26 June, 2022

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Forex Crisis & A Plethora Of Platforms & Solutions

By Rusiripala Tennakoon –

Rusiripala Tennakoon

Current debate on economic recovery centered on the Foreign Reserves of the country is heavily patronized 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 mean-time a few astute 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 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 indicate 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 sound, nevertheless, tend to making 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 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 lost to understand why the investors, whoever they are, should not benefit by 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 favoring 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 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 rationalize their stand. Sometimes creditable motives are attributed to uncreditable 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 Bn USD 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 centered round 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. Because defaulting loans and dues will create a worst picture which will discourage remittances further and even inflow of tourists who will think twice before deciding to visit a “starving county” which even has defaulted 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 down graded 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 down grade 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 realization 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 debts is like putting a noose round the neck and get ready to jump. Pure and simple suicide but some may call it a sacrifice. What most of these experts are trying in effect 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 overleverage.

* 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 honoring 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.

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Latest comments

  • 5
    0

    Experts say srilanka cant go to IMF. Knowing the fact that the chinese would suck the last blood drop of us remain, to rely on them ? Rajapakshes will have to face the truths sooner than later. If there were not such egocentric politics, things would not have reched this much of deep levels.
    .
    But CBG Ajith Carbal, says we dont want to go to IMF.
    .
    Who do they think are fooling today ? Why cant RAJAPAKSHE LED politics see it in favour of the people – at least today.
    :
    https://www.bbc.com/news/business-59952980

  • 2
    0

    I live in UK, & though UK is the 6th biggest economy, there are many who live ‘below the poverty line’, drawn into debt due to circumstances & others who are in debt due to basic mismanagement of finances. Anyway, to all those in debt, the govt. & the banks are willing to ‘restructure’ the debts as declaration of bankruptcy as a defaulter benefits neither the lender nor the borrower. However, some think that by defaulting & declared bankrupt means clearing the slate to start fresh again is the lucrative option only to realise that a bad credit rating would jeopardise the ability to even open a bank account or even hamper employment prospects later.

    It is obvious now that SL is in this situation due to financial mismanagement, just like those who have gone on a credit spree without realising the debt implications. Politicians come & go (maybe not in SL) but it is the integrity of the CB economists & its top management who are held responsible at the end of the day. If unable to persuade those governing the country of the prudent path to follow, these officials should resign to preserve their integrity & I am sure such people will always find employment in private banking. At this crucial hour, is the govt. short sighted, arrogantly pig headed or self serving until the last drop of blood is sucked out from the country?

    • 3
      0

      “endurance displayed by the people in facing the events surrounded by the highly ill-conceived advice and opinions of Quacks”
      Wow, what brutally honest self-criticism from Mr.Rusiri!
      Still, I find this hard to believe:
      “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”
      So, Mr. Rusiri don’t you know that those bonds only fall due in 25 YEARS??? What do you think the purchasing power of 10 billion rupees will be in 25 years? A couple of used tuktuks maybe? Is that a bad deal?
      “Opinions of quacks ” indeed.

  • 7
    1

    Mr Rusipala,

    You always have a slant to your thinking, don’t you? Can you ever think straight? It looks like, writing these blah-blah is some sort of therapy for you. :))

    Are you a real economist or a Rajapakse-economist?

    Trained at the Mahinda Rajapakse School of Economics, Mattala?


    Anyway, thanks for the entertainment, in these bleak times :))

    • 1
      1

      nimal, here’s an excuse fo you to spend 47 minutes with Palki Sharma,
      .
      https://www.youtube.com/watch?v=fnjCRFg9Z1k
      .
      although you put it all on oc, that she is his crush.
      .
      Other readers may want to start 24 minutes into the Youtube for her views on Lanka.

      • 0
        0

        SM, I have seen a couple of times that you follow Palki religiously. Please do not!! No doubt, she is very smart, talks eloquently and can easily impress you with her smooth-as-butter political analysis. However she is not an independent journalist at all, one of the top class stooges of N. Modi – the most racist and bigoted heads of state in Asia, if not one of the top class bigots in the world!! She happily propagate Modi ‘vision’ when it comes to domestic politics.

        • 2
          0

          Jit,
          Yes, Palki is far from objective. Shekhar Gupta on the Point is much better. But not so sexy.

          • 3
            0

            “But not so sexy.”

            Ah! Finally, Old Codger has left the imaginary world of philosophy and landed in the real one ……….thought, never live to see the day!

            If it’s all about news and views …….. why don’t they put ol’ Palki in a Carmelite nun’s dress? Old Codger will desert and the ratings will nose dive ………..

            Sex sells!

            In spite of all the manufactured pretend-morality and piety …….. women instinctively know it more than anyone else ……… and use it to the max ………


            But there’s an invisible wall ……. you can look and lust but you can’t touch ……… if you do, all moralistic shit hits the fan!

            Poor Native!


            I was watching Beyoncé doing a photo-shoot for her upcoming album …….. she was dressed in a skimpy dress and crawling on the floor on her hands and knees like a baby; bum in the air ….. and a fan from behind was blowing her skimpy dress away leaving the knickers exposed ….. very Victorian and proper ………


            She is very religious and is selling religion to mankind ………. Mr Rusiripala will be first in line to buy the album. He has such faith!

            Wonder why Aretha Franklin sang fully clothed? ……….Perhaps she could sing.

            • 2
              0

              Nimal,
              “why don’t they put ol’ Palki in a Carmelite nun’s dress?” Oh, but I did watch Saudi newsreaders kitted out like that, you see.

              • 0
                0

                Dear oc,
                .
                I took your objections to Sunil Handunnetthi’s line of argument seriously. However, doesn’t he answer those charges satisfactorily here?
                .
                https://www.youtube.com/watch?v=6OnTAH0Ds2c&t=629s

                .
                Warning: 53 minutes of Sinhala here, but it is easy to follow.
                .
                Panini Edirisinhe

                • 0
                  0

                  S.M,
                  This speech still contains the rabble-rousing 80’s chauvinism of the old JVP (which AKD doesn’t indulge in). As SJ says, these aren’t real Marxists.
                  Note too the obsequious and frequent references to “ape hamuduruwane” . “Hamuduruwo” means “master”. Why is an alleged egalitarian doing this? Furthermore, he goes along with the nonsensical myth that whoever controls Trinco or our airports controls Asia. The Japanese proved that idea wrong in 1942 with devastating consequences.

              • 0
                0

                “Oh, but I did watch Saudi newsreaders kitted out like that, you see.”


                OC,

                No wonder you left Saudi and now reside where you can watch Palki! :))

                • 0
                  0

                  Nimal,
                  When there is very little to see, you are free to fantasize. A little mole there… Nice fingers….

        • 0
          0

          Jit, I must be serious to start with at least. I realise that you’re now thinking of me as an odd guy whom you must take seriously. Let’s exchange more views later. Yes, I know that Palki is pushing Indian interests. I haven’t yet worked out whether she’s an acolyte of Narendra Modi. Shekhar Gupta of “The Print” is much more objective.
          .
          However, what the hell do you mean by objecting to my secretly lusting for Palki? See the exchange between nimal and oc. Just because I was educated at S. Thomas’ do you expect me to still display the obsessions associated with such schools. Even the mixed-up nimal doesn’t want to listen exclusively to Shekhar owing to such considerations.

          • 0
            0

            SM, I am so glad to note that you have come a long way from the Thomian domain to a hetero domain blessed with loads of lechery…..oh poor Palki!! ………………………. ;)

    • 4
      0

      Nimal, I have been following comedy/sillypala for years, just to get a grip on his psychology. I really do not know what his qualifications are, but then again titles do not matter in Lanka. Anyone with basic knowledge in Economy and some commonsense , reading this article will realize the stupidity and ignorance of the writer, yet trying his level best to fool others.. Just consider the last few articles Comedypala has written on this subject. But for Rusiri and many so called experts, parroting Rajapksas glory is what matters, not their self esteem,credibility or educational integrity.

  • 3
    0

    Sri Lankan should learn from at least the past. China invested in Hambantota harbour, Matala airport and how productive it was. Sri Lanka couldn’t repay it and then extended to give it for 99 years deal. Sri Lanka signed a deal to import Organic fertilizer. Sri Lankan scientists found it is not suitable to this country but China black listed the Bank for not paying the agreed deal. After Sri Lanka surrendered to China and paid the money the black list was removed and Sri Lanka signed more deals and to import more fertilzer and more loans. China uses passive threat against Sri Lanka and Rajapaksas use violent threat against Sri Lankans. Rajapaksas put the blame on Corona which was imported from China.

  • 0
    1

    Dear nimal,
    .
    I always thought you an intelligent fellow; even more, I realised that I couldn’t match you as an entertainer.
    .
    How ethical, though, is what we are doing to “little Rusiri”, alias “Sillypala”? The guy deserves the scorn we’ve been pouring on him, but isn’t it rather an uneven battle?
    .
    On his previous article, even “old codger” joined in. Poor Rusiri. It’s just impossible for him to counter us all when we get together.

    • 2
      0

      “How ethical”

      SM,

      We are trained/taught to be ethical/considerate/compassionate ………. that’s what “Christian schools” do to you.

      But look at the utter damage and devastation done to the country in all facets imaginable by the likes of Rajapakses and their supporters …….. Rusipala is a prominent one …… he deserves all the scorn he gets!

      When I see people standing in queues and suffering …… mothers selling their daughters to survive …… it shouldn’t stop with mere scorn ……. In fact if I run into the prick I’ll smash his face into bloody pulp.

      It has gone past niceties, now.

  • 2
    0

    SM, We are trained/taught to be ethical/considerate/compassionate—-that is what Medical Schools do to us. But I also strictly follow my own principle, “be smart but never at the expense of others”. That is not trying to be smart making others look stupid or taking for granted others are stupid. Not confronting such people is indirectly enabling their deviant behavior. Rusiri has been doing it too often , too long. We have seen it time and again, patients doing , at their own peril.

    • 0
      0

      Thanks, chiv,
      .
      I have no time to think carefully, quite apart from reading all that matters and writing carefully. I’m in Maharagama, trying to get to Bandarawela at least tomorrow morning.
      .
      However, I get your point, and thank you for it.

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