you cannot fix the dollar rate at the rate you want to fix it.”

Potential IMF conditions and their impact

Economist and University of Colombo Lecturer Umesh Moramudali elaborated on possible “conditions” that Sri Lanka may have to implement as a means of procuring the IMF loan.

Moramudali pointed out that floating the rupee was likely a requirement.

He noted: “One condition is that they would ask the recipient country to devalue the currency, which is to have a floating exchange rate system where the market determines the exchange rate. Currently the Government is holding the exchange rate at an artificial rate; this has also contributed to the dollar shortage. This is one condition the IMF is very likely to ask for – to let it float without defending it – which means the exchange rate is going to go up. The idea behind this is that they want the economy to stabilise on its own.

“How this helps, in their view, is when you allow the exchange rate to float, it drives up the exchange costs, resulting in increased import costs. When prices of imported items go up, people are compelled to adjust and bring down their demand. On the other hand, when the exchange rate increases, that also encourages people to engage in more export-oriented activities, because if you earn in dollars, a higher exchange rate means higher earnings. Essentially, through this condition more people will get into exports and bring in foreign currency while imports are reduced, curbing foreign exchange outflows,” Moramudali explained.

Fiscal policy changes would also be needed to demonstrate that Sri Lanka could increase revenue through the introduction of taxes, and possibly even revert back to the tax system introduced by the former Yahapalanaya Government.

“That will certainly be one condition, and this must happen regardless, because we have a very low tax revenue which would mean we would have to borrow continuously. One concern in this regard is that we don’t know what will happen with the VAT. This is because we decreased the rate from 15% to 8% and we increased the threshold, which means fewer businesses are liable to pay VAT. This contributed significantly to a shortfall of Government revenue, without bringing about a price reduction, meaning the objective of the VAT reduction wasn’t achieved,” Moramudali opined.

Reduction of expenditure would also be needed in tandem with an increase in revenue, which could further see subsidised services such as water, electricity, and fuel undergoing a price hike in order to reduce costs for those state-owned institutions.

“There is an IMF policy that state-owned enterprises shouldn’t be making losses, so they don’t advocate for subsidised water or electricity, which our Government provides. The consumer pays lower for a unit of electricity than its actual cost, and the remainder is borne by the Ceylon Electricity Board (CEB) at a loss. This is something the IMF would say to abolish because such subsidies are enjoyed by both the rich and the poor consumer. Instead, there should be targeted subsidies, since these losses are borne by the state and then subsequently passed down to the consumer one way or the other. Water and fuel subsidising also falls in this category,” Moramudali explained.

A key factor in Sri Lanka’s current economic disaster is the bunching up of massive foreign debt over the coming years. According to Moramudali, addressing this issue would significantly help Sri Lanka out of the current financial quagmire.

He said: “There’s a possibility that we may have to go for debt restructuring. Sri Lanka has not done debt restructuring before, so we don’t know what type of restructuring that might happen. For now it appears to be the best way out of this current crisis. The IMF will give us a short-term loan to stabilise the balance of payment issues, but since this won’t be enough to sort out the crisis, we’ll have to restructure the debt.”

While explaining the possible methods of debt restructuring, Moramudali noted that Sri Lanka and its citizens would inevitably face a tough economic period before things could recover.

He noted that debt restructuring could happen in different ways. One option is for the Government to restructure the sovereign bonds and inform the creditors that they would be paying the accumulated interest at the end of the two years. The other option would be for the Government to decide to pay the interest instead of the capital initially, and then pay the capital in four or five years.

He explained: “The idea is to postpone repaying the loans through an agreement with the creditors. Creditors in this instance will mostly be the sovereign bonds, because I don’t think it’s possible to restructure the World Bank or Asian Development Bank debts.”

IMF: Solutions for present economic crisis

University of Colombo Department of Economics Professor Chandana Aluthge spoke of the advantages of going to the IMF.

“Going to the IMF will boost the country’s credibility since we will receive IMF backing, and this will increase the confidence level of potential investors and those who have given loans to Sri Lanka. The second advantage is that IMF Loans are soft loans where the interest rates are nearly 0% with grace periods to commence the repayment, while the loan itself is long-term. However, all this depends on how the Government behaves during the loan agreement,” he said.

Aluthge also agreed that going to the IMF was the best option for Sri Lanka, since it would not be possible to obtain credit from the open market given the situation in the country. He further noted that around $ 5 billion would be needed as a loan considering the upcoming debt repayments.

“Since Sri Lanka had a weak foreign policy in the last few years, we do not have friendly countries that would bail us out. Therefore, the IMF is the best option. Deciding how much to borrow from the IMF depends on the immediate loan repayment. We have to repay about $ 2 billion next year, so I think it would be best to increase reserves up to $ 5 billion if possible as a good starting point,” he shared.

Speaking of how Sri Lanka needed to move forward in terms of bringing foreign exchange, Professor Aluthge said the economy should be revamped and the export sector expanded as the current traditional exports were either not sufficient or were being outmatched through market competition.

“In the near future and in the mid-term, Sri Lanka needs to overhaul the economy to attract more foreign exchange to the country. Our priority should be exports. We are still relying on tea, rubber, garments, and labour exports despite many issues; we’re sending labour to other countries but it is not easy to send money back to Sri Lanka. Therefore, user-friendly systems need to be implemented. In the garment industry, there are other countries supplying large portions of the world trade. Sri Lanka is still only supplying about 2% of the global demand for garments, but it is still one of the largest foreign exchange earners in the country. We will have to implement new strategies,” he warned.

He charged that the notion that Sri Lanka could be self-sufficient was a mistake and that history proved this, pointing out that even the largest of countries depend on exports to thrive.

“We also need to drop the idea of self-sufficiency, since it is not realistic. Sri Lanka is a very tiny country with a very small market, so self-sufficiency will not work. We saw this happen in the past in the 1970s. Even if you take China, which is a very large country, their economy depends very much on exports. If you look at smaller countries like Bangladesh, Singapore, and Korea, their world trade contribution to their gross domestic product (GDP) is very high. That is how they have developed their countries. They have a steady flow of foreign exchange that strengthens their economies,” he ventured.

Prof. Aluthge recommended that Sri Lanka move into high-tech industries for exports.

“We need to move into areas where export income is steady. Therefore, we have to identify those types of goods and services. New markets that have great potential are high-tech industries. We have no future otherwise. We’ll have to attract investors and the Government should support local investors who would like to take the risk. The Export Development Board should look for new markets and help investors,” he elaborated.

Government rejects possible IMF assistance

Despite various expert recommendations positing that the IMF was the lifeline the Sri Lankan economy needed to grab onto, the Finance Ministry remained adamant that it had no expectation of seeking IMF assistance.

“We have not spoken about procuring any loans from the IMF. Some are saying that $ 6 billion is needed by January. The IMF has never given $ 6 billion throughout its history. We haven’t spoken to the IMF, and nor do we have any intentions of going to the IMF for any loan,” Treasury Secretary S.R. Attygalle said, adding that the recent IMF visit was routine and no loan discussions had taken place.

“The IMF did not arrive on this occasion to discuss a loan. They will now give their report following their visit and issue a communique. That is all. We are not proposing anything,” he asserted.

He then said that the Indian credit line to import food, medicines, fuel and other essential items would be available by January.

“The Indian loan will come through. There are things that need to be arranged both here and in India for the credit line to be implemented. But it will most likely come through by January,” Attygalle said.

Fitch downgrades Sri Lanka sovereign rating to CC

Fitch has downgraded Sri Lanka to ‘CC’ from ‘CCC’ saying there was an increased probability of default as liquidity injections made to sterilize interventions and enforce a 6.0 percent policy rate continue to drain reserves and create forex shortages.

“The downgrade reflects our view of an increased probability of a default event in coming months in light of Sri Lanka’s worsening external liquidity position, underscored by a drop in foreign-exchange reserves set against high external debt payments and limited financing inflows,” the rating agency said.

“The severity of financial stress is illustrated by elevated government-bond yields and downward pressure on the currency.”

In addition to repaying debt, the central bank is also spending reserves for current imports and printing money to sterilize the interventions, adding more rupee reserves to the banking system to enforce a 6.0 percent policy rate, preventing the monetary base from contracting, short term rates rising, and reducing credit.

Related Sri Lanka overnight injections top Rs400bn amid sterilized interventions

Below ‘CCC’ Fitch does not use notches (+ or – notations) and downgrades by entire levels.

“We believe it will be difficult for the government to meet its external debt obligations in 2022 and 2023 in the absence of new external financing sources.

“Obligations include two international sovereign bonds of USD500 million due in January 2022 and USD1 billion due in July 2022.”

Fitch Downgrades Sri Lanka’s Long-Term Foreign-Currency IDR to ‘CC’

Fri 17 Dec, 2021 – 11:31 AM ET

Fitch Ratings – Hong Kong – 17 Dec 2021: Fitch Ratings has downgraded Sri Lanka’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to ‘CC’, from ‘CCC’. Fitch typically does not assign Outlooks or apply modifiers for sovereigns with a rating of ‘CCC’ or below.

A full list of rating actions is at the end of this rating action commentary.

Key Rating Drivers

The downgrade reflects our view of an increased probability of a default event in coming months in light of Sri Lanka’s worsening external liquidity position, underscored by a drop in foreign-exchange reserves set against high external debt payments and limited financing inflows. The severity of financial stress is illustrated by elevated government-bond yields and downward pressure on the currency.

We have affirmed the Long-Term Local-Currency IDR at ‘CCC’, as authorities have continued access to domestic financing, despite high and still-rising government debt and an elevated debt service burden.

Sri Lanka’s foreign-exchange reserves have declined much faster than we expected at our last review, owing to a combination of a higher import bill and foreign-currency intervention by the Central Bank of Sri Lanka.

Foreign exchange reserves have declined by about USD2 billion since August, falling to USD1.6 billion at end-November, equivalent to less than one month of current external payments (CXP).

This represents a drop in foreign-currency reserves of about USD 4 billion since end-2020.

We believe it will be difficult for the government to meet its external debt obligations in 2022 and 2023 in the absence of new external financing sources. Obligations include two international sovereign bonds of USD500 million due in January 2022 and USD1 billion due in July 2022.

The government also faces foreign-currency debt service payments, including principal and interest, of USD6.9 billion in 2022, equivalent to nearly 430% of official gross international reserves as of November 2021.

Cumulative foreign-currency debt service, including interest and principal, amounts to about USD26 billion from 2022 through to 2026.

The timing and availability of external resources is unclear and may not be readily available for debt service. The central bank published a six-month roadmap in October that outlined plans to raise additional external borrowings through a number of channels, including bilateral and multilateral sources, syndicated loans and through the monetisation of under-utilised assets in 1Q22.

A drawdown on the existing currency swap facility with the People’s Bank of China (PBOC) could boost reserves by up to CNY10 billion (USD1.5 billion equivalent). However, even with resources from the swap facility, foreign exchange reserves are likely to remain under pressure, in our view.

Additional sources of financing could come from an economic support package from India, which contains a swap facility under the South Asian Association for Regional Cooperation currency framework of USD400 million, a swap facility with the Qatar Central Bank, remittances securitisation and a revolving credit facility with the Bank of China Limited (A/Stable).

However, even if all these sources are secured, we believe it will be challenging for the government to maintain sufficient external liquidity to allow for uninterrupted debt servicing in 2022.

Press reports suggest the government may be contemplating IMF financing; an IMF programme would unlock multilateral financing, but we believe the Fund could well suggest restructuring to bring about debt sustainability.

Sri Lanka’s external finances are further challenged by a persistent current account deficit, resulting in downward pressure on the exchange rate. We estimate that the deficit widened to about 5.7% of GDP in 2021 and expect it to remain at about 4.0% in 2022, before falling to 2.1% by 2023.

A plunge in remittances, a weak tourism recovery and rising imports have contributed to the wider current account deficit. Travel and tourism, an important economic driver, has been hit hard by the COVID-19 pandemic and the outlook for a recovery remains uncertain given the emergence of new highly transmissible virus variants.

The Sri Lankan rupee/US dollar spot exchange rate depreciated by 7%-8% since end-2020, and the central bank intervened to support the currency, exacerbating the decline in reserves.

Wide fiscal deficits continue to worsen the outlook for debt sustainability. The 2021 fiscal deficit target of 8.9% of GDP was missed by a wide margin, and we expect the government deficit to widen to about 11.5% of GDP in 2022.

We believe 2022 revenue targets are optimistic, especially in light of our expectation of weak economic activity. We forecast general government debt to reach about 110% of GDP by 2022, and to keep rising under our baseline, absent major fiscal consolidation.

We also believe it is unlikely that Sri Lanka will meet its 2025 government debt reduction target of about 89% of GDP or narrow the fiscal deficit to 4.8% of GDP. Rising interest payments are a major driver of the widening deficit and the interest/revenue ratio of at about 95.0% is well above the peer median of 11.3%.

Sri Lanka’s economic performance is likely to weaken in 2022, as the challenging external position and exchange-rate pressure will have knock-on effects on economic activity. Foreign currency shortages in 2021 hampered food and fuel imports, and continued external liquidity stress could worsen supply shortages, hurting economic activity.

We expect growth to slow to 2.0% in 2022, from an estimated 3.6% in 2021, before recovering to 4.3% in 2023 partly due to base effects and a gradual easing of domestic pressures, although downside risks to our forecasts remain. Sri Lanka’s economy was expanding at a modest pace prior to the pandemic, which led real GDP to contract by 3.6% in 2020.

ESG – Governance: Sri Lanka has an ESG Relevance Score of ‘5’ for Political Stability and Rights. This reflects the high weight that the World Bank Governance Indicators (WBGI) have in our proprietary Sovereign Rating Model. Sri Lanka has a medium WBGI ranking at the 47th percentile, reflecting a recent record of peaceful political transitions and a moderate level of rights for participation in the political process. As Sri Lanka has a percentile rank below 50 for the governance indicator, this has a negative impact on the credit profile.

ESG – Governance: Sri Lanka has an ESG Relevance Score of ‘5[+]’ for the Rule of Law, Institutional and Regulatory Quality and Control of Corruption. This reflects the high weight that the WBGI has in our proprietary Sovereign Rating Model. Sri Lanka has a medium WBGI ranking at the 53rd percentile, reflecting moderate institutional capacity, established rule of law and a moderate level of corruption. As Sri Lanka has a percentile rank above 50 for the respective governance indicators, this has a positive impact on the credit profile.

Sri Lanka has an ESG Relevance Score of ‘5’ for Creditor Rights, as willingness to service and repay debt is relevant to the rating and is a rating driver for Sri Lanka, as for all sovereigns. Given the increasing possibility of default reflected in the CC rating, this has a negative impact on the credit profile.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to negative rating action/downgrade:

– Failure to service bonded debt obligations within grace periods stipulated in relevant documentation, or unilateral declaration of a debt moratorium

– Launch of a formal debt renegotiation process by authorities or the start of a process that Fitch deems to constitute a default or default-like event
Factors that could, individually or collectively, lead to positive rating action/upgrade:

-External Finances: Improved external liquidity, supported by higher non-debt inflows or lower external sovereign refinancing risk from an enhanced liability profile that allows for smooth servicing of liabilities

– Public Finances: Implementation of a credible medium-term fiscal consolidation strategy that supports a sustained decline in the general government debt/GDP ratio, increasing financing options and reducing the probability of default

– Structural: Improved policy coherence and credibility, leading to more sustainable public and external finances and a reduction in the risk of debt distress

Sovereign Rating Model (SRM) and Qualitative Overlay (QO)

In accordance with its rating criteria, Fitch’s has not utilised the SRM or QO to explain the ratings in this instance. Ratings of ‘CCC+’ and below are instead guided by the rating definitions.
Fitch’s SRM is the agency’s proprietary multiple regression rating model that employs 18 variables based on three-year centred averages, including one year of forecasts, to produce a score equivalent to a Long-Term Foreign-Currency IDR. Fitch’s QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable and/or not fully reflected in the SRM.
Best/Worst Case Rating Scenario

Posted in Uncategorized

Why is Sri Lanka being downgraded by rating agencies?

The opposition claims Sri Lanka has been downgraded once again by international rating agencies since the government has ignored the advice of economic experts.

Speaking to NewsRadio, Parliamentarian Harsh de Silva said the government has not provided any alternative as Sri Lanka is heading towards a debt default.

MP de Silva said the government initially ignored the expert advice to obtain vaccine doses and promoted a syrup instead which resulted in the death of many Sri Lankans.

He said the country’s farming industry suffered after the government took an arbitrary decision to ban the use of chemical fertiliser.

He said during both occasions, the government ignored the advice of experts.

MP Harsh de Silva said the government has claimed that it has a home-grown solution for the economic troubles as well.

The MP said Sri Lanka’s economy will endure the same fate as the coronavirus crisis and the farming issue.

He said he personally believes it is too late and the government is likely to default on its debt either in January, March or July.

MP de Silva said the Governor of the Central Bank, Ajith Nivard Cabral as a Minister if July claimed Sri Lanka’s foreign reserves will increase to US$ 7 billion by December.

He said however now Sri Lanka does not even have US$ 1 billion in reserves.

Parliamentarian Harsh de Silva noted that rating agencies have now issued red warnings since they have observed that the government will struggle to honour its debt repayments while running the economy.

Posted in Uncategorized

Basil to post of PM upon returning from America!

It is rumoured that Finance Minister Basil Rajapaksa will take up the post of Prime Minister upon his return from America.

When inquired from two prominent government members regarding this, they denied it.

However, there have been recent media reports that the current Prime Minister Mahinda Rajapaksa will step down in 2022.

Basil Rajapaksa who was the head of the Presidential Task Force on Poverty Alleviation, was sworn in as a Member of Parliament and was appointed as the Minister of Finance upon returning to Sri Lanka from the US last May.

It is reported however, that many members of the Rajapaksa family, including the President, are upset with Basil for his attempts to protect P.B. Jayasundera.

Posted in Uncategorized

NPPO Issued Non-Compliance Notice to China

Ceylon Today reliably learns that China’s Qingdao Seawin Biotech company has not produced the vital Protection of Phytosanitary Certificate to Sri Lanka and that it is the company’s mistake and not the fault of the two local fertiliser companies that opened the Letter of Credit, nor the National Plant Quarantine Services (NPQS) of the Department of Agriculture that issued a certification that the samples were contaminated.

According to a senior Ministry of Agriculture official, who requested anonymity, it is in the best interests of bilateral ties between Sri Lanka and China, as the Attorney General last week advised to resolve the dispute on trade terms acceptable to both parties.

He added that the shipment from China was deemed an illegal importation due to the lack of a valuable Protection of Phytosanitary Certificate (PPC) from the Chinese company.

The NPQS should have received the PSC of the Chinese and that has nothing to do with the LC the fertiliser companies issued as they don’t combine according, to the sources.

As a result, the National Plant Protection Organization (NPPO), which lacks the legal authority to inspect it, issued a non-compliance notice to the Chinese NPPO based on the results of the sample tests, the official revealed.

The Sri Lankan NPPO fulfilled all legal obligations under the IPPC, but the Chinese party’s NPPO was not involved in this matter because they have thorough knowledge of the IPPC’s legal obligations, according to the official.

“As a result, the supplier and Sri Lankan agent used illegal channels to resolve this dispute, relying on Chinese embassy interference in this incident. This is a violation of the IPPC, and they endanger our sovereignty,” he emphasised.

Because China is a ‘friend’ of Sri Lanka, the AG’s department has agreed to settle the matter amicably before the Court gives a decision.

Under the tender process’s compliance clause, the Chinese were chosen to supply the 20,000 tons of organic fertiliser (first batch of 99,00MT), with the lot to be sent in five consignments, the first of which sparked diplomatic wrangling between Sri Lanka and China.

The Food and Agriculture Organisation of the United Nations states that ‘all parties of the IPPC must respect the sovereignty of each country according to the Article VII which says a) prescribe and adopt phystosanitary measures concerning the importation of plants, plant products and other regulated articles, including, for example, inspection, prohibition on importation and treatment;

b) refuse entry or detain, or require treatment, destruction or removal from the territory of the contacting party of plants, plant products and other regulated articles or consignments thereof, that do not comply with the phytosanitary measures prescribed or adopted under the subparagraph(a); c) prohibit or restrict the movement of regulated pests into their territories;

d) prohibit or restrict the movement of biological control agents and other organisms.

It is purely a mistake by the Qingdao Fertiliser company for NOT obtaining the Permit for shipment too, he said. “The contaminate supply faulted the Letter of Credit (LC) payment and there is no loss for Sri Lanka as the next consignments are agreed upon and they will also be subjected to sample testing,” the official noted.

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Pakistan Navy ship PNS Tughril departs Sri Lanka after successful naval exercise

The Pakistan Navy Ship (PNS) Tughril which arrived at the port of Colombo on an official visit on 13th December 2021, has departed after a successful naval exercise with Sri Lanka Navy on 16th December.

Concluding a four-day official visit, PNS Tughril conducted the naval exercise with Sri Lanka Naval Ship, SLNS Sindurala off the western coast, adhering to COVID-19 protocols.

As such the two ships conducted preparation drills for Replenishment at Sea (RAS) and maneuvering exercises in seas off Colombo.

The exercise of this nature will pave the way for exchanging best practices and experiences of the two navies, to hone each other’s capacities in the event of responding to common maritime challenges, the Navy Media Unit said.

Intermediate option for crisis management: Indian backstop -By Dr.Dayan Jayatilleka

The Government is in a tight time-crunch. That’s not only because of repayment of debt. That’s because the more explosive time-bomb is the harvest.

If the inevitable peasant unrest which will spill-over by Sinhala-Tamil New Year is suppressed by sending in the STF or 1 Corps by the President or Security Chiefs, there will be no social and political comeback for the Rajapaksas from that. The SLPP and the ruling coalition, starting with the PM, must beseech all the deities of their acquaintance that a military response to people’s legitimate protests is avoided.

Furthermore, a Sinhala Army tasked with suppressing the Sinhala peasantry will not socially survive that traumatic coercive contact; it will begin to disintegrate.

The crisis must be managed urgently, before that time-bomb explodes. There is an intermediate option other than going to the IMF right now, which can either be an alternative to the IMF option or can place Sri Lanka on a better footing before it gets to the IMF some way down the road. I call it an India-led Asian Marshall Plan for Sri Lanka. However, I doubt that the rational alternative will be speedily activated, and therefore we may have to be carried on a stretcher into the IMF “ICU”.

Indian-led Asian Marshall Plan

A version of the option is in play and is well known, but if handled wrongly, can blowback on the Government. It is the road not taken, and that’s the road to Delhi.

That road was not taken for two reasons. The first reason was that the Chinese had more cash and its system was such that it could be injected rapidly into the necessary post-war infrastructure investment. The second reason was that the Indians would raise questions about the political and strategic IOUs we hadn’t paid, chiefly the promise made and repeated at the highest level, to fully implement the 13th Amendment.

MR was willing to make good on the promise and we can date exactly until when. In the first flush of victory, President MR’s team based at Temple Trees published a magazine, courtesy of Sri Lanka Telecom, called TARGET. The strap read ‘Sri Lanka: The way forward’. The cover story of the June 2009 issue was ‘Declaring the end of the Humanitarian Operations’. The cover photo is of President Mahinda Rajapaksa shaking hands with his brother, the Secretary/Defence Gotabaya Rajapaksa. A story on an inside is captioned ‘Indian delegation calls on the President’. The final paragraphs of that story read as follows:

“Both sides also emphasised the urgent necessity of arriving at a lasting political settlement in Sri Lanka. To this, the Government of Sri Lanka indicated that it will proceed with implementation of the 13th Amendment. Further, the Government of Sri Lanka also intends to begin a broader dialogue with all parties, including the Tamil parties, in the new circumstances, for further enhancement of political arrangements to bring about lasting peace and reconciliation in Sri Lanka.” (p 32)

This was of course the famous 21 May 2009 Indo-Lanka Joint Communique. The story featuring in that magazine in June 2009 shows it had been internalised in the system, at least by the Presidency. That was the line we took in Geneva.

June 2009 was the last it was heard of. That policy discourse soon joined the ranks of the disappeared. Since that was the president’s policy as far as I knew, and I advocated adherence to the promises President MR had made internationally, my removal from Geneva in July 2009 was probably both symptomatic and symbolic. A turn had been made, as far as I could tell, under pressure from the other figure on that cover photograph, who was now articulating the hawkish anti-devolution, anti-Indian perspective of the Defence establishment.

The Rajapaksas went all the way down the Beijing Road, abandoning the balanced ‘India plus China’ formula of the Geneva UNHRC 2007-2009 model. Now they are running out of cash and is running back to Delhi.

Delhi does seem willing to help:

https://m.economictimes.com/news/india/india-working-on-urgent-economic-package-to-help-lanka-tide-over-crisis/articleshow/88213984.cms

India is planning massive bailout package to permanently snatch Sri Lanka out of Chinese hands (tfipost.com)

There are two problems though. Firstly, the scale is inadequate. I would urge an Indian-led Asian Marshall Plan for Sri Lanka. This means, in effect, India, Japan, China, South Korea, ASEAN, i.e., India + ‘ASEAN Plus 3’ (as it is known).

Secondly, even the package in its current size, if it entails (as it probably does) the give-away of strategic national assets, there will understandably be stiff resistance on the part of the trade unions, the JVP and FSP, governmental factions, public opinion and the media. India will become the new China, which has become the old (1987) India as a target of Sinhala patriotism.

Swap, don’t sell-out

This problem has a solution, and MR and BR may see it, but will President GR permit it?

The secret of the solution lies in the nature of the swap.

Consider what India wants from Sri Lanka, then assign a domestic political price-tag to each item on the Indian wish-list.

My guess is that the most expensive items politically would involve Sri Lankan economic space. Paradoxically, the least expensive item politically, would be the political item on the list.

I don’t see trade unions hitting the streets if the Government proceeds to fully implement the 13th Amendment and hold Provincial Council Elections within a compressed time-frame. Furthermore, I expect very insignificant dissent within the government on that issue. However, if there is an economic sell-out, the trade union and intra-governmental unrest will be of a de-stabilising sort.

Logically therefore, the cheapest and safest route to go, is to use the old 13th Amendment credit card, but since this is a BJP government in Delhi and not the old Congress which enabled the Rajapaksas to get clean away without making good on its wartime pledge, the ruling clan will have to implement 13A and hold elections, while incorporating in its entirety the existing 13A in the new constitutional draft, before Indians cough up the cash in the desired quantities. Implementation of 13A may be linked to each tranche.

India may want an economic pay-off as well as implementation of 13A, but even that is more favourable to the Government than a wholly economic price, because 13A upfront can shave-off quite a bit from the economic bill.

It will be quite appropriate if Minister Basil Rajapaksa is the one to do this, because it was he who successfully neutralised the wartime Indian High Commissioner in Colombo who stayed till almost the end of 2009, returning without the fulfilment of a single pledge by the Rajapaksas. I gather that BR pulled the same stunt that J.R. Jayewardene did on (and through) Romesh Bhandari, but BR will find that Dr. Jaishankar and Hardeep Puri know all the Sri Lankan moves.

Multi-alignment/Pluri-alignment

As options go the Rajapaksas are caught between the West, the UNHRC, the IMF, and Delhi. Logically the least bad option is Delhi, not only because accountability is not as high on the agenda as in the West, a devolution swap can cut the price tag, and a deal with Delhi can open doors in Tokyo, Seoul and many other places.

Lee Kuan Yew said Singapore should occupy the spot in the shade where the Chinese and Indian branches touch. Personally, I would extend that and prefer Sri Lanka to be at the point of intersection of as many branches of as many trees as possible: I term it Multi-alignment or Pluri-alignment.

However, if Colombo wants to go the distance and come in under Delhi’s umbrella instead, there are benefits to be had. Colombo’s road to Washington and London, runs through Delhi. India can put in a word with the Quad.

Most pressing of all, a grand bargain with India, arrived at swiftly, would yield two strategic benefits:

(1) India may support a softer landing for Sri Lanka at the critical UNHRC session of March 2022 at which High Commissioner Bachelet presents her written report and pulls the trigger on international prosecution

(2) India can be an important player in any consortium of creditors in a debt re-scheduling for Sri Lanka and give the Sri Lankan economy some cushioning before it sits down with the IMF.

Though this is a rational and viable option for crisis-management, there are two major problems, both located in the realm of extreme ideologies and mindsets. I refer to Sinhala and Tamil ultranationalism(s).

In that he is dualistic, President Gotabaya Rajapaksa is the least hawkish of his crew. His hardcore backers from Milinda Moragoda and Rohan Gunaratne to Sarath Weerasekara and Ven. Dr. Medagoda Abeyatissa would prefer to pay a stiff economic price to India whatever the attendant public opinion cost than implement the 13th Amendment and reduce the economic and consequent public opinion cost. Some would prefer to pay any price to China, no price at all to India, and use the crisis to send in the military to do a Myanmar.

Basil Rajapaksa has his own chauvinist supporters (Dr. Channa Jayasumana, Mahinda Pathirana) and there are lone-wolf supremacists (Gevindu Cumaratunga). Overall, however, the balance in the Pohottuwa and SLFP ranks favour retention and reactivation of the 13th Amendment than its abolition or amputation.

Today’s Parliament potentially has broader support (across Government and Opposition benches) for the implementation of the 13th Amendment than any other parliament. It should therefore be possible for Sri Lanka to make a ‘great swap’ with India: Provincial Councils up and running with the undiluted powers of the 13th Amendment and the retention of the language of the Accord and the 13th Amendment in any new constitutional draft, in exchange for a financial and economic safety-net.

This is a rare moment in which, due to the exigencies of the economic emergency, a win-win solution is possible for the Sinhala majority and the Tamil and Muslim minorities. The citizenry as a whole would have some safety-net or hedge against plummeting material standards of living. As the numerical majority the Sinhalese are being hit hard by the crisis in larger numbers. The system as a whole would be safer if the edge were taken off the crisis, because the Sinhala working people, especially the peasantry could be driven by despair to revolt.

Sinhala sensibilities will not be affected by a grand swap of the implementation of the 13th Amendment in exchange for an Indian economic backstop, because that amendment has been part of the Constitution since 1987 and there is no shock therapy involved unlike in the case of Ranil Wickremesinghe’s CFA or Chandrika’s PTOMS.

This is a rare moment in which, due to the exigencies of the economic emergency, a win-win solution is possible for the Sinhala majority and the Tamil and Muslim minorities. The citizenry as a whole would have some safety-net or hedge against plummeting material standards of living. As the numerical majority the Sinhalese are being hit hard by the crisis in larger numbers. The system as a whole would be safer if the edge were taken off the crisis, because the Sinhala working people, especially the peasantry could be driven by despair to revolt. Sinhala sensibilities will not be affected by a grand swap of the implementation of the 13th Amendment in exchange for an Indian economic backstop, because that amendment has been part of the Constitution since 1987 and there is no shock therapy involved unlike in the case of Ranil Wickremesinghe’s CFA or Chandrika’s PTOMS

Perimeter and parameters

The obstacles will come from two sources, firstly, the handful of Sinhala hawks in power who think that:

(a) A new Constitution which formally redefines Sri Lanka a Sinhala-Buddhist state and abolishes the 13th Amendment, introducing minimalist devolution instead, is the only (polarising) move by which to make a political comeback and

(b) The crisis is the best time to introduce and gradually impose military rule.

The second obstacle comes from the camp of Tamil nationalism. The Tamil nationalist leadership has been so unrealistic in its politics that the issue of devolution and the Tamil ethnic issue which was the heart of the Indo-Sri Lanka accord of 1987 has shifted to the periphery of the Indo-Lanka equation, and instead, the strategic and economic issues which comprised the Annexures and Exchange of Letters (hurriedly) affixed to the Accord, have arrived at centre-stage.

This has of course, been the GR-Moragoda strategy all along: the Israeli model of letting the Tamils tie themselves up in political knots while creating/altering facts on the ground and rolling up any quasi-autonomous Tamil political space.

Correspondingly, an abiding failure of Indian foreign policy in Sri Lanka has been its inability to get the Tamil nationalists within the parameters of—or which are congruent with—India’s vital interests in Sri Lanka. These interests are to erect a buffer against Chinese power-projection within a safe radius of India’s southern flank by reactivating the Northern and Eastern Provincial Councils. The retention and reactivation of the 13th Amendment cannot await ‘federalism’, ‘internal self-determination,’ etc. Even those favourite tropes “13 Plus”, “building on” or “going beyond” the 13th Amendment require the continued existence of the 13th Amendment and its institutional incarnation the Provincial Councils.

Ministers Jaishankar and Puri are cerebral Realists who know that a Tamil insurgency in the 1980s, India’s tough diplomacy, Norway’s peace-bubbles and Prabhakaran’s full-scale war, couldn’t secure anything beyond the 13th Amendment. They and everybody else also know that the UNP-TNA (Ranil-Sumanthiran) tango did not produce a new, post-unitary Constitution but a post-UNP electoral landscape and a deadlocked Provincial Council system just when the Chinese were extending influence on and through Sri Lanka. India’s strategic interests were rendered vulnerable to the vicissitudes of southern politics and external alignments as never before because the TNA and UNP had in effect, deactivated the Indo-Sri Lanka accord and spiked the 13th Amendment by their constitutional and legislative adventurism.

Offering strategic assurance by restoring the buffer, the Northern and Eastern Provincial Councils with the full powers of the 13th Amendment would be an indispensable part of the Great Swap or Grand Bargain in exchange for economic insurance and the resultant prevention of a mass uprising due to deprivation and despair.

Tamil trajectory

Sri Lanka’s Tamil and Muslim political parties and leaders have caucused recently and are in the process of drafting a common platform in the face of a perceived effort on the part of the regime to eliminate the 13th Amendment.

MA Sumanthiran has criticised the effort in public (in Chunnakam) as an effort to limit the Tamil cause, rights and aspirations to the 13th Amendment.

The choice today is losing the 13th Amendment or saving it.

Sumanthiran has reminded his fellow parliamentarians that the Tamil question is no longer an internal one. True, but in its internationalisation there is no more important reality than India. Tamil politicians must realise that whoever they talk to in Washington DC, no one there is going to make a move on India’s southern perimeter outside of India’s policy parameters.

Sinhala politicians and top military brass must know the same about Russia: it won’t make a move on India’s doorstep if it thinks it may cross an Indian red line.

If the ITAK/TNA proceeds on its path of political excess i.e., of ideological demand that far exceeds political supply, it will find that the Tamil question has been traded-in for economic and strategic real-estate and left to the tender mercies of the Gotabaya Government to resolve unilaterally.

If President Gotabaya Rajapaksa obdurately chooses to dismantle the 13th Amendment unilaterally in whole or in part, and for their part the Tamil parties have defended the 13th Amendment taking a realistic stand, then the regime’s hawks will find new fronts opening or old ones newly re-opening on the island’s vulnerable periphery and in the external arena, beginning with the neighbourhood and extending through Geneva, westwards.

“This is just the beginning”, says Chinese Ambassador as Jaffna visit ends

The Chinese Ambassador to Sri Lanka made an open-ended closing remark to News 1st as he concluded his three-day visit this afternoon.

When asked about the end of his visit by News 1st, he said that although this was the end of his visit, it was also a beginning.

The beginning of what remains unanswered.

‘This is the End, but also the Beginning’, is what the Chinese Ambassador to Sri Lanka said following a historic visit to Adam’s Bridge in the North of Sri Lanka on Friday (17).

Ambassador Qi Zhenhong was escorted to Adam’s Bridge by the Sri Lanka Navy and troops by the Sri Lanka Army.

Adam’s Bridge, also called Rama’s Bridge, is a chain of shoals, between the islands of Mannar, near northwestern Sri Lanka, and Rāmeswaram, off the southeastern coast of India.

The bridge is 30 miles (48 km) long and separates the Gulf of Mannar (southwest) from the Palk Strait (northeast).

Ambassador Qi Zhenhong was visiting the Mannar as part of his goodwill tour to the North of the Island.

The Ambassador visited the 3rd shoal on Adam’s Bridge which is located some 17 nautical miles off Sri Lanka’s coast.

According to News 1st correspondent Senitha Senanayake, the Ambassador was escorted close to the 3rd shoal by the Sri Lanka Navy’s Inshore Patrol Craft and he was then transferred to a small battle boat to visit the 3rd shoal, which can be seen from India’s Rameswaram.

The visit to Mannar comes weeks after a delegation from India’s Adani Group visited Mannar to inspect a location for their proposed USD 1 Bn investment for a 1000 MW renewable energy project,

Notably, the Chinese Ambassador was given special military protection during his three-day visit to the North of Sri Lanka.

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