President Ranil Wickremesinghe recently said that Sri Lanka’s success in restructuring foreign debt is good news for all who love the country. It is a great achievement to make such progress in years as a country that was unable to pay its debts and labelled bankrupt. The President also said that no country has achieved this feat in a short period of time in recent history. It was also emphasised that the country will get a solution as well as relief if we all work together to strengthen the economy.
Here experts express their views on the debt restructuring deal.
Confirmation of international recognition of our financial system – Prof. Wijitapure Wimalarathana Thera, Department of Economics, University of Colombo
According to the information currently received, as bilateral creditors, India, Japan and others who gave us loans have given us a grace period to start repaying. At the same time, the deadline has also been extended. It has been said that they will negotiate with China separately and similarly take steps to get related concessions. In general, this is good news. If it is possible to continue it and sign agreements regarding trade loans, it is something that should be thought positively from the side of this country. Market credit (ISB) is not yet agreed upon. After reaching an agreement regarding the loan taken from the market, another step forward can be taken.
The other part is multilateral debt. They are loans from multilateral sources such as the World Bank, the IMF, and the Asian Development Bank. There is no big problem with them. The hardest part of it is market credit. How much will be written off on that loan? Is there a grace period to pay the interest rate? Another decision has to be reached regarding the amount of time to be paid.
Only after those restructurings are done and agreements are made, will the developed countries start giving loans again. Two parties mean a loan transaction between two countries. As a country this is a positive feature and confirmation of international recognition of our financial system. When it comes to loans, there are three parts. Separate agreements between countries i.e. bilateral loans, market loans and multilateral loans.
Debt restructuring is said to be complete when all these are common. The hardest part is what’s left. Unlike bilateral loans, market loans directly affect institutions and individuals, capital and interest income. Because of that, it is a complicated process. It is definitely solvable. After that, attention should be paid to the development of the country.
We should stand on our feet as a country – Prof. Nalin Abeysekera, Department of Management, Open University of Sri Lanka
At this time, there is some method in deferring the loan. But we should not claim too much glory because we have to pay this debt in 2028. Beyond that, a discussion, a dialogue and a debate should be held in the country to attract investment. Our relationship with the IMF dates back to the first loan in 1950. Now we are taking our 17th loan. I believe that there should be a big debate in our country regarding Sri Lanka’s correlation with IMF borrowing.
Unfortunately, in our country, only IMF loans are being talked about. We are still late to the conversation about how we can get out of debt and move forward as a country. We should talk about not borrowing from the IMF for the 18th time. It’s about how to stay out of debt again for the 19th time. We had to take the IMF loan, especially this time. Due to the Covid-19 pandemic and corruption, the country fell to zero economically.
Buddhism says being debt-free is happiness. Borrowing is called the “vicious cycle of poverty”. Will we enter the vicious cycle of poverty again or should we get rid of debt mentality and spend some time to get out of debt and where will be our citizens by 2050? The ruling party, the opposition, professional associations and universities should all come together to think of a system to help the country recover, a system to avoid going into IMF debt.
This is a confirmation of trust – Prof. Shirantha Heenkenda, Department of Economics, University of Jayewardenepura
There are currently debts amounting to US$ 38 billion. US$ 10 billion has been used for the restructuring program after a discussion. If we look at the money, the Paris Club is about US$ 4 billion. Even though it is a relatively small number, we believe that the trust we have built together with financial discipline and the IMF program has been confirmed. This is important. As we move forward with the IMF program, the discussions with the creditors have gone to build trust in the long run. Through this we have confirmed that Sri Lanka can develop or generate money and pay the debt in future. It is good that this message has been given to us as a country through this program. It does not mean that the entire debt has been cut.
I see this as a step-by-step development or financial discipline, the achievement of Sri Lanka’s economy moving forward step-by-step. Many stalled development projects can restart. It is possible to revive agreements made with other countries. Based on the status of this loan payment, the loans will have to be paid after 2028. In the next four years we need to focus a lot on revenue generation. We should focus our attention especially on earning dollars. It is essential to prepare a program for that. Financial pressure can come again when we start repaying the debt.
As money flows out of the country, there is a possibility that the value of the dollar will decrease depending on the demand and supply forces. So this is a credit break; postponing the time to pay. We are happy about it and we should take advantage of this credit break immediately. During that break, we as a country can make an approach. Generally, we ask for time to pay off a loan based on the assurance that we will be able to pay off the loan by earning an income and reaching a certain level in our current situation. What we must do is to plan carefully for the next few years, identify the possibilities we have and turn to income generation methods. This work should be done especially by promoting small and medium scale entrepreneurship. It is not good to be complacent. We should take it seriously that this is a period of relief that we have received, and we should make this a special break point for the development of the country. Agreements with private creditors should be discussed.
Based on the concession we have in dealing with private creditors based on the agreement regarding foreign bilateral agreements, we should proceed with the discussions based on the money to be paid in the future. Therefore, what is the environment for paying the debt, how do we pay it, the plan for it, how to spend other expenses in the country when the debt is paid off, whether it is done on the basis of the country’s macroeconomic plan, and at the same time we have to look at things like inflation and foreign exchange pressure.
What risk management will be able to withstand these conditions and internal shocks that we will have to face even after 2028? We have to think about the sustainability of risk management actions. If we don’t transform this break to a good thing and prepare the necessary work arrangements, we will have to face an economic crisis from the time we started paying the debt again. As a nation, we should be grateful to all parties for this effort. Apart from that, the organisations that have given us these instructions should be happy based on this relief. We have to make sure from now to prepare the environment to spur the development of the country by earning income to pay the debt of 2028.
Need to make financial plans to pay the debt – Prof. Navaratne Banda, Department of Economics, University of Kelaniya
We can remain silent until 2028 without paying the debt. During this time, interest is added to the total amount. After that, the interest is added to the interest. Interest payable at the end of a year is added to the amount. That sum adds up to a large amount of interest. This is called grace period and can be paid until 2043. We took the loan saying we will pay it in five years; that time can be paid until 2043. That means you can pay up to 15 years.
Within these 15 years, all loans can be paid with interest. We mention that we will not be able to pay the debt in 2022. We need to pay the relevant interest from that day i.e. from 2022 to 2028. This must be added to the total amount with interest. It needs to be calculated and paid per month or per year and it needs to complete 15 years. During this time, the dollars should only be used for development.
We should develop agro-industrially and industrially. Then we will be able to pay the debt by 2028. It is possible to get a lot of money from foreign jobs. Small and medium scale industries can be developed. By developing agriculture, the amount of money spent on imports can be reduced, and by developing tourism, it will be possible to earn dollars. By sending trained workers abroad, Sri Lanka can receive a large amount of foreign remittances. Also, it is possible to develop industries related to fisheries and fruits can be exported and also tires and rubber.
People’s minds need to be changed. Consumption should change. Demand for local products should be increased. We need to buy Sri Lankan. We need a revolution in mindset. It is no easy task. If people can get used to public transport, we will not really have to pay huge oil prices. We want to be a nation that can create a market for our products. Politicians should really explain the truth to the people and work. We should discuss methods that can develop the country, not political promises.
Bad news for Opposition – Prof. Milton Rajaratne, Faculty of Management, University of Peradeniya
Now we have got a grace period of four years. Now it seems that we have no debt, but in fact we have to pay the debt. We want to get out of bankruptcy completely. The fact that we don’t have to pay the debt until 2028 does not mean that we are out of debt. But we can stay debt free until 2028.
We need to accumulate foreign exchange until 2028. We have an opportunity to protect these things like development activities using foreign exchange, lost jobs and lost public expenditure. These four years will be useful for us to speed up the economic growth. You don’t have to start paying for four years. We have the ability to use that money in projects related to economic growth.
We will pay the debt in 15 years from 2028 to 2043, which means that we can continue to pay the debt while keeping the amount of debt payment very low. There is more relief in having the opportunity to pay for fifteen years. Since it is difficult to pay a large amount at once, they have been told to pay this loan in fifteen years. This is a big relief for the Sri Lankan Government.
We earn foreign exchange very slowly. Our export income is improving very slowly. New foreign exchange earnings are very limited. We must develop the tourism industry. We only have a very limited amount of foreign exchange per year. If we have to pay back, our economy will not be able to bear it. Fifteen years here means we can pay little by little with low instalments. We need to increase our reserves. When the reserves increase, it leads to many economic benefits like strengthening the rupee.
When we were dealing with creditors and the IMF, there were a lot of objections from the Opposition. Now we know that macroeconomic variables have strengthened within two years. The biggest problem we had was the debt payment problem. It is as if four years of debt were lifted at once. This is really good news for Sri Lanka, but bad news for the Opposition.
