Economic

This has to be covered with the daily revenue of LKR 5.46 billion, a veteran financial analyst said, adding that the total estimate for the payment of loan and installment this year for government borrowings is Rs. 2,157 billion.  

However, the expected revenue in 2021 is LKR 1,994 billion and the foreign debt burden has increased to ten times more than the current foreign reserves at present, he claimed.  

If the state monetary and fiscal authorities will be able to roll over short term debt and official loans, and China lends an additional USD 800 million to Sri Lanka in 2021, reserves should fall to around  USD 3 billion by the end of 2021, giving them room to muddle through next year.

This prediction was made by Citi Global Finance International in an in-depth debt analysis report on Sri Lanka recently.

The Central Bank has launched a special investigation after the revelation of a massive dollar transaction fraud by a leading financial institution after the sudden depreciation of the rupee to LKR 194 against the USD recently from LKR 185 -187 previously, informed sources said.

This fraud which led to the outflow of much needed foreign exchange has taken place without the knowledge of the heads of the private financial institution and neither the CBSL nor the Finance Ministry hasn't issued any statement regarding this matter, informed sources added.

Revealing the government’s strategy to tackle this massive debt burden of USD 5.5 billion, State Minister of Finance Ajith Nivard Cabraal said that in addition to savings from cheaper oil and import restrictions, the government was also continuing negotiations with India for a USD 1 billion SWAP, which is in addition to the USD 400 million it received in July.

Sri Lanka will also receive USD 700 million as the second tranche of a USD 1.2 billion syndicated loan from the China Development Bank. The first USD 500 million was transferred in March this year.

The government will also revisit a USD 500 million Samurai bond, which the CBSL began laying the groundwork for in 2018, and possibly a Panda bond as well, Cabraal said.

Sri Lanka could offer these bonds “sooner rather than later,” depending on market conditions, the State Minister added. A USD 1 billion repurchase arrangement with the US Federal Reserve, announced in July, also made the list.

The CCPI for all items for the month of December 2020 was 138.0 and it records an increase of 0.9 in index points that is 0.66 percentage points compared to the month of November 2020 for which the index was 137.1. This represents an increase of expenditure value by Rs. 549.24 in the “Market Basket”

Year on Year inflation of Food Group has decreased from 10.3% in November 2020 to 9.2% in December 2020 while that of Non‐food Group has increased from 1.6% in November 2020 to 2.0% in December 2020.

For the month of December 2020, on a year‐to‐year basis, contribution to inflation by food commodities was  2.80%. The contribution of Non Food items was 1.41%.

This was mainly due to increases in value change in groups of ‘Housing, Water, Electricity, Gas and Other Fuels’ (0.68%), ‘Transport’ (0.45%), ‘Education’ (0.14%), ‘Clothing and Footwear’ (0.13%), ‘Restaurants & Hotels’ (0.13%), ‘Miscellaneous Goods and Services’ (0.09%) and ‘Alcoholic Beverages Tobacco and Narcotics’ (0.07%).

Decreases in value change were reported for the groups of ‘Health’ (0.17%), ‘Communication’ (0.08%), ‘Furnishing Household Equipment and routine Household Maintenance’ (0.03%) and slight decrease in price was reported in group of ‘Recreation and Culture’.

The moving average inflation rate for the month of December 2020 is 4.6%. The corresponding rate remained unchanged in December 2020 relative to the month of November 2020.

This was mainly attributable to the increases observed in production, new orders, employment, and stock of purchase in the manufacturing sector while services also continued to recover led by the expansions observed in new businesses, business activities, backlogs of work and expectations for activity.

The Purchasing Managers Index compiled by the Central Bank showed that the employment sub sector has also increased during the month of December 2020.

Some respondents in the manufacture of food and beverages, textiles and wearing apparel sectors highlighted that they could better utilise employees amidst improved factory operations with increased demand.

The Stock of Purchases sub-index increased significantly in line with the expansion in New Orders and Production, as well as with the intended accumulation of stocks anticipating supply chain disruptions in coming months, particularly due to upcoming Chinese New Year holidays.

Many manufacturers mentioned that their shipments were rescheduled, causing considerable delays in arrival/clearance of required materials, mainly due to the continuous delays at the Port of Colombo.

Expectations for manufacturing activities in the next three months improved further with the expectation for the normalisation of economic activities within the country as well as in major export markets.

Business activities in the services sector increased in December 2020 after declining for two consecutive months.

Further, business activities in transportation, and wholesale and retail trade sub-sectors expanded owing to relaxation of travel restrictions to some extent during December 2020.

Moreover, financial services and other personal services sub-sectors also experienced an increase in activities in December 2020.

These options to be explored in the new year includes a USD 1 billion SWAP agreement with India, attracting investment to the securities market and possible Panda and Samurai bonds, as well as receiving $ 700 million in a syndicated loan from China.

State Minister of Finance Ajith Nivard Cabraal has insisted that the Government had taken steps well ahead of time to restrict imports and protect reserves precisely to meet debt obligations.

He pointed out that according to Central Bank estimates the resultant reduction in the import and fuel bills would save Sri Lanka about $ 2 billion, which would also help top up reserves.

He noted that t private sector participation has been facilitated even in the COVID-19 environment by maintaining stable macroeconomic fundamentals.

Referring to debt management and the foreign reserves position, he revealed that USD 2.5 billion could be achieved as the latest investment for the Port City alone amounts to USD 1 billion.

The Hambantota tyre factory is expected to attract USD 300 million, with at least USD 175 million in 2021.

Investments in pharmaceuticals and education should be in the range of $200 million, he said adding that other investments are also flowing in, and realisation of these inflows would attract further investments.

The Government will also revisit a USD 500 million Samurai bond, which the Central Bank began laying the groundwork for in 2018, and possibly a Panda bond as well, Cabraal said. Sri Lanka could offer these bonds “sooner rather than later,” depending on market conditions, the State Minister added.

 A USD 1 billion repurchase arrangement with the US Federal Reserve, announced in July, also made the list.

The Fund stands ready to discuss all options of engagement with Sri Lanka, including financial support, if requested by the authorities. The preconditions for financial support are the same as for any other member, Masahiro Nozaki, IMF mission chief for Sri Lanka said.

In an email response to a request for comments on the present stand of the IMF, he noted that they continue to engage with the Sri Lankan authorities and are considering the full set of options for engagement.

The continuation of the EFF policy reform programme will increase the prospects of improving the sovereign rating, a senior economist who has in-depth knowledge in dealing with the IMF in the past  added. He added that in this case, a successful restructuring would be difficult and costly.

He pointed out that the government will be compelled to engage with the IMF to execute the restructuring. If no new IMF and private sector credit comes in, gross reserves would fall to about USD 3.7 billion by the end of 2021, he predicted.

The USD 1.5 billion EFF arrangement approved in 2016 expired on June 2, 2020. Given that the final review under the arrangement was not completed, Sri Lanka could not avail of the last disbursement under the EFF, amounting to SDR 118.550 million equivalent to around USD 200 million.

Disbursements under any Fund arrangement can only be made during the period between the date of its approval by the IMF Board and its expiration date, IMF mission chief Masahiro Nozaki said.

Therefore at this point, for Sri Lanka to access any additional Fund resources, the IMF Board approval of a new arrangement would be needed, he disclosed.

In April 2020, IMF received a request from the Sri Lankan authorities for emergency financial support under the Rapid Financing Instrument (RFI).

Assessing relevant conditions for the RFI has taken longer than for other countries, due to Sri Lanka’s daunting economic challenges, high public debt, and Parliamentary elections in August. The RFI request remains in place, Mr. Nozaki pointed out.

“We have sought but not reached understanding yet on how to fulfill key requirements for the RFI, which include policies to continue ensuring debt sustainability”, he said.

"The authorities have a range of options to ensure debt sustainability and the IMF stands ready to discuss all options with the authorities," he assured.

Sri Lanka's export earnings in November 2020 amounted to USD 748.58 million, which was 20.97% lower than the November 2019 and 11.84% lower than October 2020, the Export Development Board (EDB) announced.

The unprecedented disruptions of COVID-19 are causing a geopolitical reset — and as the global order is redrawn, small emerging market economies like Sri Lanka are vulnerable to the fallout. Sri Lanka straddles vital shipping routes and is at the centre of diplomatic spats between China and the United States, who called on Sri Lanka to make ‘difficult but necessary choices’ over its growing economic and political ties to China.

In December 2020, a US grant offer of US$ 480 million under its Millennium Challenge Corporation was withdrawn and any further assistance under the US Coronavirus Aid, Relief, and Economic Security Act has been made conditional on Sri Lanka containing China’s influence. China in turn denounced what it considers as US pressure on countries ‘to pick sides’. The challenges are many for Sri Lanka’s newly elected government to sidestep global rivalries and maintain its stated stance of a neutral foreign policy.

The economic fallout of the COVID-19 pandemic is not helping. Sri Lanka’s economy was already weak, weighed down by persistently low growth averaging under 3 per cent, high public debt nearing 90 per cent of GDP and large fiscal deficits of near 7 per cent of GDP at the end of 2019. With foreign debt settlements averaging US$4 billion per year due in 2020–2023 — primarily in the form of international sovereign bonds — Sri Lanka’s ability to implement fiscal and monetary stimulus, without generating further macroeconomic imbalances, is severely constrained.

Sri Lanka had early success in battling COVID-19, recording only 3000 cases and 11 deaths by the end of September 2020. This helped to revive economic activities. But a second and more severe wave of infections has seen those numbers spike sharply to over 43,000 infections and 204 deaths as the year drew to an end.

Dealing with Sri Lanka’s foreign debt settlements remains the most critical priority for now. Despite sovereign credit rating downgrades, the government remains confident of meeting all repayments without resorting to a conditional arrangement with the International Monetary Fund. This is in keeping with the government’s stated intentions of moving away from foreign loans to foreign investment, with the latter already earmarked to raise an estimated US$2.5 billion in 2021. For Sri Lanka’s debt-burdened economy, the strategy makes good sense. Yet it will also pose fresh challenges in dealing with rivalries closer to home, such as that between China and India.

While the Chinese debt trap narrative can be disabused, China does remain Sri Lanka’s largest bilateral creditor, owning 9.6 per cent of total outstanding foreign debt at the end of 2019. India’s share is a much smaller 2.4 per cent. Sri Lanka made an early appeal to both countries to provide debt relief and hard currency to shore up its foreign exchange reserves. China and India responded swiftly and positively — China granted a US$500 million loan top up and India provided a US$400 million swap arrangement. Sri Lanka is reportedly seeking an additional US$2.5 billion swap funding from both.

Such assistance will not be devoid of China and India’s competing interests. Sri Lanka will have to look at its past missteps in balancing their regional interests and avoid a repeat. Indeed, China’s pervading presence and India’s response to it is acknowledged by Sri Lankan Prime Minister Mahinda Rajapaksa himself as a key factor behind his unexpected presidential election defeat in 2015.

This time around, Sri Lanka is emphasising an Asia-centric outlook in its political, economic and strategic positioning. Tellingly, it also assures an ‘India first’ strategic and security policy within this realignment. How it will work in the harsh light of Sri Lanka’s economic reality is yet to be determined.

For now, Chinese investments into Sri Lanka are speeding ahead. The China Harbour Engineering Company (CHEC) that built the Colombo Port City signed its first US$1 billion agreement in December 2020. This was on the back of approval to set up a US$300 million Chinese tire factory in close proximity to the Hambantota Port. At the same time, a decision on whether India will be allowed to operate a terminal at the Port of Colombo that the previous government had agreed to is still pending, despite a recent high level visit by the External Affairs Minister.

Balancing these tensions and trade-offs will test Sri Lanka’s political and diplomatic skills. Fresh hostilities between China and India on renewed border conflicts, India’s decision to withdraw from the Regional Comprehensive Economic Partnership negotiations — which China played a leading role in — and rising battles over technology all point to a hardening geopolitical stand-off. In this environment of escalating big power rivalries and unrelenting pressure on the economy from COVID-19, 2021 promises to be yet another testing year for Sri Lanka. This is particularly so as the global economy and international power relations are being reset in fundamental ways.

*Dushni Weerakoon is the Executive Director and Head of Macroeconomic Policy Research at the Institute of Policy Studies of Sri Lanka.

In the wake of unprecedented rupee depreciation for the first time in eight months, the Central Bank has taken measures to aggressively bring the rupee to 185 to the US dollar as the currency weakened towards 193 to the US dollar in forex markets in the wake of money printing. It is of the view that the recent increase in volatility of the exchange rate is unwarranted and unacceptable.

Accordingly, among other measures, the Central Bank will take appropriate action aggressively hereafter to contain this volatility in the domestic foreign exchange market.

The monetary authority expects that these actions, together with the continuation of the curtailment of non-essential imports, will enable the Rupee to appreciate within the next few days towards the levels of below LKR 185 per USD observed in November 2020.

The Central Bank reiterates that official reserves remain at sufficient levels. At present, gross official reserves are at USD 5.6 billion.

Discussions with the Central Bank’s domestic and foreign counterparts to boost the level of reserves are also reaching an advanced stage of conclusion.

The receipt of these expected inflows as well as the ongoing improvements in the domestic production economy leading to the expansion of foreign exchange earnings will facilitate the maintenance of exchange rate stability, while meeting Sri Lanka’s debt obligations on time, in the period ahead as well, the Central Bank announced.

The government together with the Central Bank of Sri Lanka (CBSL) will  introduce and implement essential structural changes that are required to drive the economy along the envisaged growth path.

Fitch noted that it typically does not assign outlooks or apply modifiers to sovereigns with a rating of ‘CCC’ or below.

The re-calibration will result in rating actions for some issuers with Sri Lankan national ratings. These rating revisions will be announced soon.

National scale ratings are a risk ranking of issuers in a particular market designed to help local investors differentiate risk.

Sri Lanka’s national scale ratings are denoted by the unique identifier ‘(lka)’. Fitch adds this identifier to reflect the unique nature of the Sri Lankan national scale.

National scales are not comparable with Fitch’s international ratings scales or with other countries’ national rating scales.

The Government had earlier refuted down grading by Fitch Ratings saying it fails to recognize the robust policy framework of the new Government.

The Finance Ministry noted that it observed with disappointment the rating action by Fitch Ratings.

The ministry expressed  concerns about Sri Lanka’s external debt repayment capacity over the medium-term, financing options and debt sustainability risks.

This was done at a time when its medium term policy framework in its Budget 2020 was just announced, the ministry said.

The Finance Ministry noted that Fitch Ratings builds up its argument based on the ‘existing financing model’, thus adopting a backward looking approach.