This article is compiled from an interview with Prof. Priyanga Dunusinghe of the Faculty of Economics, University of Colombo.
As announced by President Ranil Wickremesinghe during his recent address to the nation, Sri Lanka has signed the agreement to the tune of US$ 10.08 billion for bilateral debt restructuring. One agreement has been signed with the Official Creditor Committee (OCC) of the Paris Club and the other with China. This will give the country extra time to repay the debt.
Also, a debt repayment grace period is available through restructuring. According to the President’s announcement, through debt restructuring, Sri Lanka’s debt load, i.e. nine percent of the Gross Domestic Product (GDP) required in relation to repayments, is expected. Efforts will be made to reduce it from nine to 4.5 percent in relation to the 2027-2032 period. Also the gross financial requirement has been reduced by 13 percent in relation to these periods, i.e. in relation to 2027 to 2032 period. These debt restructurings are expected to achieve these goals related to debt sustainability.
Restructuring of bilateral debt is very important and it can be considered a victory. It can be analysed on several points. The first point is that Sri Lanka’s name was seriously tarnished internationally with the debt default. The reason for that serious scar is because Sri Lanka has never defaulted on debt in its history before 2022.
Exporters, importers and investors faced various problems and difficulties. Through the restructuring of this debt, we can expect to rebuild the image as well as improve the situation. Secondly, especially with debt restructuring, all foreign projects that were currently being implemented with the assistance of bilateral creditors were suspended due to loan defaults.
In practice, if a certain type of country defaults on its debt, all development projects are put on pause. The same situation happened in Sri Lanka. The Central Expressway, the BIA expansion project and various other projects were stalled. With the completion of the debt restructuring, the development projects are expected to resume very soon as per the agreements. Even creditor nations are expecting these development schemes to resume as soon as the debt restructuring is done.
Economic recovery
A positive impact on the economic development and a positive impact on security can be expected in starting the development projects that had been halted along the way. To create a good economic outlook, to create credibility for foreign and local investors, for the entire people, some credibility will be created in the gradual occurrence of economic recovery. The chances of a country becoming nationally bankrupt and facing various shocks may increase in the future. In the history of the world, especially when the economy of Latin American countries recovered, there have been external shocks.
For example, if an epidemic such as the current bird flu spreads, the tourism industry around the world may collapse. Foreign currencies may collapse and lead to an economic crisis again. In the event of such an economic crisis, if we did not have the IMF, no other country would be able to help us. Due to debt restructuring, if we face any kind of shock now, we will be able to get some assistance in such a case. There was great uncertainty and challenge in the delay in not restructuring the debt.
Debt restructuring has led to a reduction in exposure to risk and the possibility of a repeat economic crisis. Restructuring with bilateral creditors is mandatory. It is also necessary to ink agreements with the International Sovereign Bond (ISB) holders very soon. This will help complete the debt restructuring process to meet IMF conditions. The end result is that the positive situation needed to reset the economy is created.
The money from this restructuring will have to be paid by the year 2028. We should prepare for that. To ensure loan payments, we need to increase export earnings. In the coming period, our economy will have to bear a lesser burden than it has before. As a country we are entitled to a grace period to repay the debt. Giving that extra time means paying a less amount as a premium. We need to create the ability to repay the debt. Gradually we will be able to pay the debt through economic development. Debt sustainability is evident in the study.
We need to push our economy into the export sector as much as possible. Even if our existing economy is maintained to this extent and the economic growth is maintained at four to five percent, we will surely get the ability to pay the debt. As the loan instalment has been reduced, it is possible to pay the loan more than the requirement.
To maintain a continuous level of economic growth, necessary measures to promote exports should be expanded to promote local investments. We are given room to breathe. There we should breathe properly and all parties should work to build the country’s economy. As a country, we will not make a debt payment during that period, including the year 2028; a moratorium – a temporary period that allows the lender to stop making payments for a specified period of time. There it works through several methods.
There are some cases where the loan is unpaid and interest is not paid. There are also cases where the portion of the loan is paid and the interest is paid. Although it is not clear what has been given here, the debt burden of this country will decrease. More importantly, debt repayment has been eased from nine percent to 4.5 percent of GDP with debt-related restructuring.
Of the US$ 14 billion commercial loans, there is another US$ 12 billion. Negotiations are ongoing with respect to the bond holders. In debt restructuring, the debt of ISB holders is usually restructured after the debt from bilateral sources is restructured. Once bilateral debts are restructured, the debt restructuring process of bondholders can be completed easily. Therefore, we must promote the export sector and the foreign investment sector.
The Government’s targets are set out in the Economic Transformation Act. We need to implement development programs and policies to increase exports of goods and services to 25 percent of the GDP in 2025 and gradually to 40 percent in 2030, and to bring foreign investments to a level of five percent as a percentage of the GDP. We should use this relief given to us to positively create a revival in the economy. Especially exports should be promoted. Without that, we cannot expect the country’s economy to grow.
By 2025, the export of goods and services as a percentage of the GDP is to grow to 25 percent and it is basically intended to grow to 40 percent by 2030. The Government has already prepared plans towards an export-oriented economy. It is a constructive process. Changes are taking place in a related structure within the Government’s development program to promote foreign investments and market Small and Medium Enterprises (SMEs). Accordingly, organisations such as the Enterprise Sri Lanka have been established and efforts are being made to promote foreign investment.
Export development
The Government hopes to develop identified export promotion sectors to promote the effectiveness of the Bureau to establish an agency for international trade. It is necessary not only to initiate but also to operate all these institutions. Any Government that comes to power in the future should pay attention to this matter. Export development should be done urgently. The matters of foreign investment promotion and trade must be followed. For that, the foundation must be prepared by now.
With the IMF today we have reached financial stabilisation and debt restructuring has started. In the future, many deep reforms will have to be done. We must continue these reforms. If adverse decisions are taken for the sake of gaining political power, if there is opposition to these reforms, it is very clear what the final result of that opposition will be. This ongoing economic reform may be disrupted. For example, if the leadership of a different political party is chosen, the progress of economic reforms may be hindered. It is a big challenge and it will cause the biggest obstacle to the economic stability of Sri Lanka in the future.
Care should be taken to ensure that these reforms are not affected by any upcoming political changes. These essential economic reforms should be implemented in the country, regardless of which political parties gain power. We can no longer go to these welfarist economic reforms. This economy cannot be built on subsidies. All political parties should understand this.
In the future, welfarist populist political promises cannot be implemented. Even though they make promises to get into power, as a country, we should think clearly and realistically and make short-term painful decisions that benefit the country in the long run. The leadership should also not hesitate to take painful decisions.
If there is any hope to develop the country, welfare economic reforms cannot continue. In the future, we must overthrow the system of maintaining a group of people who benefit from the tax money of hardworking citizens. We need to get out of the subsidy mentality. Instead of maintaining a group who live on welfare we should create an environment that benefits those who do honest labour.
There are politicians who use the economy for political gains by perpetuating the welfare system as means of gaining power. If we build a society of hardworking citizens, this country will be able to develop again. If not, we may end up in a crisis again and again. This is a clear victory, and to sustain that victory, the people must work hard and line up to build the country.
Translated by Jonathan Frank
