Treading a fine line

Tuesday, 11 February 2020 00:16 -     - {{hitsCtrl.values.hits}}

Prime Minister Mahinda Rajapaksa’s visit to India, which was the first State visit undertaken by him after being appointed to the post, brought an unexpected development. On the sidelines of the visit, in an interview with The Hindu, Rajapaksa revealed that a request had been made to India to extend a debt moratorium to Sri Lanka for three years. He then expressed hope that if India was willing to oblige Sri Lanka, then other countries may be more amenable to take the same route. 

It would not be a stretch to think that given the vast amount of funding that has come Sri Lanka’s way since the end of the war, Rajapaksa was referring to China. But analysts of Sri Lanka’s debt portfolio have time and again pointed out that in fact over 40% of Sri Lanka’s debt is owed to international capital markets and it is in fact this debt that Sri Lanka is mainly obligated to pay in the years till 2023 and again from 2025 onwards. 

This year Sri Lanka has to repay $ 4.8 billion, which comes on top of $ 5.6 billion in 2019, which was the highest debt repayment year in the country’s history. The silver lining, if it can be viewed as such, is that in 2020 the large debt payments are towards the end of the year starting with a $ 1 billion repayment due in October. This gives the Government a bit of breathing space to get its political house in order before going to the international markets to raise funds. Also the trending down of global interest rates and a projected growth slowdown due to the coronavirus outbreak and other issues could mean that the Government can avail itself of reasonable interest rates.

In 2019 the situation was quite the opposite as Sri Lanka stumbled out of a constitutional crisis and had to repay $ 1 billion in January, which it did by dipping into its reserves. The situation stabilised later in the year but it highlighted the sensitivity of Sri Lanka’s external position.

Rajapaksa’s remarks came on the heels of the latest International Monetary Fund (IMF) review of Sri Lanka’s economy. The Government, quite rightly, has expressed interest in maintaining the $ 1.5 billion Extended Fund Facility (EFF) that is expected to conclude in mid-2020. As expected the IMF’s report came with few surprises and contained several warnings the Government would do well to heed.

It warned the 2019 deficit and current account targets were badly missed and this, together with the stimulus announced by the Government, called for fiscal prudence and continued reforms. The IMF stressed, given the high level of public debt and refinancing needs of the country, ensuring macroeconomic stability called for fiscal consolidation, prudent monetary policy, and sustained efforts to build international reserves.

Ambitious structural and institutional reforms remain critical to raise the country’s growth potential and promote inclusiveness. The IMF has projected that the current account deficit is likely to widen to about 3% of GDP in 2020, and due to the stimulus package primary deficit is projected to widen to 1.9% of GDP this year. Reserves, which are crucial, fell about $ 100 million short of the target in December.

Citizens are confident that Sri Lanka will continue to meet its obligations but that means the Government has to balance its political ambitions with ensuring stable macroeconomic policies and perhaps prioritise the economy.