Economists tell: default on bond, buy food

Sri Lankan rupee banknotes sit in a bucket at a fruit stall in Colombo. The country is running out of imported food, fuel, medicine and a key ingredient of milk tea.   © Reuters

COLOMBO — Sri Lanka’s top economists and business leaders are urging President Gotabaya Rajapaksa’s government to default on a debt repayment next week and to use the nation’s foreign currency reserves to buy fuel, food, medicine and other essentials.

Ajith Nivard Cabraal, governor of the Central Bank of Sri Lanka, on Jan. 5 tweeted that the CBSL has allocated $500 million for an International Sovereign Bond maturing on Tuesday. Since the announcement, many experts have come out against the allocation.

Shanta Devarajan, a former World Bank chief economist from Sri Lanka, suggested that the island’s acute shortage of foreign currency reserves is exacerbating everyday problems like long lines to buy cooking gas, rapidly rising food prices, more frequent power outages and a lack of powdered milk, a staple in a hot, tropical country where many homes do not have refrigerators and millions of people thirst for milk tea.

“This $500 million could enable people, especially poor people, to buy and cook food for themselves and their children,” Devarajan wrote in the DailyFT, a Sri Lankan newspaper. “Instead, the government is choosing to reimburse bondholders, who are hardly poor.”

Following a $1.5 billion currency swap with China, Sri Lanka in December managed to boost its reserves to $ 3.1 billion. According to Fitch Ratings, that’s just enough. The agency says Sri Lanka has $3 billion worth of foreign currency debt repayments coming due during the first quarter of this year.

Vish Govindasamy, chairman of the Ceylon Chamber of Commerce, has taken a similar position as Devarajan. Rather than use foreign reserves to service debt, Govindasamy told the DailyFT that the government should find a way to restructure its debt so the country’s foreign currency inflows can go toward essentials, thus easing the plight of Sri Lankans.

He also warned that with tourism being a primary foreign exchange earner, Sri Lanka cannot afford to tell the world — and thus potential foreign arrivals — that it has run out of food. Sending such a message “will only be counterproductive,” Govindasamy said.

On Thursday, many parts of the country, including Colombo, suffered a long blackout after the state-owned Kelanitissa Power Station ran out of fuel. The Ceylon Electricity Board said the Ceylon Petroleum Corporation had not provided the utility with the fuel needed to operate the plant.

A. Wijewardena, a former central bank deputy governor, compared Sri Lanka’s situation to a double-edged sword, one that will be fatal to everybody if not handled properly. “Sri Lanka has an unblemished record of debt repayment but in the present conditions of near-zero forex reserves, it may not be able to keep that record anymore,” he told Nikkei Asia.

Wijewardena said next week’s repayment is only one commitment Sri Lanka faces in its balance of payments crisis, and that once it is met, the nation will have to figure out how to pay for imports of necessities and make service payments.

Next week’s repayment “is a choice among alternatives,” Wijewardena said, and a “choice which has to be made with careful analysis.”

Anila Dias Bandaranaike, a former assistant governor at the central bank, has warned of possible food riots if Sri Lanka runs out of foreign reserves with which to import food. She said last year’s ban on imports of chemical fertilizer — which was costing Sri Lanka $400 million annually — has resulted in low crop yields. Available foreign currency reserves “must be used to meet essential needs, not to repay $500 million [in] debt maturing next week,” she told a local newspaper.

However, Dulindra Fernando, managing director of Ceylon Asset Management, said the calls by business leaders and economists are “politically motivated and frivolous.” He said the government’s political opponents have been hollering about a default for the past three months.

“Now that the government is honoring [the debt], the same economists want the government to default or seek a restructure,” he told Nikkei. “It’s frivolous because it irresponsibly neglects the vast cost of default to Sri Lanka. vs. the manageable ISB settlement amounts. Sri Lanka has an impeccable credit record since independence, and [the] opposition now realizes this is the best opportunity to destabilize the government.”

Meanwhile, on Wednesday, S&P Global Ratings downgraded Sri Lankan debt to CCC from an earlier CCC+ with a negative outlook, sending it deeper into junk territory. (Nikkei)

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