ECONOMYNEXT – Sri Lanka reached a deal with its bilateral creditors last week and President Ranil Wickremesinghe government’s supporters celebrated the milestone with fire crackers.
The bilateral loans accounted for US$10 billion out of the total US$37 billion foreign loans, the government data show.
The island nation is set to start the second round of negotiation with its commercials creditors and sovereign bond holders, government officials have said.
Here are some questions (Q) and answers (A) over what Sri Lanka’s deal on bilateral debt restructuring mean:
Q: Is Sri Lanka out of bankruptcy now?
A: Sri Lanka’s debt restructuring process has three components: domestic, bilateral, and commercial. Out of these three, Wickremesinghe government has reached deals only with domestic and bilateral creditors . The government has said the country will be out of bankruptcy when it concludes all the debt restructuring including the deal with commercial creditors and sovereign bond holders. Out of the US$14 commercial debts, Sri Lanka owes US$12.5 billion for sovereign bond holders.
Q: What does Sri Lanka reaching the deal on debt restructuring with bilateral creditors mean?
A: Sri Lanka will now have a five-year grace period (from 2022) from bilateral creditors for the repayment and another 15 years unto 2042 for repayments.
The grace period has given a fiscal space of US$5 billion which should otherwise be paid for bilateral lenders. The island nation can use this space to plan strategically to prevent the repeat of another sovereign debt default unlike the most bankruptcy declared nations. The money which should have been paid for bilateral debt repayment could be used for some public financing that would enhance country’s ability to ensure more government and export revenue.
The deal also has reduced the country’s interest payment, which is the largest component in the island nation’s annual budget. This means the pressure on the debt servicing will be somewhat reduced.
Soon after Sri Lanka declared bankruptcy on April 12, 2022, all the projects funded by the island nation’s bilateral lenders were suspended. After the last week’s deal, Sri Lanka can now reach its bilateral lenders to resume all the infrastructure projects that have been suspended in the last two years and some new projects, government officials say. Such move is expected to boost the country’s construction industry, which once contributed a significant share to the economy.
Q: Can Sri Lanka relax some of the tight fiscal policies like tax reduction?
A: No. The bilateral debt restructuring deal will not give space for the government to reduce taxes or implement some populist policies to woo more votes in the upcoming election. The bottom line is Sri Lanka cannot deviate from the agreement with the International Monetary Fund (IMF). State Finance Minister Shehan Semasinghe said the country has a long way to go before considering reduction of taxes.
Q: Will the people at the grass root see any benefits from the last week deal?
A: Yes, but gradually. When the suspended bilateral infrastructure projects start, the construction sector is likely to see a boom and completed infrastructure projects will have trickle down effects to the public. However, it will be slow and gradual, economists say.
Q: Why does the government consider the bilateral debt restructuring deal as a huge success?
A: Successive Sri Lankan government in the past has been swinging between pro-Chinese and pro-Indian foreign policies. Those moves have angered both of those emerging world powers plus the United States, analysts say. Sri Lanka’s plan to come out of the bankruptcy would have been threatened if one of its bilateral creditors disagrees on the debt restructuring. The island nation has now secured the debt restructuring with China, India, the U.S. and all other countries. The West and India originally resisted the move to treat China separately in the debt restructuring talks. However, Sri Lanka was able to bring all the creditors to the same treatment through the “net present value” concept on their future repayment. Despite all the differences in the past, Sri Lanka’s ability to deal with all these countries and bring them to agree on the debt restructuring is an achievement, experts say. (Colombo/July 02/2024)