Big say for a little piece

Friday, 24 June 2022 00:00 - - {{hitsCtrl.values.hits}}

Sri Lanka aims to reach a staff-level agreement with the International Monetary Fund (IMF) by the end of July according to Prime Minister Ranil Wickremesinghe. A debt restructuring framework in the works with a team from Lazard and Clifford Chance present in the country to provide financial and legal advice, while discussions with the IMF delegation continue.

Parallel to these discussions, a foreign credit aid consortium led by India, Japan and China is to be organised, signalling to our main bilateral lending partners that Sri Lanka is working towards favourable negotiations. All the while discussions with the World Bank, the Asian Development Bank and even the elusive Paris Club via the United States, is expected to renegotiate debt and secure interim short-term loans until IMF support is finalised.

Pointing at the fuel, gas, electricity and food shortages, the PM admitted that these issues can only be resolved through first resolving the foreign reserves crisis. For example, the pertinent fuel bill of $ 550 million to meet monthly fuel demand, would empower the private and public sector to get back to efficient work and hopefully contribute to recovery.

According to Wickremasinghe, the initial discussions have been concluded and sectors such as public finance, finance, debt sustainability, stability of the banking sector and social security are being looked into. Food security too appears on the agenda, with plans to provide farmers with the necessary fertiliser and import rice and vegetables discussed. “If we receive the IMF seal of approval, the world will once again trust us” he purported while also showing fiscal resolve in the proposed tax system.

Optimistically, this would lead down a path towards a primary surplus in by 2025, while the temporary avoidance of calamity is the true victory point. In addition to these efforts, a team from India and the US Treasury department is set to arrive soon. India has assisted with a $ 4 billion credit line and humanitarian aid.

According to Wickremesinghe, $ 5 billion is need to ensure “daily lives are not disrupted,” and a further $ 1 billion to strengthen the rupee. Therefore, while discussions on relief efforts continue, Wickremesinghe insists that going to the IMF is a must.

However, according to Lee Buchheit, a legal expert on debt restructurings, some of the nation’s debt contracts contain a ‘single series collective action clause’. What this entails is that a minority of bondholders may have the power to veto or demand terms in the negotiations, displaying disproportionate power to their actual holding value. The IMF, being a multilateral lender, too insists that existing debt must be brought to ‘sustainable levels’, typically less than 80% of debt-to-GDP, before any aid is given out.

That could include long and drawn-out discussions with not just the large bilateral creditors but also global asset managers, each of whom would want their slice of the pie, regardless of size. For example, India expressed that China needs to be treated just like every other creditor in the process, while China has other plans. Historically, China preferred to hand out fresh loans as refinance rather than rework existing debt and doesn’t often share details of the credit. Therefore, the pie while small, is certainly not served lightly.