Breaking the cycle of debt: Finding sustainable solutions

It is important to recognise that while an IMF bailout can provide short-term relief, the country needs to focus on creating more economic activities in the long run to ensure sustainable economic recovery  

It is astonishing to discover that at the highest levels of the Government, strategic thinking is sorely lacking. Having spent almost two decades in the private sector, working with some of Sri Lanka’s most reputable companies including Unilever, MAS, and Sri Lanka Insurance, I can attest that, as senior corporate executives, strategy was a constant topic of discussion. Our training emphasised the importance of taking a holistic view when prioritising actions. Regrettably, my experience as a senior officer and politician in the Government revealed a significant dearth of individuals willing to comprehend the bigger picture and engage in strategic thinking. Instead, their primary focus appears to be on survival, leading them to concentrate on tactical matters, as opposed to strategy.

Let us consider the ongoing crisis in Sri Lanka, which is primarily the result of the successive Governments’ poor management of the economy. How many individuals are willing to delve into the intricacies of this complex issue to explore viable solutions? It is my observation that the vast majority of parliamentarians and perhaps those outside prefer to lean on external entities like the International Monetary Fund (IMF) to chart a way out of the crisis. Some even naively assume that the IMF will spearhead the rescue mission, and all they have to do is sit back and wait for the problem to be resolved. It is intriguing to note that those who once spoke out against the IMF and its programs are now singing its praises as the ultimate solution, owing to a change in leadership.

In early 2022, Sri Lanka was hit by a foreign currency shortage that resulted in a scarcity of essential imports and caused immense hardship for the general public. The country was grappling with the twin challenges of meeting its regular foreign debt payments while sustaining its regular imports. In short, the Government’s announcement of a default was followed by severe import restrictions. The new leadership’s sudden ability to make essential imports such as fuel and gas available to consumers was met with great enthusiasm. However, few realised that the imports were made possible by the Government’s decision to withhold payments of more than $ 5 billion in loans, thereby merely providing a temporary solution to a cash flow issue.

Even before the public outcry against him led to his decision to step down from the presidency, President Gotabaya Rajapaksa had already recognised the severity of the economic crisis and had decided to seek guidance from the International Monetary Fund (IMF). To this end, he had appointed consultancy firms Lizard and Clifford Chance to provide advice to Sri Lanka on financial and legal matters related to debt restructuring. Consequently, the new President had inherited a well-established mechanism to continue the discussions with the IMF, which had been set in motion by his predecessor.

After a long wait of nearly a year since President Gotabaya Rajapaksa wrote to the IMF in March 2022, the IMF program for Sri Lanka has finally been approved. Sri Lanka has received the first tranche of $ 333 million out of the promised $ 2.9 billion, which is to be disbursed over a period of four years. Despite the highly enthusiastic speeches of Government parliamentarians, it is evident that many of them have not read the IMF document that was tabled in parliament by the President, who is also the finance minister.

It is important to understand that the IMF’s calculations are typically based on incremental improvements, as macroeconomic stability is typically achieved through steady and gradual reforms. IMF works with the Sri Lankan Government and provides advice based on basic strategies. Their analyses are based on past patterns and predictions of the future assuming that the Government will follow their guidelines. However, it is important to note that the IMF’s role is to provide macroeconomic stability and support the country’s efforts to reform its economy. They do not tell the Government how to think outside of the box and come up with breakthrough solutions.

According to data compiled by IMF, Sri Lanka’s total debt portfolio is about $ 83.5 billion currently, of which 49% or $ 41.5 billion are foreign debts. The IMF calculates that $ 25 billion of this has to be paid back during the 2023-2028 period which also includes a debt moratorium of $ 2.8 billion related to 2022. That is almost $ 5 billion settlement each year. 

So how does the IMF propose Sri Lanka to bridge this gap? IMF will be supporting with $ 2.98 billion worth loans over the period of five years. World Bank and ADB project loans disbursements are expected to be around $ 1.75 billion and 2 billion respectively. There is also the $ 2.8 billion moratorium which was mentioned earlier. IMF also proposes that in 2027 having improved its debt ratings, the Sri Lanka Government issues fresh ISB worth $ 1.5 billion going back to the good old practice of rolling out debt with fresh loans. This still leaves a gap. 

According to the staff’s baseline scenario, the Sri Lankan Government needs a debt service reduction of $ 17 billion, which includes arrears accumulated in 2022. This means the country’s creditors must agree to waive off this amount. However, it’s unlikely that external creditors will agree to do so willingly, and they may impose their own conditions. One likely condition is that all creditors should take a proportionate hit without discrimination. This means that local treasury bills and bond holders will also have to take a haircut. Such a move could have significant implications for the local banking system. It could lead to a decrease in the value of these assets and may lead to a decrease in investor confidence. This could ultimately impact the banking system’s ability to lend and impact the overall economy.

I wonder how many Sri Lankans who are celebrating the IMF loan truly understand the actual situation. The country’s debt problem is a serious issue, and simply adding more debt is not a sustainable solution. As Honorable Dilan Perera emphasised in parliament, our problem is debt, and the cause of the problem is also debt. It’s concerning that some people think the solution to the problem is more debt. It may bring temporary relief, but it does not solve the root cause of the problem. Instead of celebrating loans, we need to focus on finding ways to generate sustainable revenue. We must ensure that our leaders make informed decisions that are in the best interests of the country and its citizens, rather than relying on short-sighted solutions that may do more harm than good.

To identify a solution, one must go back to the root cause of the problem. In 2022, Sri Lanka was facing a dual problem – a significant budget deficit and an unmanageable balance of payment deficit. This was not a new issue for the country. Since 2010, the country has faced an annual balance of payment deficit of over $ 2 billion, which was usually addressed with fresh International Sovereign Bonds (ISBs). During the period of 2010-2014, the Mahinda Rajapaksa Government issued $ 5 billion worth of ISBs, while the Ranil Wickremesinghe and Maithripala Sirisena Government issued $ 12.05 billion worth of ISBs during the 2015-2019 period. However, neither of these Governments took significant steps to improve the country’s exports or increase investments. There was a lack of emphasis on improving service sector exports, and there was no focused strategy on the part of the Government to improve the tourism or workers’ remittance sectors. 

As a result, the country developed a pattern of obtaining short-term commercial loans to bridge foreign currency deficits. This short-sighted approach has contributed to Sri Lanka’s current debt crisis. While securing loans may offer temporary relief, it is not a sustainable solution. To address the root cause of the problem, the Government must focus on implementing structural reforms, improving exports and investments, and generating sustainable revenue. These difficult decisions and sacrifices must be made for the long-term health of the economy.

If we remain reliant on the IMF plan without exploring alternative approaches, we may ultimately fail to achieve our desired outcomes. According to the IMF document, we can expect a modest 3.1% growth rate by 2026 and reserves of $ 10.8 billion. However, it’s worth noting that back in 2014, just before the Yahapalana Government came to power, we had achieved a growth rate of 5.5% and reserves of $ 8.3 billion. This means that after a 12-year cycle, we could potentially end up where we were when Ranil Wickremesinghe came into power in 2015.

Is this really what we aspire to? Perhaps it’s time to think more ambitiously and explore alternative approaches. Should we continue with our current strategies or take a more proactive approach to both our revenue and expenditure? These are the questions we must ask ourselves in order to achieve the results we desire.

For Sri Lanka, it is important to recognise that while an IMF bailout can provide short-term relief, the country needs to focus on creating more economic activities in the long run to ensure sustainable economic recovery. 

In addition, creating more economic activities is crucial to ensure that Sri Lanka can repay the IMF loan in the future. Without a strong and growing economy, the necessary revenue to repay the loan cannot be generated. Furthermore, reducing the country’s reliance on external funding is also essential as it makes Sri Lanka vulnerable to external shocks and fluctuations in global financial markets. Therefore, Sri Lanka needs to focus on creating more economic activities and building a stronger economic foundation to address the underlying issues, ensure loan repayment, and reduce reliance on external funding. This will lead to a stronger and more resilient economy that can support growth and development in the long run.

In my opinion, in order to activate the Sri Lankan economy, several steps need to be taken. Firstly, there needs to be a focus on stimulating entrepreneurship and facilitating free market competition. Additionally, digitisation of public administration and encouraging the use of technology in all economic sectors is necessary. Reforms in tax collection agencies are also important, as is controlling public expenditure and fighting corruption. To promote an export economy, investment promotion must be a priority for all Government agencies, provincial councils, and local Government agencies. Efficient and effective management of public resources and institutions is also vital. Prioritising human capital development and productivity growth at the state level is necessary, along with expanding capital markets and facilitating access to finance. Finally, effective management of monetary and exchange rate policies is essential to achieving a successful economic recovery.

In conclusion, while borrowing may be a viable short-term solution for Sri Lanka’s economic needs, it is not a sustainable long-term strategy for creating a dynamic and robust economy. It is essential for Sri Lanka to adopt a holistic approach that prioritises long-term growth and sustainability over short-term gains, and to invest in the development of our own resources and potential, rather than relying solely on external funding.

(The writer is a Member of Parliament.)