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Sri Lanka’s International Monetary Fund bailout plan could be a turning point in its worst economic crisis, but far-from-stable politics and a need to get debt relief from competing powers China, India and Japan means some of the hardest work is still to come.

President Ranil Wickremesinghe knows a lot of circles will need to be squared for IMF’s $2.9 billion lifeline to become a reality.

Spending cuts, tax hikes and debt write-downs are a common formula for bankrupt countries, but crisis veterans say there are some uniquely difficult elements here.

An impoverished population that forced former President Gotabaya Rajapaksa to flee in July still needs to accept Wickremesinghe, seen by many as of the same political ilk and a man who faces a bristling opposition.

The country’s borrowings are so complex that estimates of the total range anywhere from $85 billion to well over $100 billion. To get it to a sustainable level Beijing, New Delhi, Tokyo, multilaterals and global asset managers must all swallow losses.

“This one of the biggest messes I’ve ever seen,” said Renaissance Capital’s chief economist Charles Robertson who has watched emerging market crises unfold for decades.

“The government destroyed its revenue base with unsustainable tax cuts, it tried to hold the currency when tourism revenues collapsed and now it has no reserves in the bank and a population facing widespread poverty.”

Estimates from the United Nations say the crisis has left more than a quarter of Sri Lanka’s 22 million population struggling to secure adequate, nutritious food.

The IMF’s 4-year rescues plan provisionally agreed last week demands serious fiscal repair work and more autonomy for the central bank, which was ordered to frantically print money under Rajapaksa.

To hit the IMF’s target of lifting its primary budget surplus to 2.4% by 2025, Sri Lanka would get its economy growing by around 6%, something not achieved for about five years. This year it expected to contract at least 8%.

COURTING ASIA’S HEAVYWEIGHTS

Just as challenging, the IMF wants Colombo to secure “financing assurances” – Fund speak for debt relief and new loans – from regional heavyweights China, Japan and India who have long jostled for influence.

The World Bank estimates Beijing’s lending, which has funded costly projects from ports to stadium, adds up to $7 billion, or 12% of Sri Lanka’s $63 billion external debt. Japan has provided another $3.5 billion while India has given around $1 billion.

Without the “assurances” from those countries, the Fund’s money cannot flow, IMF Mission Chief Peter Breuer stressed.

“Finding creative ways to have a collaborative platform to advance these debt restructuring discussions is very useful,” Breuer told Reuters. “How debt relief is distributed amongst creditors…that is something we don’t insert ourselves into.”

UNCOMMON FRAMEWORK?

The crisis has culminated in Sri Lanka’s starkest crisis first debt default since independence from Britain in 1948. The rupee almost halved in value since the central bank abandoned its peg in March, basic goods have become scarce and inflation is now running at 64%.

Economists say the restructuring could have been far simpler if the country had been part of the G20 “Common Framework” plan – a programme set up at the height of COVID-19 to help debt-crippled countries. At the time, Sri Lanka was classified as a middle-income country and did not qualify.

China automatically provides debt relief alongside “Paris Club” countries and private sector creditors under that arrangement. Colombo’s absence from the setup means an alternative is needed.

Step up Japan – which is now pushing for China, India and others to join talks. read more Beijing, which did not respond to a request for comment, has not yet signaled if it will, although there are hopes its lead role in Zambia’s restructuring may encourage it to do so. India has not commented so far.

Pessimists worry though that if China doesn’t take a writedown others won’t either, including global asset managers who hold nearly $20 billion of Sri Lanka’s international bonds.

“China is the largest creditor country. Without its participation, any scheme won’t succeed,” a Japanese government official who requested anonymity said.

DOOM LOOP

Another problem is what to do about the country’s $50.5 billion of “local” debt mostly dominated in rupee and largely held as capital by commercial banks and local pension funds.

Sanjeewa Fernando, Head of Research at CT CLSA Securities said it won’t be a straightforward decision, especially with elections looming in 2024.

“From a realistic point of view, banks are preparing for a 40% haircut (on Sri Lanka’s international bonds and ‘development’ bonds which are also dominated in dollars) as a base case scenario,” he said.

Even that might not be enough though, given the IMF wants the debt-to-GDP ratio slashed to under 100% from 140% currently.

That would put domestic debt in play but David Beers, a Senior Fellow at the London-based Center for Financial Stability who has compiled a global database of sovereign defaults said there are always tradeoffs.

“If the domestic debt is predominately held by domestic banks and you get haircuts, then that eats into their capital,” he said, adding that they might then require bailouts which add to the government’s costs again.

Reuters (Source)

Sri Lanka’s ousted President Gotabaya Rajapaksa, who returned home after seven weeks in exile following protests over economic hardships, could face legal action over forced disappearances of activists now that he has been stripped of constitutional immunity, a lawyer said.

Rajapaksa flew to Colombo around midnight Friday from Thailand and was escorted under military guard to his new home in the capital.

He has no pending court cases because he was protected by constitutional immunity as president. A corruption case against him during his time as a top defense official was withdrawn soon after he was elected in 2019.

However, Rajapaksa will be served a summons next week to appear at the Supreme Court, where his immunity from testifying on the forced disappearance of two young political activists is challenged, said lawyer Nuwan Bopage, who represents the victims’ families. He said Rajapaksa fled the country when he was about to be served a summons in July.

The disappearances took place 12 years ago soon after the end of the country’s long civil war when Rajapaksa was a powerful official at the Defense Ministry under the presidency of his older brother.

At the time, Rajapaksa was accused of overseeing abduction squads that whisked away rebel suspects, critical journalists and activists, many of them never to be seen again. He has previously denied any wrongdoing.

Rajapaksa escaped from his official residence when tens of thousands of people, angry over economic hardships when the country slipped into bankruptcy and faced unprecedented shortages of basic supplies, stormed the building on July 9. Days later, he, his wife and two bodyguards flew about a military plane to the Maldives. A day later he went to Singapore, and later Thailand.

Sri Lanka has run out of dollars for imports of key supplies, causing an acute shortage of essentials like food items, fuel and critical medicine.

The foreign currency shortage has led the country to default on its foreign loans. Sri Lanka’s total foreign debt exceeds $ 51 billion of which $ 28 billion must be repaid by 2027.

The International Monetary Fund on Thursday agreed to provide Sri Lanka $ 2.9 billion over four years, subject to management approval that will come only if the island nation’s creditors give assurances on debt restructuring.

Economic difficulties led to monthslong street protests, which eventually led to the collapse of the once-powerful Rajapaksa family that had controlled the affairs of the country for the most part of the last two decades. Before Rajapaksa resigned after fleeing, his older brother stepped down as prime minister and three other close family members quit their Cabinet positions.

President Ranil Wickremesinghe, who took over from Rajapaksa, has since cracked down on protests and dismantled their main camp opposite the president’s office.

Some protesters said they were not opposed to his return as long as he faces justice.

“Whether he is president or not, he is a citizen of Sri Lanka and he has the right to live in this country,” said Wijaya Nanda Chandradeva, a retired government employee who had voted for Rajapaksa and then participated in protests to oust him. He said Rajapaksa should be given necessary protection if there is a threat to his safety.

“I reject him because we elected him and he proved himself to be unsuitable,” said Chandradeva.

Bhavani Fonseka of the Center for Policy Alternatives, an independent think tank, said although Rajapaska is not going to be seen favorably, “the anger we saw in July has diminished. But there are still many questions about his role in the economic crisis and the call for accountability is still there.”

(Courtesy AP)

Some provisions of the draft of the 22nd Amendment to the Constitution are inconsistent with the Constitution, Speaker of Parliament Mahinda Yapa Abeywardena said today announcing the Supreme Court’s determination to the House.

Accordingly, the Supreme Court has arrived at the conclusion that the draft constitutional amendment should be passed by a special majority and a referendum or the clauses in question should be amended.

The draft of the 22nd Amendment to the Constitution was challenged in the Supreme Court in terms of Article 120(1) (1) of the Constitution.

The Speaker’s announcement is as follows:

I wish to announce to Parliament that I have received the determination of the Supreme Court in respect of the Bill entitled “Twenty Second Amendment to the Constitution” which was challenged in the Supreme Court in terms of Article 121(1) of the Constitution.

On an overall consideration of the provisions of the Bill, the Supreme Court has made the following Determination:

1. The Supreme Court states that the Bill complies with the provisions of the Article 82(1) of the Constitution and requires to be passed by the special majority specified in Article 82(5) of the Constitution.

2. Clause 2 of the Bill contains provisions inconsistent with Article 3 read together with Article 4(b) of the Constitution and as such may be enacted only by the special majority required by Article 82(5) and upon being approved by the People at a Referendum by virtue of Article 83. However, the necessity for a Referendum shall cease if the proposed Articles 41A(6) and 41B(4) in Clause 2 are suitably amended to remove the deeming provision set out therein.

3. Clause 3 of the Bill contains provisions inconsistent with Article 3 read together with Article 4(b) of the Constitution and as such may be enacted only by the special majority required by Article 82(5) and upon being approved by the People at a Referendum by virtue of Article 83. However, the necessity for a Referendum shall cease:

(a) If the proposed Article 44(2), the proviso to Article 44(3), Articles 45(1), 46(1), 47(3)(a), 48(3) and 50 in Clause 3 are suitably amended by deleting the reference to the President acting on the advice of the Prime Minister and replacing instead with the President acting in consultation with the Prime Minister;

(b) If the provisions of Article 47(2)(a) are restored in the proposed Article 47(2) in Clause 3. I order that the Determination of the Supreme Court be printed in the Official Report of today’s proceedings of the House.

Minister of Justice, Prisons Affairs and Constitutional Reforms Wijeyadasa, Rajapakshe says the government will proceed to enact the 22nd Amendment to the Constitution avoiding a referendum.

However, the enactment of the constitutional amendment will adhere to the proposed variations in the determination by the Supreme Court, the lawmaker said further.

Announcing the Supreme Court’s determination on the draft constitutional amendment in the parliament this morning, Speaker Mahinda Yapa Abeywardena stated that some provisions of the Bill are inconsistent with the Constitution.

The Supreme Court concluded that the draft constitutional amendment should be passed by a special majority and a referendum or the clauses in question should be amended.

On an overall consideration of the provisions of the Bill, the Supreme Court made the following determination:

1. The Supreme Court states that the Bill complies with the provisions of the Article 82(1) of the Constitution and requires to be passed by the special majority specified in Article 82(5) of the Constitution.

2. Clause 2 of the Bill contains provisions inconsistent with Article 3 read together with Article 4(b) of the Constitution and as such may be enacted only by the special majority required by Article 82(5) and upon being approved by the People at a Referendum by virtue of Article 83. However, the necessity for a Referendum shall cease if the proposed Articles 41A(6) and 41B(4) in Clause 2 are suitably amended to remove the deeming provision set out therein.

3. Clause 3 of the Bill contains provisions inconsistent with Article 3 read together with Article 4(b) of the Constitution and as such may be enacted only by the special majority required by Article 82(5) and upon being approved by the People at a Referendum by virtue of Article 83. However, the necessity for a Referendum shall cease:

(a) If the proposed Article 44(2), the proviso to Article 44(3), Articles 45(1), 46(1), 47(3)(a), 48(3) and 50 in Clause 3 are suitably amended by deleting the reference to the President acting on the advice of the Prime Minister and replacing instead with the President acting in consultation with the Prime Minister;

(b) If the provisions of Article 47(2)(a) are restored in the proposed Article 47(2) in Clause 3. I order that the Determination of the Supreme Court be printed in the Official Report of today’s proceedings of the House.

Sri Lanka is contending with a high risk of default on its local currency bonds as it seeks to reduce debt, key to winning financing from the International Monetary Fund to bring relief to the crisis-hit island.

Fitch Ratings’s ‘CCC’ rating on long-term local currency debt that was affirmed in May “reflects a high risk that local-currency debt will be included in debt restructuring,” Sagarika Chandra, Hong Kong-based associate director, wrote in a statement. Sri Lanka had $30 billion of foreign debt and $34 billion of domestic debt as of the end of April.

Sri Lanka defaulted on its dollar debt in May for the first time, and must clinch a restructuring deal with private bondholders and official creditors including China, Japan, and India to get the IMF board’s nod for a $2.9 billion loan. The nation faces a lawsuit in a US court over its proposed debt recast, with one of the bondholders, Hamilton Reserve Bank Ltd., accusing Sri Lanka of setting terms that favor domestic banks.

“There is a big question mark over whether sustainable levels of debt can be reached by just restructuring US dollar market and concessional debt,” said Kenneth Akintewe, head of Asian sovereign debt at abrdn in Singapore. “Arguably, local currency debt needs to be restructured too in order to reach what the IMF would see as sustainable levels.”

There are mixed signals from the government. President Ranil Wickremesinghe in August said the government was looking at including local bonds in the debt restructuring. Meanwhile, central Bank Governor Nandalal Weerasinghe has said he was confident the nation’s debt can be made sustainable without restructuring domestic debt.

Sri Lanka is walking a tightrope as it juggles the need to meet the IMF demands while ensuring the impact of the debt restructuring on the economy is manageable. Fitch warned that “a default on local-currency debt could have adverse effects on Sri Lanka’s banking sector that would erode the net benefits of such a restructuring.”

Officials are working with financial and legal advisers on a debt restructuring strategy and intend to make a presentation to the creditors in the next few weeks, the finance ministry said last week.

Imposing a debt restructuring on local currency debt could also prove challenging as the rating company views public support for the government as “weak,” and anticipates risks to reforms from political instability. An interim budget last week raised tax rates and included reforms to restore the nation’s fiscal health and meet IMF requirements.

“If there is a haircut on these bonds also, there will be a huge impact on the banking sector,” said Sanath Manatunge, chief executive officer at Commercial Bank of Ceylon PLC, adding that it would also make the restructured sovereign dollar bonds vulnerable.

Source: Bloomberg