Sri Lanka’s reorganization is threatened by a complex web of creditors and politicians.
LONDON (Reuters) – Social upheaval, political insecurity, and a complicated network of creditors might jeopardise Sri Lanka’s efforts to restructure its $12 billion foreign debt, experts warn, adding that the South Asian country is rapidly running out of options.
There are loans from Japan, China, and India, as well as a huge pile of bonds owned by foreign investors, that have made the South Asian country’s worst financial crisis since 1948 even more complicated.
S&P Global (NYSE: SPGI) Ratings downgraded Sri Lanka’s foreign-currency debt to “selective default” on Monday after the country’s failure to make interest payments.
The World Bank agreed to loan $600 million to help Sri Lanka pay for essential imports, the International Monetary Fund said the government should raise interest rates and taxes, and Sri Lanka said it was in talks with China about refinancing its debts, all in the last week.
“The IMF’s reaction has been really encouraging, and our impression is that they will attempt to accelerate a plan within its constraints,” government spokeswoman Nalaka Godahewa told Reuters. “We are in conversations with India, the World Bank, and the (Asian Development Bank) to get further assistance, putting Sri Lanka in a stronger position to manage until the IMF funds arrive.”
The Finance Ministry did not respond to a request for comment.
The economy of the 22 million-strong country collapsed after President Gotabaya Rajapaksa’s big 2019 tax reduction depleted government coffers and COVID-19 wreaked havoc on the rich tourist sector. Foreign reserves have dwindled by 70% in the last two years to $1.93 billion, leaving Colombo unable to meet basic needs like as gasoline, medications, and food.
In the face of rising prices and shortages, hundreds of people have been protesting for weeks. They want Rajapaksa and his brother, the prime minister, to step down.
Colombo aims to finish the IMF assistance discussions in roughly six months, but he has no influence over the length of the negotiations.
“Six months is pretty ambitious,” said Guido Chamorro, emerging market portfolio manager at Pictet Asset Management, the country’s bondholder. “Sri Lanka has delayed going to the IMF for years, which implies the Fund will need to complete reforms before providing a package.“
However, investors may not be so forgiving.
“With the present state of circumstances, waiting six months is not a feasible option, as we see a very fast-paced and fluid scenario on the ground,“ said Joe Delvaux, portfolio manager at Amundi Asset Management, which owns the country’s debt.
The administration has failed to choose financial and legal counsel, a critical step before to engaging in debt negotiations with foreign creditors.
He also serves as the country’s communications minister. Godahewa says the government has received more than 50 responses to their request for financial and legal help, “and we’ll move as soon as we can.”
China’s Importance
Sri Lanka is requesting a bridging loan of around $3 billion. With the help of the World Bank, India has pledged $1.9 billion and is in talks for an extra $1.5 billion in credit for gasoline and other important imports.
Nathalie Marshik, Stifel’s director of emerging market sovereign research, says that many recent government decisions have put more pressure on debt sustainability.
Only lately have officials taken real moves to prepare the way for the country’s 17th IMF loan, depreciating the rupee by about a third in early March and virtually doubling interest rates this month with a 700 basis-point boost.
It’s not clear how Sri Lanka can raise more money after it reported a budget deficit of more than 10% of GDP in 2021, given that there was a big rise in the prices of fuel and cooking gas.
“Measures would very certainly harm the pockets of the majority of the people,” Chamorro of Pictet stated.
China’s impact is evident: the world’s second biggest economy has invested in motorways, a port, an airport, and a coal-fired power plant.
Godahewa, the cabinet’s spokesperson, said that the government’s “sole worry is China’s stance,” adding, “We will have to use our strong relationship with China.”
According to the Institute of International Finance, Sri Lanka owes Beijing over $6.5 billion in finance ranging from development bank loans to a central bank swap (IIF).
“The IMF needs indications from China, India, and Japan that they would offer some kind of funding,“ said Sergi Lanau, the institute’s deputy head economist.
Stifel’s Marshik says that recent talks about Suriname’s debt, which included support from the Paris Club for an IMF programme and Chinese involvement, are a “case worth paying attention to.”
However, not all debt negotiations involving China as a key creditor have made rapid progress lately. Beijing agreed to join Zambia’s creditor committee last week, two years after the southern African country filed for bankruptcy.
And this is despite the fact that Zambia, unlike Sri Lanka, qualified for a restructuring under the Common Framework – a G20 effort aimed at streamlining restructurings for developing countries.
Sri Lanka’s investors are on hold until further clarity on the terms of an IMF plan becomes available, but time is running short.
“Sri Lanka faces a $2.5 billion funding deficit between 2022 and 2023, “Lanau of the IIF said,” adding that Sri Lanka needs at least $1 billion from the IMF. “The nation needs new funds to spend. Otherwise, it will collapse. “
