Foreign debt relief is the single biggest challenge for Sri Lanka to get out of its most vulnerable economic situation. Colombo requires its superlative diplomatic channels to convince borrowers of a favourable bail-out proposition from International Monetary Fund.
Sri Lanka is working overtime on its diplomatic channels to convince its biggest bilateral lenders China, Japan and India to restructure their loans to the island, which is facing its worst-ever economic crisis.
The single biggest challenge before the dollar-strapped Sri Lanka today was to win the assurances of debt relief from its various lenders, which will help it secure a US$2.9 billion (S$4 billion) bailout from the International Monetary Fund (IMF).
Bankrupt Sri Lanka must get a bail-out from IMF which is the last resort available to the island country. But it requires prudent handling of the issue with its lenders for getting a provisional assurance for restructuring the terms of repayment for a longer period and without any penal interest
Sri Lanka’s foreign liability stands at US$35 billion which includes bilateral, multilateral and commercial loans as of June 30, 2022. Most of it is payable to global private creditors through international sovereign bonds (debt instruments issued by the Sri Lanka government), which analysts say successive governments staked their import-dependent economy on for at least 15 years. Colombo has to repay US$10.9 billion in bilateral loans, US$9.3 billion in multilateral borrowing, and US$14.8 billion for commercial loans, according to government data released on Nov 3, 2022.
China is the top bilateral lender, accounting for 43 per cent of the country’s total bilateral debt. Japan and India follow at 24 and 14 per cent respectively.
The highest levels of the Sri Lankan diplomatic windows are vigorously acting upon the debt restructuring almost daily. Sri Lanka desires its bilateral lenders to restructure its debt by reducing the principal amount or temporarily suspending interest payouts.
Sri Lanka made progress with Japan
Meanwhile, Colombo has made some progress with Japan, which is being guided by the Paris Club of wealthy nations including France and Australia that have faced such demands before.
Dealing with China and India most demanding
But dealing with China and India is proving very arduous as pleasing one will displease the other. The major impediment was that China usually preferred to extend the maturity date of loans over offering haircuts on debt, but that comes at a cost by compromising with the interest of the sovereign country. Sri Lanka is striving to maintain amicable relations with various countries, in the order they can restructure all loans and all the creditors receive equitable treatment.
“China and India have both been part of the two important creditors’ in terms of IMF’s pre-conditions and modalities and Sri Lanka appears to be optimistic in convincing both and others by the December 2022 deadline. If Sri Lanka misses the December deadline to give creditor assurances to the IMF, it will have to wait until March 2023 for the bailout, by which time its foreign reserves and currency could worsen, and the painful recession could deepen.
Food prices increased by a whopping 86%
Reeling under high debt and low dollar reserves owing to the damage caused by the pandemic besides some ill-advised policies, it has not been able to repay foreign debts or import enough essentials like fuel, rice and lentils in the last one year. Food prices have spiked by 86 per cent in the interim, forcing many Sri Lankans to go hungry.
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Political upheaval added to their economic woes
The vacuum created by the political unrest in Sri Lanka in recent times has added to their miseries bitterly. Massive power cuts, rampant corruption and acute scarcity of fuel and food grains incited the public to hit the streets. The highly volatile citizen’s unrest that erupted across the island country forced the brothers – President Mahinda Rajapaksa and Prime Minister Gotabaya to resign and flee the country. They could not have faced the ire of the citizens for their unscrupulous decisions that emptied the country’s coffers.
The intensity of the widespread protests declined in the island nation after the new Wickremesinghe government jailed prominent activists, and also reduced fuel shortages with purchasing assistance from India and a new voucher system to avoid long queues. The government has raised fuel, electricity and water tariffs to prevent losses and borrowings to pay for imports.
But for the ordinary people, there is little or no relief.
Ultimately, however, Sri Lanka’s problem is not the lack of economic ideas but their implementation, and unfortunately, the same set of cabinet ministries and key institutions are back again, whose decisions ruined the economy. In this dreadful situation, the IMF bailout could instill some public assurance and investor confidence and buy crucial time for the government to provide safety nets for the most vulnerable Sri Lankans.
It is indeed crucial for Sri Lanka and would be interesting to see how they endure with countries, China and India – with diametrically opposed interests.
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