Forex crisis and a plethora of platforms and solutions

The real economic crisis we are facing is centred around factors very much beyond our control  

Current debate on economic recovery centred on the foreign reserves of the country is heavily patronised by business magnates and economists. Politicos of all sorts too are offering their expedients and fantasias as they please to come into the fray with others to portray their identity. In the meantime, a few astute people with a history of talent and experience are expressing their views unbiasedly adding their share to the blah-blah. We the onlookers behold the ongoing play on stage, with new scenes unfolding each time the curtain rises, filled with anxiety.

The solutions offered by some make us recall the time of ‘Dhammika Peniyas’, ‘charmed pot throwers’ and those advocating myth and fancy as panaceas, during the height of the COVID-19 pandemic. The WHO and the medical experts were seriously engaged in inventing a vaccine while recommending measures painful but necessary to prevent the spread. Today, fortunately, we have a sigh of relief amidst several conjectures still running riot against, about the achievements gained delivering solace and consolation to the human race eventually. 

All this indicates the value of invaluable patience and the endurance displayed by the people in facing the events surrounded by the highly ill-conceived advice and opinions of quacks. People appear to be well-tuned now to face the calamities now before them in the same spirit despite the storms in the tea cups and the crocodiles in the kitchen clay pots often shown by those with ulterior motives. 

I went through some of the views expressed, about the current economic situation of the country, which received the highest publicity in the economic circles and the media recently. Astonishing, how strange some of these sounds, nevertheless, tend to make many believe that “defaulting” the loan repayments instead of settling the dues are the only steps we can now take under these desperate circumstances as made out by them. 

Some of the experts have gone to the extent of even listing out examples of countries refusing to pay the debts (in this instance, sovereign obligations). We cannot deny these happenings but should we also jump into a well where many were forced to jump in, due to situations of illiquidity, insolvency and other uncontrollable situations like social uprisings, etc.? We have to look at this more carefully without getting carried by emotional factors.

What is the sovereign default?

Sovereign default refers to the failure of the government of a sovereign entity to pay back principal and interest payments when they are due. The failure to repay debts owed to creditors may be accompanied by a government’s formal declaration that it will not pay owed debts, or it may sometimes occur without any formal declaration.

In this set up let us now take a look at what the “top economists” have to say!

“Repaying the full value of the bond would provide a windfall gain to those currently holding these bonds”   

We are at a loss to understand why the investors, whoever they are, should not benefit from their investments. As long as the Government does not incur any payments beyond the contracted values promised to the investors such a step cannot be justifiably considered as a case of favouring or privileging a party discriminately. This exercise of repaying the bond value to the holders of course is in extreme contrast to what happened in the CBSL bond scam involving the ex-Governor Mahendran, now in exile, diligently and strenuously defended by the then Prime Minister. 

We did not, however, see many of those current day critics coming forward to denounce that despicable act then, despite the fact that the serious adverse repercussions were to run into several decades. Instead, we saw how some of these critics argued and attempted to sabotage the proceedings to defend the scandalous operation during the COPE investigation stage.

The top-notch guys appear to have forgotten the possibility of some original purchasers of the ISBs still holding on to their investments awaiting normal maturity payments. 

If we pay these without a default the very same investors may be influenced to re-invest in the future programs more confidently to benefit by their own speculatory activities which is their business. On the other hand, if we default what will be the possible consequences? None of the economic advisers advocating a default of payments have addressed this issue. 

“At a great cost to the people who will face shortages of their essentials like food, medicine and fuel”  

A highly humanitarian consideration more than the economics involved in it! It is the primary duty of the government subject to the limitations, to ensure an uninterrupted supply of the essentials to the public. We are not, according to our belief, that badly deprived of humanitarian support forthcoming from the rest of the world if a need arises to seek even in SOS for such help! Such a move for humanitarian assistance in the most unlikely event such a need arises, will be much better morally as well as ethically than to default on a promise to borrow. 

Talking about food riots and social eruptions cannot be considered as healthy contributions. We can only presume that it is an unwarranted fear expressed by sectors normally not so interested in such areas, presented to rationalise their stand. Sometimes creditable motives are attributed to uncredible ones. But such statements could very well help to instigate civil unrest and commotions. Therefore, within the realm of a demanding responsibility to be responsible and focused on the right issues specially during a critical period, such statements and actions could be construed as veiled attempts to indoctrinate eruptions.

How realistic it is to say, “no forex to import basic foods. No funds for essential drugs and medicines. Power cuts are imminent with the CEB facing fuel shortages. Airlines and Shipping lines will bypass Sri Lanka because of Forex issues…”. 

We all know these same things can be presented in more hard-hitting terms provoking the minds of people specially the worse-affected masses. The solution offered by such soothsayers is “not to pay USD 500 m. debt maturing next week or USD bond due in June 2022.”

According to the normal requirements as assessed we need a minimum of approximately $ 1.5 billion to meet our normal monthly import bill for our essential needs. This immediately poses a big question as to how we are going to sustain such a requirement. We cannot forget the ongoing discussions the Government has initiated with other countries to solicit assistance towards such requirements.

The real economic crisis we are facing is centred around factors very much beyond our control. The immediate necessity of supplying essentials to a “starving population” as is made out is an exaggeration in callous disregard of this reality. If we can take adequate measures to improve our foreign remittances and supplement our income from sources such as services and tourism, we can very well tide over the difficulties more effectively than by resorting to a default. Defaulting loans and dues will create a worse picture which will discourage remittances further and even inflow of tourists who will think twice before deciding to visit a “starving country” which has defaulted on its own borrowings. They will try to shun such an idea more than being cherished to come to a country in distress to spend their leisure and holiday.

“Suspending debt payments will drop Sri Lanka’s ratings further”

We do not and cannot dispute this. But strangely this is what the rating agencies were trying to propagate even before it happened. Fortunately, the world is experienced to take the ratings with a ‘pinch of salt’ having seen and sometimes even challenged in legal suits the eventualities the rating agencies have led the investors up the garden path in the past.

They downgraded us on the probability of default. As a country we have never had a defaulting history. Now when we in actual fact default payments to investors they will downgrade us with no mercy. The consequences will be dire and gruesome than the comfort anticipated by those who advocate non- payment. Establishment of their predictions will be important to Rating agencies more than the adversities we have to face arising as consequences to such an action. It looks like they are using various ruses and influences to propagate a realisation of their unwarranted predictions. 

Limited magnanimity of the Samaritans!

It is strange that none of these business magnates touch or even mention other feasible solutions to supplement the revenue of the State. For example, if they volunteer to pay a higher tax component (percentage) or even agree to pay an amount in advance which can be set off against their future commitments, it will be a better relief to the masses whom they are weeping about today. 

Even in the height of imagination we cannot think of such a humanitarian approach by these kind hearted elements. But they wish the country to fall from a non- defaulted state to an insolvent level with considerations such as “keeping the people anxious and worried when they will get the next meal for the family”. Obviously, they sound as Good Samaritans, the best among them, as persons who want to compassionately help those in distress only at heart!

But if and when the masses fall into situations beyond anybody’s help, they may come forward because the entry into the scenario at that stage would be highly profitable.

Consequences of sovereign default

When sovereign default occurs, there will be various consequences to creditors and the State.

The immediate impact of sovereign default to creditors is the loss of the principal amount loaned to the Government and the interest owed on the debt. 

A state defaults on its sovereign debt, by disposing of its debt obligations owed to certain creditors. When a state defaults on its debts, it becomes less attractive to investors, and it will become difficult for the state to access new funds from the international bond market. In other words, defaulting on debts is like putting a noose round the neck and getting ready to jump. Pure and simple suicide but some may call it a sacrifice. What most of these experts are trying to accomplish is to put the whole country into a straightjacket with limited movements.

A country may issue bonds to investors with a contractual obligation to pay the principal amount and interest to bondholders. The government guarantees to repay bondholders using tax revenues raised from its citizens.

Now to wind up the discussion, I wish to quote some international references to the different aspects of sovereign defaults to enable us to understand the correct percept of the so-called good-hearted recommendations of our economic experts, who in no uncertain terms categorically confirm the essential nature of saving the forex levels to support the living standards by defaulting the payments due on sovereign guaranteed bonds as the solution.

“During the debt period, the government may run into cash flow problems due to various factors such as political instability, poor investment, mismanagement of investor’s funds, etc.

Insufficient cash flows impede the government’s ability to pay back debts due on time. Sovereign defaults may result in lower credit ratings and increased interest rates, making it difficult for the sovereign state to borrow additional funds from the international bond market.

Sovereign default occurs when a sovereign entity or state is unable to pay back the principal and interest owed to creditors.

Sovereign defaults may be triggered by a struggling economy, political instability, poor investments, overspending, or overleveraged.

When a country defaults on its sovereign debt, it receives a lower credit rating, making it difficult to borrow more from domestic and international lenders.

When investing in sovereign debt, bondholders monitor a sovereign entity’s political stability and financial environment to determine the risk of sovereign default. 

Such a scenario is known as a sovereign debt crisis, which is common in governments that rely on short-term borrowings since it creates a mismatch between the short-term bond and the long-term value of assets financed through debts. When a country defaults, credit rating agencies will review its financial status and assign it a sovereign credit rating. The rating assigned will depend on various factors such as procedural defaults, failure to abide by the terms and conditions of the debt, and the sovereign entity’s interest expense.”

Do we need to fall into a situation like this? Or are we to explore all other available options and opportunities to tide over our difficult period using our international relations, our strategic geo-political importance, the long history of our debt honouring tradition and the possibility of soliciting multilateral assistance from international agencies such as World Bank, Asian Development Bank and IMF, approached with care and diligence, in addition to various bilateral arrangements for financial assistance? 

There is no doubt we have to explore the possibility of a restructuring plan for our debts in consultation with a multilateral international agency. This possibility the Government has not ruled out.