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World Bank cuts Sri Lanka’s growth to 2.1%, while Central Bank rounds on debt naysayers
Sri Lankans reeling from unprecedented prices of daily essentials, shortages of cooking gas, fuel, critical medicines, and diminishing purchasing power, are in for further pain this year, an economic prediction from the World Bank suggests.
On Tuesday, the World Bank Group forecast Sri Lanka’s economic output to sharply contract in 2022. The ‘Global Economic Prospects’, report shows that Sri Lanka’s real GDP growth will tumble from an estimated 3.3% in 2021 to 2.1% in 2022. Sri Lanka’s per capita income is also predicted to shrink further from 2021 to 2023, the World Bank says.
On Wednesday, in a live ‘Government Media Conference’, Ajith Nivard Cabraal, the Central Bank governor, claimed: “I think, about 5.5% growth is possible for this year.’’ He noted the weak economic output in 2021 and said 5.5% growth would be a “success’’. Mr. Cabraal said there are many challenges and pleaded for “everyone’s cooperation’’, without specifying what support he was asking for.
Prompted by a lady beside him, who referred to reports of going bankrupt, Mr. Cabraal took aim at “some’’ journalists and also noted that in 2020 and again 2021 it had been said that Sri Lanka will not be able to repay its international debts. “Now, after we have countered their story that we won’t be able to pay and that we will crash and the whole country will go into chaos and ultimate terrible situations will occur, when we say that we will pay, now they’re saying don’t pay,’’ he said, smiling. “Now, they “have a different chorus, they start off with a different cry’’.
“What are they saying not to pay,’’ he pondered. “They’re saying don’t pay US$500 million and if you don’t pay all your problems will be solved. That’s not the case. Your problems will get aggravated. That is why, we have diligently, as a nation which has always honoured its debts, we are making the payment, and we are making arrangements for every single payment. I can tell you that. We don’t want to go through the path Lebanon faced, where when they had reserves, there was a cry within the country, orchestrated by various journalists as well as the opposition to make them not pay and they went into a serious crisis, where the country started burning.
“We don’t want to have a situation like that, we are on top of the situation, we are making the payments, we are gradually building the reserves, we have built the reserves out to US$3 billion, from US$1.5b, which was quite, er, difficult number, and now, we are gradually increasing that, and when we are doing that, I think some people are not very happy. Maybe, they have different dreams that Sri Lanka will go into anarchy, Sri Lanka will go into a difficult situation.’’
Mr. Cabraal said the debts will be honoured, “and therefore, this country will have to stay stable in that exercise and we are taking the necessary steps from various other sources that we are collecting the necessary funds to make sure that Sri Lanka will be able to honour its debts.’’ He argued that US$500m, if not handed over to creditors, would be enough for half a month’s imports, and that forex reserves should be built up.
Private economists had made the case repeatedly for rebuilding forex reserves, and debt restructuring, while also flagging the unsustainable debt. Yet, more debt is being added.
Economists have said swap arrangements are not forex reserves.
Responding to calls for restructuring of debt, Mr. Cabraal, cited his credentials, saying “I am also a chartered accountant, so I know what restructuring means’’. He said: “Restructuring does not mean that you go and say that you are bankrupt and that you cannot pay. You change your debt structure early. That’s what you are doing, What are we doing. We are changing some of our debt payments into different instruments. Earlier, at the time I left as the governor … at this time a lot of people don’t mention this because I think they fear this point…we had US$5b in international sovereign bonds and at that time the GDP of the country was US$79b. That stage, it was a comfortable value for us to service.
However, in the next five years, whilst the IMF was also there, Sri Lanka borrowed heavily from the international sovereign bond market and we increased our sovereign bonds to US$15b. If we had increased the sovereign bonds to US$15b and the GDP also had increased three fold, it wouldn’t have mattered, because we would have been comfortable. But, the GDP improved by only by a very very small fraction to US$84b. So what happened was we had US$15b worth of international sovereign bonds, which had to be serviced with a economy that was only US$84b. There lies the structural defect. So, what did we do once we came into office. We gradually started pulling this back. Now we are shifting those debts from ISBs to other instruments so that the longevity as well as the interest rates are controlled to some extent.
“We have already paid US$2b of international sovereign bonds thereby reducing the international sovereign bonds level from US$15b to US$13b, we are also negotiating and have negotiated with other countries to have lower rates of interest as well as longer periods of time to settle those international sovereign bonds, as a result of which we will be much more stable. So our intention is to reduce the ISBs to a level of about US$10b and grow the economy to the level of about US$100b, at which stage we will have a greater comfort when we go forward.’’
He said this is “a very clear strategy’’. “And what is that strategy. We are actually restructuring our debt portfolio. So, what we are doing is exactly what people are asking for, restructuring. But we are doing one difference .. we’re not inflicting any pain to the investors that have already helped and had faith in Sri Lanka and invested.
“There is no big deal about going and making it difficult for investors. We are actually taking the investors into consideration, we are not causing pain to them, we adjusting our debt portfolio so that we can face this situation much better in the longer term, as well as in the shorter term.’’
Data show that between 2015 and 2018, Sri Lanka issued more than US$10b ISBs. This also covers a period in which Mr. Cabraal was governor from 2010, in his second term. By 2019, data from the External Resources Department, show that ISBs made up 47% debt. It was, however, agencies such as the IMF that laid the path for Sri Lanka’s fiscal consolidation and debt sustainability, not bureaucrats or politicians.
While Mr. Cabraal called out journalists for Lebanon’s misery, the country did not come apart because of the media or opposition forces. A corrupt government led by officials living in fantasy land caused the financial meltdown.
In 2016, the World Bank Group’s Systematic Country Diagnosis found that Lebanon’s political leaders were using the system of sectarian governance as a “veil” to advance their own personal interests at the expense of its people.
In several respects, the multiple crises the Lebanese face, mirror the entrenched rot that Sri Lankans are enduring. Poorly-rated Sri Lanka is also unable to borrow in international capital markets and is struggling with debt distress.
Finance Minister, Basil Rajapaksa, in his November budget, that set the stage for further macroeconomic turmoil, stayed silent on making a forecast for 2022. For Sri Lanka, the new year with its US dollar liquidity challenges and high consumer prices (more than 11% inflation in November, and 12.1% in December), will turn out to be a period that will reflect the government’s multiple economic and social policy failures of the past, lurching rapidly from one crisis to another, unable to extricate itself from the after-effects of a debt binge from 2007 in the so-called ‘Mahinda Chinthana’ years.
In Parliament, where the responsibility and control of public finance lies, the budget’s fiscal forecasts were viewed with greater suspicion and glaring data manipulations revealed by the opposition, while private economists also frowned on the dodgy data. Revenue estimates were questioned.
The government had, for example, estimated 2021 state revenue at Rs. 2.019 trillion, but ended up heavily revising it down to Rs. 1.556 trillion. The revenue estimate for 2022 was Rs 2.321 trillion, but private economists estimated it in the Rs. 1.900 trillion range. Budget deficits had also been often underestimated by the Ministry of Finance, regardless of the responsibilities under the Fiscal Management Responsibility Act, which sets a 5% cap on the budget deficit. The forecast budget deficit to economic output was 8.8%.
Overall, the integrity of the economic data and the mathematical balance beam gymnastics, came into sharp focus.
The Rs 5 rise in excise duties on cigarettes the budget mentioned, turned out to be actually less than Rs. 2.50, was a prime example. More borrowing is on the cards. Sri Lanka has sought credit from India (US$1 billion and US$400m swap arrangement, US$500m credit line for oil from Indian Oil Corp), Qatar (US$1b), and yet another loan from China. Mr. Cabraal indicated Wednesday turning yet again to China for a loan.
Moody’s forecast on Monday that the debt burden will rise to around 108% of GDP by the end of 2022 from around 101% at the end of 2020 and 87% at the end of 2019, before stabilising at the elevated 2022 level thereafter, mainly reflecting the recovery in nominal GDP growth. It also said that factoring in a lower base, “inflation-adjusted real GDP growth would pick up to around 5% in 2022 from around 4-5% in 2021’’.
Referring to the Rs 229b handouts Basil Rajapaksa laid out recently, Moody’s said, “it reduces the scope for fiscal and debt consolidation at a time when fiscal flexibility is already severely limited by the large share of interest payments in government revenue (60-70%)’’.
In the World Bank report, India’s economy is predicted to expand by 8.3% in fiscal year 2021/22 (ending March 2022), and in Bangladesh, growth is projected at 6.4% in fiscal year 2021/22, ending June 2022.
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