As Sri Lanka battles COVID-19 with its public health expertise and military might, it is gearing up for another imminent crisis — servicing its mounting external debt, of which $2.9 billion is due this year.

Of the many economic side effects of the global pandemic, is the drastic fall in Sri Lanka’s foreign exchange reserves — driven mainly by exports, remittances and tourism that have all suffered heavily post COVID-19

The Central Bank of Sri Lanka recently sought a $400 million currency swap with the Reserve Bank of India (RBI), to boost its foreign reserves. “Yes, we have made a request to the RBI for a swap facility for $400 million,” Central Bank Governor W.D. Lakshman told The Hindu on Monday.

Sri Lanka has resorted to the currency swap facility with the RBI from time to time to maintain its reserves, but the middle-income country has a daunting road ahead this year, as it must pay a sizeable portion of its foreign debt amounting to 42.6% of the country’s GDP in 2019.

Well before COVID-19 emerged a threat, Sri Lanka mulled appealing for loan moratoriums from India and China, two of its willing lenders. Sri Lanka owes about $960 million to India, while its debt to China was $5 billion in 2018.

Following the recent public health emergency — nearly 600 COVID-19 positive cases reported so far — President Gotabaya Rajapaksa urged the Director General of the World Health Organization (WHO) to persuade the International Monetary Fund, the World Bank and the Asian Development Bank, and leading bilateral lenders to provide a debt moratorium or debt re-profiling facility for “vulnerable developing countries” like Sri Lanka.

Debt management

Contrary to the popular “Chinese debt trap” analysis often made in regard to Sri Lanka’s economy, the country’s debt concerns are not confined to borrowings from China alone. “Sri Lanka certainly has a debt problem, but it is not necessarily a Chinese debt problem,” according to Ganesh Wignaraja, executive director of the Lakshman Kadirgamar Institute of International Relations and Strategic Studies.

Along with three other researchers, Mr. Wignaraja recently co-authored a paper on Chinese investments, as part of a study commissioned by the London-based Chatham House policy institute. Citing 2018 data on Sri Lanka’s loans from different lenders, the paper shows that the country’s debt owed to financial markets (holders of international sovereign bonds issued in Sri Lanka) is more significant than that owed to multilateral lenders [such as the World Bank, IMF], and bilateral lenders [including China, Japan and India].

Economists like Mr. Wignaraja argue that Sri Lanka’s economic situation is better off compared to that of Greece or Argentina at the height of their crises, in terms of meeting its domestic and international obligations — using its reserves, domestic borrowings or by printing money. However, everyone agrees that the debt raised through sovereign bonds in the international money markets is stifling, with little wiggle room or scope for negotiation.

With a $1 billion-international sovereign bond maturing in October, the alarm bells are already ringing in Sri Lanka.

Acknowledging the pressure, former Prime Minister Ranil Wickremesinghe, in a recent interview to The Hindu, proposed that SAARC as a region negotiate this with the London Club, referring to the informal group of private creditors in the international money market.

Asked about Sri Lanka’s strategy, the Central Bank told The Hindu that the country had maintained “an unblemished record” of debt servicing and had entered into a long-term financing arrangement through which it received funds totalling $500 million in March, and expected an additional $300 million soon.

Further, the apex bank said liquidity facilitation arrangements with the RBI — in the form of swap facilities — and other major central banks are at “an advanced stage of completion”. Arrangements with the IMF and other multilateral donors are also under review, a spokesman said.

However, in addition to managing different lenders, it is time for Sri Lanka to consider some fundamental changes to its policy, economists emphasise, pointing to the need for greater attention to the rural economy, mainly agriculture, and a shift from an “urban bias” in policy, as Mr. Wignaraja put it.

Ahilan Kadirgamar, senior lecturer, University of Jaffna, said Sri Lanka’s limited foreign reserves are necessary not only for debt servicing but also for essential imports amid falling foreign earnings. In the current situation, he predicts that the government will be squeezed by its demanding foreign lenders, while facing growing discontent from citizens who are denied imported goods that Sri Lanka has failed to substitute in the past.

“Even as the government makes every effort to avoid defaulting on its foreign debt, can it muster the political will to redistribute wealth to ensure the working people can afford a broad basket of goods amidst rising costs for many goods in short supply?” he asked. (The Hindu)

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