By Uditha Devapriya –
Sri Lanka’s Central Bank will be settling a USD 500 million bond the day after tomorrow. Earlier this month, Ajith Nivard Cabraal tweeted that the Bank had set aside the required amount from its foreign reserves, reiterating the country’s commitment to honouring its debts. Perhaps in response to this development, bondholders appear to have regained confidence about our prospects: latest figures show that bond market prices are converging with face value, though this may well be a temporary gain.
The January 18 settlement is the first of two that will have to be made to our International Sovereign Bond (ISB) holders this year. The second, amounting to USD one billion, is due on July 25. The Central Bank’s strategy is one of doubling down on these obligations while renegotiating debts from other governments. This strategy isn’t as muddled up as it is made to be by its critics: unlike governments, ISB holders don’t negotiate, and if they are asked to, it’s usually on the eve of a default or severe economic crisis.
In strategising a way out, then, the Central Bank’s priorities seem clear enough: it will pay up on its ISB commitments, and devote foreign exchange to little else.
It’s likely that this will affect our foreign relations in the longer term. The country is presently governed by a party that promised never to sell or lease out its assets. Yet, today, officials are travelling everywhere, negotiating with this government and that, hoping for more lifelines. We have clearly exhausted other options: we can’t raise anything from bond auctions, and we are rejecting the IMF line. Since governments are easier to talk with, we are talking with as many of them as possible. It’s doubtful whether this is the only option available, but it’s probably the best shot we can give.
In giving that shot, however, are we exposing ourselves to the pressures of regional and extra-regional power pressures? Consider the countries we have gone to so far: Oman, China, and India. Negotiations with India have been successful, with Foreign Minister S. Jaishankar stating that Delhi is ready to stand with Sri Lanka. Though his government has remained quiet over requests for credit lines, these may well come our way.
On the other hand, Beijing has responded to Gotabaya Rajapaksa’s call to Foreign Minister Wang Yi to restructure its debts, with Cabraal declaring that a new loan is on the docks. As for Oman, though negotiations have stalled over requests to explore the Mannar Oil Basin in return for interest-free credit, this too is a window that remains open.
These developments are, all things considered, intriguing. In the face of the worst global health crisis in over a century, our foreign policy has taken a massive beating. The fertiliser imbroglio with China and the withdrawal of Chinese projects from the North over alleged Indian pressure, as well as the visit of the Chinese Ambassador to the North, are cases in point here. All these point to an increasingly complex foreign policy front. The question is, will the country’s foreign exchange problems complicate it even more?
Perhaps more so than the 1970s, when it faced a severe balance of payments crisis, Sri Lanka is giving way to a foreign policy dictated by depleting foreign reserves. The regime’s dismissal of W. D. Lakshman and appointment of Cabraal, in that regard, accompanied a shift of focus last year to the country’s foreign exchange situation. This has spilled over to our external relations.
Here the Central Bank has had to reckon with a contradiction: between its insistence on not going to the IMF and its assurances about meeting ISB obligations. Though it’s debatable whether the Bank has addressed, let alone resolved, that contradiction, it is making use of Sri Lanka’s foreign policy to pay bondholders their due.
For their part, economic experts have shifted in their response to what the government is doing. While earlier they warned about impending defaults, now many of them have turned to questioning the current policy of repaying bondholders no matter what.
Nishan de Mel of Verité Research, for instance, points out that defaulting is not the same thing as declaring bankruptcy. Suggesting that the former is preferable, he contends that the government should do what it can to renegotiate its debts. On the other hand, Dushni Weerakoon of the IPS observes that while restructuring debt may be easy for a country with a reputation for defaults, like Ecuador, it is unviable, lengthy, and costly, at least in the short and medium term, for a country like Sri Lanka.
What of the IMF line, then? It’s obvious that Sri Lanka can no longer negotiate for breathing space from the IMF without conditionalities being imposed on it. The only way it can obtain such space, in other words, is by succumbing to those conditionalities.
What do we make of this? Defenders of the IMF line may argue, justifiably, that there’s no give without take, and that if we go to that body we will have to eat humble pie. But the question to ask here is, who are we asking to take on these burdens? Who are we asking to endure more of the same? Have IMF advocates considered these problems?
The IMF is not a charitable organisation: it has provided assistance to almost 90 countries on condition that fiscal discipline be enforced in the long term. If we go down that road, we will need to give back something, like public sector retrenchment. These have generated enough and more backlashes elsewhere. Are we ready to risk them here?
So long as the government fears an uprising from the people, it will not choose the IMF line. To say this is not to defend the powers that be. They have contributed to the mess we are in. But to admit to that is not to deny that, whatever that mess may be, to opt for structural adjustment, when social pressures are peaking, would be inadvisable.
That is why Basil Rajapaksa’s billion dollar economic relief package, tabled earlier this month despite much criticism, is intriguing: among other things, it promises a LKR 5,000 allowance to 1.5 million government workers, pensioners, and disabled soldiers. Its underlying thrust is not less money, but more: not spending cuts, but spending hikes.
The urban and suburban middle-classes have responded to the package with characteristic ambivalence. While demanding for relief from the government, they are also questioning the efficacy of printing money. What they have failed to realise is that that printing money is the only resort the government has to grant the kind of relief being demanded. It’s a classic either/or scenario: you get the relief with printed money, or you don’t.
Mainstream economists have their own solutions lined up. They observe that printing money can only lead to greater inflation, implying that the only alternative is to stop doing so. But what are the socio-political costs of such policies? What will their knock-on effects be on economic relief for the masses? To ask these questions is not to split hairs, but to raise valid concerns that have not been addressed by the other side.
That is not to say that the government’s measures have been farsighted. They have not. Though Modern Monetary Theory (MMT) policies, which the regime is advocating, may get us space in the short term, they are not the type of reform we should be enacting in the longer term. The policies we need require radical reform. However viable it may be, printing money should not be considered a substitute for such reform.
To suggest just one option, one of Sri Lanka’s most brilliant economists, Howard Nicholas, has advised that we industrialise, noting that the historical record has been better for countries which opted to do so. Vietnam is a case study for how even a sector like textiles can propel industrialisation. That is an example Sri Lanka under Ranasinghe Premadasa followed, at least according to Dr Nicholas, but it is one we have abandoned in favour of policies alternating between neoliberal prescriptions and populist measures.
Sri Lanka will obviously have to consider these options, instead of caving into stopgap measures and orthodox alternatives. But the question is, how can it do that?
One route, as Dayan Jayatilleka suggested not too long ago, would be to convene an economic roundtable. Such a roundtable would prevent economic discussions from being monopolised by elite intellectuals, helping the government and the opposition to formulate policy proposals after consulting a whole range of stakeholders, and aligning the interests of the economy with the interests of the masses.
This has, by and large, been a long time coming. Both the government and the opposition have tended to view economic priorities as distinct from other socio-political concerns. Yet the two remain interlinked. In that sense, caving into economic orthodoxy while ignoring social reality would be detrimental to the future of the country and the plight of its people. We obviously need to think of alternatives, and fast. But have we, and are we?
*The writer can be reached at email@example.com