Just a few days after President Anura Kumara Dissanayake’s landmark State visit to India, a key player in the Official Creditor Committee (OCC), yielded positive results, comes the good news that Sri Lanka has emerged from its bankruptcy declared in the wake of an impending economic crisis in 2022.
Leading financial ratings agency Fitch Ratings said yesterday that it was upgrading Sri Lanka’s foreign currency rating out of Restricted Default (RD) status, to CCC+ after 98 percent of bondholders accepted an offer to restructure defaulted bonds with new securities issued on December 20. In layman’s terms, this means that Sri Lanka is no longer perceived to be bankrupt and that its economy is solvent again. To put it another way, our lenders are confident of our ability to pay back the loans and maintain debt sustainability.
“The upgrade of the Long-Term Foreign-Currency IDR (issuer default rating) reflects Fitch’s assessment that Sri Lanka has normalised relations with a majority of creditors, after the announcement of final results of the invitation to exchange the outstanding stock of international sovereign bonds…” the rating agency said.
Sri Lanka had never previously suffered a default, even amidst a 30-year war that devastated the economy. The Covid-19 pandemic, several disastrous policy decisions and economic mismanagement combined to pummel the economy during the Gotabaya Rajapaksa administration. With the economy hitting rock bottom, there was no way to service the foreign debt, which amounted to US$ 51 billion, including US$ 12 billion in International Sovereign Bonds (ISBs) held mostly by overseas corporates and private buyers. In the end, the Central Bank of Sri Lanka (CBSL) declared bankruptcy.
While it is true that actions of all post-Independence Governments finally led to this scenario, the Supreme Court did name several individuals led by former Presidents Mahinda Rajapaksa and Gotabaya Rajapaksa and former CBSL Governor Ajith Nivard Cabraal as being responsible for the economic crisis of 2022, which led to a people’s revolt called the Aragalaya. The Aragalaya did succeed in ousting Gotabaya Rajapaksa and former President Mahinda Rajapaksa, who was Prime Minister at that time.
In the ruling, the Supreme Court stated, “This situation brought in a total breakdown of economic and social life of the entire society. Such breakdown ultimately led to the collapse of public order and the complete undermining of the rule of law.” It was noted that three factors in particular (other than the pandemic) led to the economic meltdown – the drastic tax cuts implemented following Gotabaya Rajapaksa’s election as President in November 2019 which led to a massive loss of around Rs.800 billion, the delay in seeking assistance from the International Monetary Fund (IMF), and artificially maintaining the exchange rate of the Sri Lanka Rupee (LKR) to the US Dollar (USD) by using the country’s foreign exchange reserves. At the peak of the economic crisis, Sri Lanka had only US$ 20 million in reserves at the CBSL. Moreover, the powers that be insisted that it was not necessary to seek IMF help, aggravating the already bleak situation.
Fortunately, former President Ranil Wickremesinghe, who succeeded Gotabaya Rajapaksa for the two-year interim period, did seek the assistance of the IMF as well as the OCC. The IMF later provided Sri Lanka with an Extended Fund Facility (EFF) to the tune of US$ 2.9 billion, to be issued in several tranches. Although this in itself is not a big sum in terms of our overall debt, it nevertheless raised confidence in Sri Lanka’s financial prospects among the donor community and ISB holders.
President Dissanayake who was elected in September and the National People’s Power (NPP) Government elected last month, are by and large, committed to continue the IMF agreement, with the caveat of striving to get terms more favourable to Sri Lankans. Although the previous administration insisted that not even a word of the IMF agreement could be changed, President Dissanayake last week announced Pay As You Earn (PAYE) tax relief across a range of salary bands and also income tax relief, which the IMF has also endorsed. He has promised to provide further relief when and where possible whilst adhering to the core IMF agreement. The provision of tax relief is highly significant in the backdrop where a large number of professionals left the country, as they were unable to bear the brunt of heavy taxation.
But Sri Lanka is not completely out of the woods yet, in economic terms. Debt restructuring is a long and arduous process and the path ahead might not be easy. But with the latest developments, Sri Lanka will be in a much stronger position. For example, Sri Lanka is in a position where it can import private passenger cars from February next year, after a five-year hiatus. Car imports generally cost around US$ 1 billion per year, but this is not much of a challenge with the healthy reserves currently in place.
However, those who precipitated the economic collapse should be held to account. The people have indeed demanded that these persons should face justice for their financial crimes. It is also vital to track down and bring back the monies stashed abroad by corrupt politicians, perhaps with the help of the World Bank’s Stolen Assets Recovery (STAR) initiative. This will be an immense boon to the economy.
The Fitch decision signals that Sri Lanka is literally back in business. It will spur investments and development, as foreign partners will be more confident of doing business with a resurgent Sri Lanka helmed by a dynamic new leadership. This could be a turning point for Sri Lanka in more ways than one.
