One should not forget that it was President Gotabaya Rajapaksa who approached the IMF in March 2022, two months prior to Ranil Wickremesinghe taking office as Prime Minister
Finally, Sri Lanka is out of the default status now and enjoying a breathing space
If a country is considered to be bankrupt when it defaults on its foreign debt, it should be correct to say that it is out of bankruptcy when it officially exits sovereign default
Ratings agency Fitch raised Sri Lanka’s long-term foreign-currency default rating on December 20 while the Moody’s Ratings on Monday (December 23) also raised the country’s long-term foreign currency issuer rating.
Subsequent to the announcement by Fitch, Treasury Secretary Mahinda Siriwardana on Saturday stated “20 December 2024 marked a major milestone in our economic recovery process as Sri Lanka officially exited sovereign default.” Samagi Jana Balawegaya Parliamentarian Dr. Harsha De Silva also described the development as Sri Lanka exiting the defaulters group.
When Sri Lanka defaulted on its external debt on April 12, 2022, local and international media described it as the country declaring bankruptcy. However, the first leader of the government to call it bankruptcy, though belatedly was the then Prime Minister Ranil Wickremesinghe. He told Parliament on July 5, 2022 “Sri Lanka is bankrupt and its unprecedented economic crisis is set to last until at least the end of next year.”
If a country is considered to be bankrupt when it defaults on its foreign debt, it should be correct to say that it is out of bankruptcy when it officially exits sovereign default. Is Sri Lanka no longer bankrupt?
Dr. Harsha De Silva seems to be hesitant to accept this argument. When journalists posed this question to him this week, he said that there is no such thing called a country going bankrupt and what has happened is that Sri Lanka has left the defaulting group. He further argued that Sri Lanka cannot go bankrupt as its assets are far more than its foreign liabilities.
However, this runs counter to one of his earlier arguments. On June 23, this year he told the Daily Mirror “We have heard that President Wickremesinghe is to announce that Sri Lanka had come out of bankruptcy. However, it is the rating agencies which have to announce it. Sri Lanka has to have triple C rating to come out of bankruptcy. Besides, Sri Lanka has not reached an agreement with ISB holders. Therefore, how can one say our country has come out of bankruptcy?” he had questioned.
Now, Sri Lanka has reached an agreement with ISB holders after which the country has officially exited sovereign default, after the Rating agencies raised the country’s rating.
When journalists asked former State Finance Minister Shehan Semasinghe in December last year if Sri Lanka was nearing a declaration of the country being out of bankruptcy he also said “I think we are almost there, by the first quarter of 2024, we will conclude the MOUs,” referring to a deal with private or sovereign bond holders.
However, various people seem to interpret the status of bankruptcy and exiting it in different ways. Former President Ranil Wickremesinghe had talked about Sri Lanka coming out of bankruptcy in various situations.
The staff-level agreement between the International Monetary Fund (IMF) and Sri Lankan government on a four-year Extended Fund Facility (EFF) of $ 2.9 billion for Sri Lanka was arrived at on September 1, 2022. Nevertheless, AFP on February last year quoted President Wickremesinghe as stating that the country will remain bankrupt for at least three more years.
However, six weeks later, when the staff-level agreement was approved by the IMF Executive Board on March 20 last year, Wickremeisnghe, making a special statement said that Sri Lanka will no longer be treated as a bankrupt country. To back up his argument he also said “The IMF has certified that Sri Lanka is capable of restructuring its debt.”
As if he forgot this, three months later, he expressed hope that Sri Lanka will be able to shed its bankruptcy status by September, while addressing the AGM of the Sri Lanka Institute of Directors (SLID) held on June 29, 2023. His prophecy did not come true. He again made another similar unrealistic prediction on November 25, this time putting off the declaration of end of bankruptcy for the end of the year, based on a claim about an “expedited economic recovery programme.”
Nonetheless, State Minister Semasinghe, further deferring the good news for the end of first quarter of 2014 attributed it to the possible conclusion of MOUs with private or sovereign bond holders. Yet, nothing came about till June this year when Sunday Times quoting highly informed official sources said that the government was planning to announce the country’s freedom from bankruptcy status on June 27. This was the story that was rebuffed by Dr. Harsha De Silva who argued that it was the rating agencies which have to announce that Sri Lanka has come out of bankruptcy.
This newspaper story seems to have been based on a fact that Sri Lanka was to reach a final agreement in Paris with its official bilateral creditors on June 26. In fact, the deal was finalized as scheduled and President Wickremesinghe in a special statement ecstatically said “I successfully elevated our country from bankruptcy.”
However, proving Dr. De Silva right, Wickremesinghe again fixed another date for the declaration on exiting bankruptcy after September 19 when crucial discussion between the Government and international sovereign bondholders were held. Addressing several final day meetings of the Presidential Election campaign on September 18 he stated “Once tomorrow’s meeting is concluded, Sri Lanka’s bankruptcy will be formally over.”
Finally, Sri Lanka is out of the default status now and enjoying a breathing space. Whoever lays claims to the credit, it was the economic reforms as well as debt restructuring which came in the form of IMF conditions and the IMF sponsored overseas financial assistance that have worked. One should not forget that it was President Gotabaya Rajapaksa who approached the IMF in March 2022, two months prior to Ranil Wickremesinghe taking office as Prime Minister. It was during Rajapaksa’s tenure that Sri Lanka’s team and the international advisors for the negotiations with the IMF were selected.
There seems to be hardly any local inputs having been accommodated during the negotiations, as almost all reforms that were put in place during the last thirty months could be traced in the IMF’s “2021 Article IV Consultation with Sri Lanka” published on February 25, 2022, even before the Rajapaksa government approached the global lender. The debt restructuring process too seems to have been dictated by the lenders, turning down Sri Lanka’s professed expectations for 10-year debt moratorium and hair cut in bilateral debts.