15 July, 2024

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Paris Summit To Push For Global Debt Reforms & What Sri Lanka Could Bring To The Table

By Hema Senanayake

Hema Senanayake

President Ranil Wickremesinghe will be one of the Head of States among more than one hundred head of states to be attended to the above conference to be held in Paris from 22nd to 23rd this month (June). Ad-hoc debt restructuring of Sri Lanka and Ecuador’s debt buy-back would be discussed as recent examples of multilateral efforts to ensure the debt sustainability in developing countries. Since, Sri Lanka is not out of the woods yet, it would be best to present some of the weaknesses we have in our ad-hoc solutions designed with the support or insistence of IMF for our debt crisis. 

Why do I say that IMF support program is ad-hoc. Here I am not submitting a conclusion, instead my effort here is to bring other eminent economists and accounting professionals into this discussion. According to the program approved by IMF in March this year, Sri Lanka’s gross external financing needs for the year 2023 will be amounted to USD million -6,636 (negative 6,636, refer page 46 of IMF Country Report No. 23/116 of March 2023). Whatever the case, this amount needs to be financed to prevent an economic crisis. So, the source of financing will be from three major items namely, (1) borrowing, (2) other net capital inflows and (3) change in reserve assets. Under this program the government is to borrow USD 2,120 mainly from multilateral and bilateral lenders except 11 million dollars. Then, net capital inflow will be USD 2,110 million, both will amount to USD 4,230 million. Therefore, the shortfall is USD 2,406 million (6,636 – 4,230). However, with the proposed “change in reserve assets amounting to USD -2,533 million (negative 2,533) new external financing gap is USD 4,939 million. This financing gap will be financed as follows; (1) IMF USD 663 million, (2) IFI budget support USD 900 million and (3) debt relief USD 3,376 million.  All these three items amount to USD 4,939 million, the exact amount equal to external financing gap.

However, let us consider the change in reserve assets. The amount is negative 2,533 million dollars, but on monetary authorities’ accounts this is positive which means the amount is available to be used in case of extreme necessity but usually not expended under a very strict policy framework. Now assume that we reduce the change in reserve assets by one billion dollars. In that case we can reduce the amount of debt relief by one billion or we can reduce the government borrowing by one billion. If debt relief can be reduced by another one billion dollars that will make easier for the debt restructuring negotiations. Or else, if the change in reserve assets reduced by one billion dollars, the government borrowing can be reduced by one billion dollars and that will set the borrowing target easy. This kind of arrangement is more feasible if multilateral agencies provide a standby credit line which will never be used under a strong policy framework but will increase the foreign exchange reserve position by one billion in our example. 

Even though the change in reserve assets in 2023 is estimated to negative 2,533 million dollars in estimating gross external financing needs, in regard to the year 2024 the same is estimated to negative 1,697 million dollars, again it rises to negative 2,392 in 2025. If almost everything is decided by market forces or by demand and supply including rate of exchange, according to the ideology of IMF, I strongly feel that those estimates are much more arbitrary than scientific. This means that it questions the economic wisdom in designing strong policy framework for developing countries by existing multilateral financial institutions including IMF.

Additionally, recent macroeconomic theory reveals that when the demand and supply equilibrium is met, it always happens so by creating a component of debt that can never be paid back, as such debt should keep on accumulating creating unsustainable debt bubbles under the current Fractional Reserve banking system which is the current practice of almost all countries. The said debt occurs in three main debt regimes namely in public debt or household debt or non-financial corporate debt or in all three which is defined recently as “Total Core Debt” by Bank of International Settlement. Perhaps this theory might explain the severe debt crises faced by developed nations. The same will occur in developing countries too, if they show continuing dismal low economic growth patterns similar to mature developed economies. 

Perhaps these are some of the points Sri Lanka can bring to the discussion at the Paris conference as one of the main goals of the conference is to evolve the existing multilateral development banks and to get increased participation with more contributions from countries which have more foreign exchange surpluses. If successful, then the shift in vision suggested by the conference in order to articulate the protection of climate and biodiversity along with the United Nations Sustainable Development Goals can be remodeled with a new shift in scale of financing and through novel methods. 

If the Paris summit is strongly thinking of evolving multilateral financial agencies including IMF, ultimately it is not only the scale and method of financing as cited in the example that need to remodel to ensure debt sustainability but also the ideas behind policy framework uphold by those agencies need to be evolved in view of the new findings of macroeconomic theories.

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Latest comments

  • 15
    0

    The author in his writing seems to assume that the current president of Sri Lanka is genuinely doing something for the country, as he is attending these economic summits etc. He would be very naive to think so. Ranil has never worked for the country; he has always played politics as his main role; he is not bothered about the people of the country; he knows that he will not be punished for his callous neglect, as long as the present system prevails (no other destructive leader was ever punished, including the captains of them all in the last decade or so); he is simply continuing to play his politics, clearly demonstrated by his banter and sarcasm, brushing away serious argument frivolously with a snigger and a giggle etc. To imagine that this rascal or his many “supporters” within the political and corporate ranks are anything but selfish parasitic scum is to be utterly stupid. The saddest part is that many people fail to see through these farcical shenanigans.

  • 4
    0

    Paris Summit To Push For Global Debt Reforms & What Sri Lanka Could Bring To The Table

    Hat triks as in the picture, Hold hat for begging.
    When you receive what you begged for, it only lasts for a short time. But what you build day after day will stay on for posterity to meet. Be a world changer and work out your dreams

  • 8
    0

    It’s a bit rich for countries to borrow to un-sustainability ……… and then demand debt-reform.

    The best debt-reform ……… is not to borrow …….. and not to lend.

    If no one lent us ……. the Rajapakses won’t be so rich …….. and Ranil wouldn’t be the president. ……… And more importantly, the people/citizens/poor won’t be starving and undergoing so much untold misery. ………… The country would have found a natural indigenous solution.

    Borrowing – like Ranil’s borrowing, now – has helped to sustain the rulers: not the people. ……… The truth is, for the people/citizens it would have been better if no one lent us!


    Pure supply/demand should set natural interest-rates ………… Central-Banks manipulating the interest-rates …….. has caused a debt-bomb …….. even many “developed” countries are sitting on zillions of – external/internal – debt.

    Singapore has zero debt ……. can’t recall if it’s external or internal or both.

  • 7
    0

    What? You mean Lankan economists create the numbers and then try to force-work it on the People?! Well, they did so at the beginning at least (for a long time actually), and now these number creations keep rolling on and on? Ranil must be feeling very grand indeed, going to Paris Club and talking like a big-shot about these figures. Guess what? Macron and his wife must be laughing their heads off at Ranil and his wife. More intelligent and successful countries survey the country environment and the ambience of the People and their livelihoods, and then, and ONLY THEN, create the figures. Now that’s a far more complex thing to do, but then, these countries are far cleverer than ours.

  • 4
    1

    We know little about what really happens even in the states closest to us. There is news from the Maldives yesterday:
    .
    https://edition.mv/news/28224
    .
    Although I left the Maldives in December 1994, having taught there a total of three years, and haven’t set foot in the country since then, I wrote about the Maldives Parliamentary Elections where I expected happy outcomes.
    .
    My predictions were pretty accurate:
    .
    https://www.colombotelegraph.com/index.php/the-maldivian-parliamentary-elections-2019-where-a-happy-result-can-be-predicted/
    .
    In the article I have given a link to Professor Jeevan Hoole’s report on the Presidential Election a few months earlier, but unless I link you separately to it you may not realise its significance:
    .
    https://www.colombotelegraph.com/wp-content/uploads/2019/04/Report-of-the-Sri-Lankan-Observer-Mission-to-the-Maldivian-Presidential-Election-of-23-Sept.-2018.pdf
    .
    Now, the result doesn’t look so happy. The two men whom I met in Berjaya Hotel, Mt Lavinia, have fallen out. They are contesting each other! First round of polling, Saturday, September 9, 2023.
    .
    https://edition.mv/news/26832
    .
    Many of the problems they also face are similar to ours. But at least they have elections!
    .
    Panini Edirisinhe of Bandarawela

    .

  • 11
    4

    Ranil’s genes will not produce anything honest. He is just like Esmund, taking every advantage out of the massive chances he has got in life due to the corruption of a society, stupidity of the people and advantages of being a big fish in a small pond.

    Ranil did not miss a single Davos meeting( Switzerland meeting of the rich) . What is the relevance to the country ? He will grab every chance to fly to western countries, Washington, London, Paris, Tokyo ! Ranil went to Brussels to eat chocolate !What has the country gained ?

    I think when Ranil meets JR and Esmond in the UNP heaven he will boast them about the number of countries he visited ( with all the advantages of VIP travel-although from a failed country) and the various big names he got to shake hands with !

    However they all know ( including JR and Esmond) that he is just a fraud and that the people of this country never wanted him to be their leader.

    • 2
      3

      Deepti Silva@ what a fool you must be. You yourself revealed to us that you are a medical graduate and we thought you were learned, but from what I read here, I am forced to feel that you are no different than Jayasumana, who is ruled by Natha-dewiya.
      .
      We had leaders who travelled to Newyork with 300 or more local councilors to strengthen their parties and make the country a bankrupt state, however now you are talking about a president going to the world summit with a handful of delegates? Our punnaku drinking nation, never uttered a single word against their extra vaganzas. However, you to criticise Ranil s trips today ? how stupid you should be.
      :
      Even if you live in the UK, your mindset hasn’t changed positively because of some wrong reasons that is you grew up in the Sinhala Buddhist mantra.

    • 2
      1

      leela , MR committed his crimes differently. Ranil commits them another way. However both are criminals.

      I am very happy you keep reading all my comments and reply negatively. At least I have one strong critic ! Keep it up, this is how people learn, oppose, criticize, eventually you will realize I am right

  • 1
    1

    I was in Athens in 1980 . I met a couple of Silankans on the streets who were
    being stopped by Greek Police to check their permits to stay in Greece . The
    Police asked them why in Greece ! And when they said Tourists , the Police
    grinned and said ” Malakkka ” tourists ! And in 1982 , I was at Frankfurt
    airport with a friend , at the check out queue and the queue had a dozen
    passengers , all Europeans . The man at the checking counter spotted us and
    signalled us to step aside and wait . We had to wait until everybody else was
    done . Other EU capitals I visited I only had very pleasant experiences . The
    point I try to raise here is , in some circumstances , no sooner we are spotted ,
    our ID becomes very clear to them . Things have changed a little since Obama
    Sunak and Sadiq Khan . But they are all their citizens . When it comes to
    people like Ranil , it is Greek Malakka !

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