Workable plan backed by durable analysis urged for avoiding default

„Verité Research Executive Director says such would allow build back confidence on Sri Lanka and allow access to financial markets „Identifies crisis of confidence on the country as underlying factor for current state

„Criticises fixation on IMF programne to solve current crisis; says SL should go to IMF with a plan

Aworkable plan backed by a durable analysis presents Sri Lanka with the best chance to overcome the current external debt crisis and a potential foreign exchange reserve crisis by rebuilding the confidence on the country among local and foreign investors, while averting a default scenario, according to a top economist.

“Path to no default has to begin with a plan that is sensible, robust and with a durable analysis behind which you rebuild confidence to gain access to international financial markets. When you have workable plan with a durable analysis, you can build confidence. Then, it makes the plan more workable. When the government doesn’t have a plan that is working out, people tend to keep their foreign exchange out of the country and they hold off their investment decisions,” Verité Research Executive Director, Dr. Nishan de Mel asserted. He shared thee remarks taking part in a panel discussion organised by CA Sri Lanka titled ‘Debt situation of Sri Lanka: What is ahead of us?” last Friday.

The other panelists were; State Finance Minister Ajith Nivard Cabraal, Finance Ministry Secretary Sajith Attygalle, Central Bank Governor Prof. W.D. Lakshman and Ceylon Chamber of Commerce Chairman Vish Govindasamy and Fitch Ratings Lanka Managing Director Maninda Wickramasinghe.

He reasoned that crisis of confidence on the country as the underlying factor for the current state of the country.

“It’s in December 2019 when rating agencies downgraded the country’s rating by another notch. Not financing some of external debt servicing obligations from ISBS is not a choice that the government is making, because the markets have already shut the doors to Sri Lanka, so effectively the country cannot borrow at single digits. That’s loss of confidence resulting from rating downgrades based on how international rating agencies analyse Sri Lanka,” Dr. de Mel elaborated.

While welcoming pledges made by the government to maintain consistent policies, Ceylon Chamber of Commerce, Chairman, Vish Govindasamy also echoed Dr. de Mel’s sentiments.

“Business community needs serious level of confidence from the government to say this is the plan and go ahead with this plan,” he said.

Meanwhile, Dr. de Mel was also critical of the fixation on an International Monetary Fund (IMF) programme to solve the current crisis instead of coming up with a workable plan backed by a durable analysis.

“To go to IMF or not to go to IMF is not the right question. Rather, the right question to ask is, would Sri Lanka have a workable time to steer repayment of debt in a way inflows match outflows…. That can be done without the IMF, if you are smart enough. You can come up with a plan that builds confidence. Sometimes, you can also get IMF to help for it. It’s important that we go to IMF with a plan, which has garnered confidence across the board. We need to convince IMF, instead of expecting IMF to write our plan as happened in the past,” he elaborated.

In particular, he emphasised that the Central Bank should spearhead such an exercise as it posses required resources in terms of experience and knowledge.

Responding to Dr.de Mel, Central Bank Governor, Prof. W. D. Lakshman assured that the government would not allow the country to fall into any form of default.

“We will not allow a disorderly default. We don’t expect to go into any form of default. Plan for action will be ready in a short period of time. By the end of this year, we will have the same levels of forex reserves that we had at the beginning of the year, or likely even more,” he assured.

Although, the government aims to finish the year with around US$ 7 billion foreign exchange reserves, Dr.de Mel projected that the country is likely to finish the year with US$ 2.5-3 billion in reserves (baseline scenario), while the external debt servicing obligations remain above US$ 4 billion for the upcoming year.

If the country continues on the current path without a workable plan, he warned that Sri Lanka could face a crisis in foreign exchange reserves in 2022 or 2023 leading to an orderly default or even worse, a disorderly default.

Therefore, he urged the government to realign its ambitious targets in the current context.

“There’s a liquidity problem. The solvency problem can be avoided. Trying to achieve a large reduction in foreign debt stock too could fast lead to a crash as If you run too fast in the beginning of a marathon, you could burn out fast. We are not too late to realign and get out of this problem,” he stressed.