Sri Lanka’s International Monetary Fund bailout could be a turning point in its worst economic crisis, but far from stable politics and the need for debt relief from competing powers China, the India and Japan mean that some of the toughest jobs are yet to come.
President Ranil Wickremesinghe knows that many circles will have to be closed for the IMF’s $2.9 billion lifeline to become a reality.
Spending cuts, tax hikes and debt relief are a common formula for bankrupt countries, but veterans of the crisis say there are particularly difficult elements here.
An impoverished population that forced former President Gotabaya Rajapaksa to flee in July has yet to come to terms with Wickremesinghe, seen by many as of the same political ilk and a man who faces bristling opposition.
The country’s borrowings are so complex that estimates of the total range from $85 billion to well over $100 billion. To bring it to a sustainable level, Beijing, New Delhi, Tokyo, multilaterals and global asset managers all have to swallow losses.
“This is one of the biggest mess I’ve ever seen,” said Renaissance Capital 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 onto the currency when tourism revenues collapsed and now it has no reserves in the bank and a population facing poverty widespread”.
United Nations estimates indicate that the crisis has left more than a quarter of Sri Lanka’s 22 million people struggling to get adequate and nutritious food.
The IMF’s 4-year bailout tentatively approved last week demands serious fiscal repair work and more autonomy for the central bank, which has been ordered to frantically print money under Rajapaksa.
To meet the IMF’s target of raising its primary budget surplus to 2.4% by 2025, Sri Lanka would see its economy grow by about 6%, something that has not been achieved for about five years. This year, he expected to contract by at least 8%.
Courting Asia’s Heavyweights
Equally difficult, the IMF wants Colombo to get ‘financing assurances’ The Fund talks about debt relief and new loans from regional heavyweights China, Japan and India which have long scrambled to influence.
The World Bank estimates that loans from Beijing, which has financed expensive projects ranging from ports to stadiums, amount to $7 billion, or 12% of Sri Lanka’s $63 billion external debt. Japan provided another $3.5 billion while India gave around $1 billion.
Without the “assurances” of these countries, the Fund’s money cannot circulate, underlined the head of the IMF mission, Peter Breuer.
“Finding creative ways to have a collaborative platform to move these debt restructuring discussions forward is very helpful,” Breuer told Reuters. “How debt relief is distributed among creditors…that’s something we don’t insert ourselves into.”
UNUSUAL FRAMEWORK?
The crisis culminated in Sri Lanka’s first debt default since independence from Britain in 1948. The value of the rupee has nearly halved since the central bank dropped its peg in March, basic goods have become scarce and inflation is now at 64%.
Economists say the restructuring could have been much simpler had the country been part of the G20’s “Common Framework” plan, a program put in place at the height of COVID-19 to help debt-ridden countries. At the time, Sri Lanka was classified as a middle-income country and did not qualify.
China automatically grants debt relief alongside “Paris Club” countries and private sector creditors under this agreement. Colombo’s absence from the configuration means that an alternative is needed.
Step up Japan who is now pushing for China, India and others to join the talks.
Beijing, which did not respond to a request for comment, has yet to say whether it will, although it is hoped its leadership role in Zambia’s restructuring could encourage it to do it. India has yet to comment.
Pessimists, however, fear that if China does not depreciate, so will others, including global asset managers who hold nearly $20 billion of Sri Lanka’s international bonds.
“China is the biggest creditor country. Without his participation, no plan will succeed,” said a Japanese government official who requested anonymity.
DOOM LOOP
Another issue is what to do with the country’s $50.5 billion in “local” debt, mostly denominated in rupees and largely held as capital by local commercial banks and pension funds.
Sanjeewa Fernando, head of research at CT CLSA Securities, said it would not be a simple decision, especially with elections looming in 2024.
“Realistically, banks are bracing for a 40% haircut (on Sri Lanka’s international bonds and ‘development’ bonds which are also dollar-dominated) as a base case,” he said. -he declares.
Even that might not be enough, given that the IMF wants the debt-to-GDP ratio reduced to less than 100% from 140% currently.
That would put domestic debt on the line, but David Beers, senior fellow at the London-based Financial Stability Centre, which has compiled a global database of sovereign defaults, said there were always trade-offs.
“If the domestic debt is mostly held by domestic banks and you get haircuts, it eats away at their capital,” he said, adding that then they might need bailouts which would again increase the costs of the government.
Category: China, Japan
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