KAMALIKA PIERIS

Critics want to know whether Sri Lanka’s foreign exchange problem is a staged default”. Mick Moore has described it as the most man-made and voluntary economic crisis.” The current problems were made in the last two years, he said.  Sri Lanka’s current crisis cannot be blamed on global economic problems. No other Asian country is in the same plight as Sri Lanka.

The precipitating factor was Pohottu’s financial policy, not decades and decades of poor planning and mismanagement, critics agreed. No attempt was made to re-negotiate Sri Lanka’s external debt as they should have done. I asked an Economist to explain this to me, and he told me that all countries borrow, there is nothing wrong in that, but a country must have the capacity to pay back and when it is unable to do so, it must re-negotiate the debt, not keeping paying the interest out of dwindling funds, as Pohottu did.

Rienzie Wijetilleke said that he had worked under several Central Bank Governors and met virtually every Finance Minister and Treasury Secretary during his time but had never before seen such an ignorant, unprincipled set of ministers, secretaries and officials as the Pohottu lot. He says the manner in which Pohottu administration managed the country’s economic and monetary policy must not be forgotten, it must be investigated. What was the logic behind not negotiating with the IMF until Sri Lanka came close to default, he asked.

Wijetilleke stated that a Chartered Accountant cannot be   the Governor of the Central Bank of Sri Lanka (or probably any Central Bank anywhere, I would add).   Central Bank Governor must be suitably qualified, possess sufficient experience, proven expertise and integrity.  To me, Kamalika Pieris, this means promotion from within. There can only be one Central Bank in a country.

Wijetilleke said that the most recent Governor of the CBSL was not only the least-qualified person to hold that post but is also largely responsible for the politicization of the Central Bank and of monetary policy. Officers, such as Dr. P B Jayasundera and other individuals in high positions, had records that should have disqualified them from consideration for those posts, Wijetilleke said.

The senior staff in the Central Bank and Finance Ministry who understood   financial matters, did nothing to stop events, continued Wijetilleke.   I, Kamalika Pieris,  disagree. I think they tried but did not succeed. They were probably told to shut up and keep quiet, if they valued their jobs.

Powerful industrialists and business leaders also cheered the decisions and held position on committees and boards, continued Wijetilleke. They did not care that their names and those of their organizations were used for political mileage. Their acquiescence and silence regarding many illogical decisions that were clearly not in the ‘national interest’ was very surprising, said Wijetilleke, adding I noted that many share prices were not only rising but were breaking records during this time”.

Wijetilleke wants a detailed scrutiny of Central Bank decisions. The monetary policy of the Central Bank must be closely studied. We need to know what drove the decision to print excessive money, to spend billions controlling an exchange rate at an unrealistic peg,   to float the Sri Lanka rupee without any contingent plans and to spend vital reserves on paying bond holders. The budgetary collapse was clear from the outset.

 Wijetilleke wants the minutes of all meetings to be made available for scrutiny, to find out what made the authorities take decisions that they did. These decisions must be investigated by the next administration; also forensic audits must be done regarding the high profits gained by investing in ISBs. (Island. 9.5.2022 p 5)  

Dr. Rani Jayamaha, a very senior Central Bank officer and member of the Monetary Board told COPE that said that she and her former counterpart Board member Sanjeewa Jayawardena were strongly opposed to the use of Central Bank reserves to float the exchange rate. She said that their objections had been tendered in writing.However, this was overruled by Governor of the Central Bank, Prof. W.D. Lakshman,  Secretary to the Treasury and the appointed member, Samantha Kumarasinghe. (Daily News 26.5.22 p 1)  

Asked about the root causes of the economic crisis, Central Bank Governor Dr.Nandalal Weerasinghe said that when the International Monetary Fund (IMF) was approached for a loan in 2020 March to April, they had written to Sri Lanka stating that Sri Lanka had no Debt Sustainability at the time. The Secretary to the Ministry of Finance and the Governor of the Central Bank had been informed in writing that the existing loans would have to be restructured in order to obtain credit facilities, he said.

Accordingly, the Monetary Board of the Central Bank had recommended the relevant technical matters to the Minister of Finance and other senior officials.   The decision was in the hands of  the Cabinet including the Finance Minister.

Parliamentarian Dr. Harsha de Silva said that the Finance Minister had never addressed Parliament and Ajith Nivard Cabraal, who was speaking in Parliament on his behalf, had not informed Parliament of any of this. Sri Lanka’s debt was at a stable level in November 2019 according to the IMF report, then a few months after the presidential election, Sri Lanka’s debt was declared unsustainable, by the IMF, said Harsha de Silva.

Harsha  also observed that a tax cut of Rs.600 billion was initiated with the intervention of the n Secretary to the President, despite the IMF advising against tax reductions. MP Sarath Weerasekara , who  clearly knows nothing about the subject, had said that this decision was taken in order to encourage new entrepreneurs.   We all know that  entrepreneurship is not created by simply reducing income  tax.

Central Bank  has stated that Yahapalana  government  purchased US$ 500 million in international Sovereign Bonds on July 18, 2016 payable on January 18, 2022. Sri Lanka did not borrow anything during 2020, 2021 and 2022.

The ’43 Brigade’   led by Champika Ranawaka defended the Yahapalana administration taking massive commercial loans, claiming that they were necessary to pay installments of loans obtained earlier. ’43 Brigade’   pointed out that out of USD 6.1 billion loans obtained in 2018, a staggering USD 5.8 bn (95% of total borrowings) were repaid as installments and interests. If not for IMF loans, the country would have been bankrupt during the 2016-2019 period due to loans obtained during the Rajapaksa administration. (Island 23.3.22)

Sri Lanka total foreign debt is USD 51 billion,  immediate need is for USD 4.5 billon bridging finance, reported the media. According to the World Bank, Sri Lanka owes over USD 15 billion in bonds, out of a total of USD 45 to 50 billion in long-term debt. The country needs USD 7 to USD 8.6 billion to service its debt load in 2022, whereas it had just USD 1.6 billion in reserves at the end of March 2022, recorded Shivanthi Ranasinghe.

The amount of  national debt owned by various bi-lateral donors and multi-lateral agencies, such as the ADB, World Bank, are known,  said analysts.  Asian Development Bank and the World Bank own 13% and 9% of Sri Lanka’s foreign debt, respectively. China is Sri Lanka’s largest bilateral lender, owning about 10% of its total foreign debt, followed by Japan which also owns 10%. India has around 4 percent.

But Sri Lanka is not in a debt trap with China, continued analysts.  It is  the Euro-American based International Sovereign Bond (ISB) traders that are mainly responsible for the default. Approximately half of Sri Lanka’s total foreign debt (55% according to some estimates) is market borrowings through US- and EU-based ISBs.

 Asset managers  Black Rock and Ashmore Group along with Fidelity, T Rowe Price and TIAA are among Sri Lanka’s main ISB creditors.  But we do not know who owns the ISBs, including one worth $1 billion that is maturing on July 25, 2022.

Dharini Rajasingham Senanayake  asked,  was Sri Lanka’s financial default a Staged Default”. It is increasingly evident that the island’s debt crisis has many external dimensions and is not entirely internally driven. Default would effectively enable the IMF and foreign advisors to effectively takeover  Sri Lanka  economy,  she said.

Dharini  wanted to know, was Sri Lanka pumped and dumped” by the Washington Consensus which up-graded Sri Lanka  to a lower Middle Income Country (MIC), thus making it ineligible for low interest development aid which compelled borrowing on Capital markets. Other countries have fallen into this ‘Middle Income Country Trap .

Sri Lanka’s  Default seems to be  following a deliberate, planned route to deliver Sri Lanka into IMF’s and Washington’s clutches.  The possibility of  Sri Lanka Default was in the air for some time,- at least since the rejections of the Millennium Challenge Corporation (MCC) compact, observed Dharini. Economists had hinted  that this was likely.

Rating Agencies and Sovereign Bond traders work in concert with the Washington Consensus and the OECD Paris Club of Western aid donors, explained Dharini.  Sri Lanka was down-graded to the point of default by Rating Agencies like Moodys, and Fitch. Sri Lanka should not have been down-graded in this manner. The downgrades were principally due to the USD 7 billion payments due to US-based Bond traders like Goldman Sachs, Black Rock and Vanguard.

The IMF’s aid conditions would enable Washington to  hold back a perceived China Threat” and make it impossible for Sri Lanka to source its oil, gas and other Energy requirements at discount rates from Russia.

Selling off strategic assets of the island that had been previously ear-marked by MCC seems to be a pre-condition., observed Dharini. Sri Lanka Business Times of April 17, 2022 announced that the Government heading into IMF negotiations is hoping to raise US$8 billion from the lease or sale of valuable public assets to bolster its rapidly dwindling foreign reserves. This was based on the  report of a newly-appointed economic advisory committee.

Among the main items for sale or long lease were the Katunayake International Airport for $2 billion, Mattala Airport for $300 million and Ratmalana Airport for $400 million. The Colombo North Port Development Project was to be handed over for an investment of $600 million while Colombo Port City lands would be leased out at a total of $4 billion.

Sri Lanka Telecom  shares will be sold at a price of $500 million and Sri Lanka Insurance Corporation shares for $300 million. Lands owned by Sri Lanka Railways and Sri Lankan Airlines  were also to be sold.

There is a difference between illiquidity and insolvency that has been ignored in the rush to monetize strategic transport, energy, land and cyber security assets in this island at the center of the Indian Ocean SLOC (Strategic lanes of communication). Moreover,  it is perfectly absurd to  sell off strategic assets simply because the institution managing them is corrupt, concluded Dharini.

Asoka Bandarage observed that the young ‘Gota Go Home!’ protesters who demand President Gotabaya Rajapaksa’s resignation seem to be unaware of the global dynamics of the Sri Lankan crisis. Perhaps local and foreign interests guiding the protests may want to keep it that way. They are certainly not encouraging the protestors to join global calls for much-needed debt cancellation, debt swaps and regulation of capital market borrowing to prevent debt crises occurring in the first place.

The breakaway  SLPP MPs group, led  by Wimal Weerawansa, Udaya Gammanpila and Vasudeva Nanayakkara in their roadmap issued in   March 2022, stated that that the loans obtained from international capital markets, at a higher rate, comprised 47 percent of the total debt. They urged the government not to repeat this. Instead, loans should be sought from foreign governments.

These eleven  MPs urged the government to initiate talks with relevant parties to restructure debt immediately or face the consequences. The group stressed that the proposed foreign debt, should be restructured as soon as possible.

Media reported that Sri Lanka has hired  two heavyweight financial and legal advisers, Lazard Freres, a  French company  and Clifford Chance, a law firm based in London  to help with renegotiating debts. They will charge very high fees.

 The Government wishes to restructure over $12 billion of overseas debt (total external debt of $51 billion), a mix of loans from China, India, and Japan, as well as all the bonds held by private investment funds that had been building up for years but become unsustainable, said  the media.