தினப்பொறி 15- `புதிய ஆட்சியும்` பழைய சிந்தனையும்!

 

மறுசீரமைப்புக்களை செயற்படுத்த உலக வங்கி 200 மில்லியன் அமெரிக்க டொலர்கள் வழங்க அனுமதி

 

அரசாங்கத்தின் மறுசீரமைப்புக்களை செயற்படுத்த உலக வங்கி வேலைத்திட்டத்தின் இரண்டாம் கட்டத்திற்கு அமைவாக 200 மில்லியன் அமெரிக்க டொலர்கள் வழங்க அனுமதி

இலங்கையின் பொருளாதார முன்னேற்றம் மற்றும் பொருளாதார மறுசீரமைப்பு வேலைத்திட்டங்களுக்கு ஒத்துழைக்கும் வகையில் உலக வங்கி குழுமத்தின் (WBG) சர்வதேச அபிவிருத்திச் சங்கத்தினால் (IDA) மேலும் 200 மில்லியன் அமெரிக்க டொலர்களை வழங்குவதற்கு அனுமதி வழங்கப்பட்டுள்ளது.

அதற்கு அமைவான ஒப்பந்தத்தில் கைசாத்திடும் நிகழ்வு இன்று (07) பிற்பகல் ஜனாதிபதி அலுவலகத்தில் நடைபெற்றதோடு, இந்த ஒப்பந்தத்தில் ஜனாதிபதி அநுரகுமார திசாநாயக்க முன்னிலையில் இலங்கை அரசாங்கத்தின் நிதி அமைச்சர் ​கே.எம்.மஹிந்த சிறிவர்தன மற்றும் உலக வங்கியின் இலங்கைக்கான பணிப்பாளர் டேவிட் சிஸ்லேன் ஆகியோர் கையொப்பமிட்டனர்.

இந்த நிதி வசதியானது இலங்கையின் முன்னெடுக்கப்படும் விரிவான மறுசீரமைப்பு வேலைத்திட்டங்களுக்கு உலக வங்கியின் தொடர்ச்சியான ஒத்துழைப்பை காண்பிக்கிறது.

இலங்கையின் மறுசீரமைப்பு, நிலைப்படுத்தல் மற்றும் பொருளாதாரத்தை சுமூக நிலைக்கு கொண்டு வருவதற்கான (RESET) அபிவிருத்தி கொள்கைகளுக்கு நிதியளிக்கும் (DPF) வேலைத்திட்டத்தின் இரண்டாம் கட்டத்தின் கீழ் இந்த நிதி உதவி இலங்கைக்கு கிடைத்துள்ளது.

இந்த இரு வருட வேலைத்திட்டம் (2023-2024), வறுமை மற்றும் பாதிக்கப்படக்கூடி மக்கள் மீதான தாக்கத்தை குறைத்து முழுமையான பொருளாதார நிலைத்தன்மையை ஏற்படுத்தும் நோக்கில் செயற்படுத்தப்படுகிறது.

இந்த வேலைத்திட்டத்தின் முதல் கட்டம் 2023 ஆண்டில் செயற்படுத்தப்பட்டதுடன், பிரதான மூன்று துறைகளின் கீழ் ஏழு வேலைத்திட்டங்கள் முழுமைப்படுத்தப்பட்ட பின்னர், 500 மில்லியன் அமெரிக்க டொலர் நிதி உதவியை இலங்கை பெற்றுக்கொள்ள முடியும்.

அதன்படி இந்த வேலைத்திட்டத்தின் பிரதான மூன்று அம்சங்களாக,

1.பொருளாதார நிருவாகத்தை மேம்படுத்தல் : நிதி நிலைத்தன்மையை பாதுகாத்து அரச வளங்கள் முகாமைத்துவம், நிதி ஒழுக்கம், வௌிப்படைத்தன்மை மற்றும் பொறுப்புக்கூறலை பலப்படுத்தல்

2. வளர்ச்சி மற்றும் போட்டித்தன்மையை மேம்படுத்தல் : மிகவும் போட்டித்தன்மை மிக்க தனியார் துறையுடன் இலங்கையின் அபிவிருத்தியை விரிவுபடுத்தல்

3.வறிய மற்றும் பாதிக்கப்படக்கூடியவர்களை பாதுகாத்தல்: நெருக்கடி மற்றும் பொருளாதார வீழ்ச்சியினால் பாதிக்கப்பட்டவர்களை பாதுகாத்தல்.

உரிய நிதி வசதியை பெற்றுக்கொள்ள தகுதி பெற வேண்டுமெனில், அரசாங்கத்தினால் மேற்குறிபிட்ட மூன்று பிரிவுகளின் கீழ் 9 வேலைத்திட்டங்கள் முழுமைப்படுத்தப்பட வேண்டிய அதேநேரம், அதற்கு உகந்த பொருளாதார கொள்கை வரைவொன்றை பேணிச் செல்ல வேண்டியதும் அவசியமாகும்.

அதன்படி இந்த நிதி வசதியின் இரண்டாம் கட்டத்தை பெற்றுக்கொடுப்பதற்காகவும், உலக வங்கிச் சபையின் அனுமதி கிட்டியுள்ளதோடு, ஒப்பந்தம் கைசாத்திடப்பட்டதன் பின்னர் அது அமுலாகும்.

உலக வங்கியின் இந்த நிதி உதவி இலங்கையின் பொருளாதாரத்தை நிலைப்படுத்தவும் எதிர்காலத்தில் அவ்வாறானதொரு நெருக்கடி மீண்டும் ஏற்படுவதை தவிர்ப்பதற்கு தீர்மானமிக்க செயற்பாடுகளை முன்னெடுக்க உதவும் என்பதோடு, நிலையானதும் போட்டித்தன்மை மிக்கதுமான சூழலை உருவாக்கும் என்றும் நம்பப்படுகிறது.

PMD ஊடக அறிக்கை அக்டோபர் 7, 2024 

Misguided foreign policy has left India friendless in South Asia

Chinese rivalry has blinded Modi to adverse political trends in nearby nations

Indian Prime Minister Narendra Modi has made a series of miscalculations in his attempts to strengthen the country’s ties with neighboring nations.    © Reuters

TORU TAKAHASHI, Nikkei senior staff writerOctober 7, 2024 11:03 JST

TOKYO -- Eager to position India as a leading Asian power to rival China, Prime Minister Narendra Modi has prioritized strengthening ties with Sri Lanka and other nearby countries. However, political developments in neighboring nations, along with some misguided diplomacy from New Delhi, are undermining the leader's efforts.

In Sri Lanka, antiestablishment lawmaker Anura Kumara Dissanayake won the presidential election on Sept. 21. However, the coalition led by his Janatha Vimukthi Peramuna (JVP) party held only three of the 225 seats in parliament, prompting Dissanayake to dissolve the legislature and call a general election for Nov. 14.

In the island nation, sometimes referred to as "the pearl of the Indian Ocean," the Rajapaksa brothers and their clan -- who played a crucial role in ending a 26-year civil war in 2009 -- had long held power. The regime of former President Gotabaya Rajapaksa collapsed in 2022, however, due to an economic meltdown caused by the perfect storm of inefficient investment in China-led infrastructure projects, the financial fallout from the COVID pandemic, and inflation triggered by Russia's invasion of Ukraine. Although the economy has recovered somewhat, painful measures such as tax hikes and spending cuts have fueled growing public discontent, contributing to Dissanayake's electoral victory.

Modi may now see an opportunity to improve ties with Sri Lanka, which, under the Rajapaksa family, had leaned toward closer relations with China. But, it remains uncertain whether this change in power will ultimately benefit India, which likes to see itself as the leader of South Asia.

Sri Lanka, long plagued by deep-seated animosity between the majority Sinhalese and minority Tamil populations, plunged into civil war in 1983 when separatist Tamil militants clashed with the military. New Delhi provided humanitarian support to the militants to address concerns among its own Tamil population while attempting to prevent the secessionist movement from spilling over into its territory. But, India's half-hearted involvement in the civil war backfired, leading to the assassination of then-Prime Minister Rajiv Gandhi by a Tamil extremist.

Currently, there are about 3.3 million Tamils in Sri Lanka, while nearly 80 million live across the Palk Strait in the southern Indian state of Tamil Nadu.

Sri Lankan antiestablishment lawmaker Anura Kumara Dissanayake waves to well-wishers in Colombo on Sept. 22, after winning the presidential election the day before.    © Reuters

Dissanayake's JVP once championed Sinhalese nationalism and still holds some anti-Indian sentiment. In February, Dissanayake visited India at New Delhi's invitation to foster friendly ties. However, during his election campaign, he criticized infrastructure projects undertaken by India's Adani Group in Sri Lanka and called for excluding Indian fishing boats from national waters. Even if the new president does not pursue a clearly pro-China policy, strengthening ties with India may not be easy.

Sri Lanka is just one of several miscalculations in Modi's "neighborhood-first" policy, which aims to cultivate good relations and economic synergy with India's smaller neighbors.

In Myanmar, the increasingly China-leaning military seized power in February 2021, detaining Aung San Suu Kyi, the pro-democracy leader who once studied in India. In Afghanistan, the withdrawal of U.S. forces in August of that year led to the resurgence of the Taliban regime, which is closely aligned with Pakistan, India's archrival.

Furthermore, the pro-India president of the Maldives lost the nation's 2023 election to a pro-China candidate. Upon assuming power, the new president, Mohamed Muizzu, ordered the withdrawal of Indian military units that had been assisting the country with maritime surveillance and medical emergencies using their aircraft, while also signing a military assistance pact with China. In Nepal, K.P. Sharma Oli, a veteran communist politician with pro-China policies, became prime minister in July.

Changes in national leadership culminated in major upheaval in Bangladesh in August, as antigovernment demonstrations led by students prompted the ousting of Sheikh Hasina, who had ruled the country with an iron fist for years. Hasina, the eldest daughter of Sheikh Mujibur Rahman -- Bangladesh's first president and a hero of the country's fight for independence from Pakistan in 1971 -- has been closely aligned with India, which supported that struggle. After her ousting, Hasina has sought refuge in India.

In an interview with the Indian Express, Abdul Moyeen Khan, a senior member of Bangladesh's main opposition party, the Bangladesh Nationalist Party, argued that the Indian government made "massive" blunders by putting "all its eggs in one basket." The former minister of information was referring to New Delhi's lopsided support for the ousted prime minister. The interim Bangladeshi government, led by Nobel Peace Prize laureate Muhammad Yunus, has demanded Hasina's extradition, placing India in a difficult position.

Modi speaks with then-Bangladeshi Prime Minister Sheikh Hasina in New Delhi on June 22.    © Reuters

Looking around, India now has only one country in South Asia that is friendly toward it: Bhutan, which relies on India for its economy and diplomacy. Many pundits attribute India's predicament to its obsession with competing against China.

"The Asian balance of power was skewed by the Partition," wrote Indian Foreign Minister Subrahmanyam Jaishankar in his 2020 book "The India Way," referring to the 1947 partition of the Indian subcontinent into India and Pakistan, which consisted of West Pakistan (now Pakistan) and East Pakistan (now Bangladesh), following independence from Britain. By the "balance of power," Jaishankar is clearly pointing to India's regional standing in relation to China.

According to United Nations estimates, China's population was 540 million in 1950, compared to India's 340 million. However, if the populations of East and West Pakistan had been included, India's population would have been 420 million. By 2023, India's population surpassed China's for the first time, reaching 1.44 billion compared to China's 1.42 billion. Pundits argue that without partition, India would have overtaken China long ago.

Population may be just one element of national power, but from India's perspective, the humiliating defeat in the 1962 Sino-Indian border conflict was attributed to the dilution of national strength, both economic and military, following partition. Actions taken by India, such as the de facto military alliance with the Soviet Union in 1971 and nuclear tests in 1974, were all aimed at countering China's rise.

India continues to face a security threat from China, as shown by a military standoff in the Doklam plateau near the borders of India, Bhutan and China in 2017, as well as a deadly clash between Indian and Chinese troops in the Galwan Valley of the Himalayas in 2020. This clash resulted in the first casualties in 45 years in the territorial conflict between the two powers.

While India is preoccupied with Chinese threats on land, Beijing has accelerated its naval expansion. Since the 2000s, China has developed several ports in India's neighboring countries, including Gwadar in Pakistan, Hambantota in Sri Lanka and Kyaukpyu in Myanmar. China is pursuing the "string of pearls" strategy, which aims to encircle India by financing infrastructure projects with potential military applications in these countries.

This growing threat from China is why Modi began to pursue his neighborhood diplomacy after taking office in 2014. He was eager to reassert the country's position as a dominant power in South Asia.

Yet China's overtures are not the only reason India's neighbors have begun to distance themselves from the South Asian country. Many experts attribute this shift to India's perceived arrogance in asserting itself as a "big brother" in the region.

Public sentiment against India appears strong in some neighboring countries. "Our local bases in Pakistan, Bangladesh and Sri Lanka were often reluctant to share information with the regional headquarters in India," said an executive at a Japanese company that moved its South Asia headquarters from New Delhi to Singapore five years ago.

Maldivian President Mohamed Muizzu meets with Chinese leader Xi Jinping in Beijing in January.    © Reuters

While directing much of his energy toward neighborhood diplomacy, Modi also sought to expand India's geopolitical reach to better compete with China's Belt and Road Initiative. Under his leadership, India has enhanced cooperation with ASEAN through the Act East policy, joined the Shanghai Cooperation Organisation, which includes Central Asian nations such as Kazakhstan, Uzbekistan and Kyrgyzstan, and formed the I2U2 cooperation framework with the U.S., the United Arab Emirates and Israel.

In addition, Modi has leveraged the Global South group of emerging and developing countries as a platform to solidify India's position as a major player while countering China. In January 2023, shortly after assuming the chair of the Group of 20 major powers, India hosted an online summit that brought together 125 developing nations and regions to discuss a wide range of concerns and challenges. India has hosted the same event twice since then, again deliberately excluding China, despite Beijing's claims of being part of the Global South.

With Modi's popularity declining at home, the tectonic shifts in political dynamics across South Asia threaten to undermine his major-power diplomacy. "Unlike China, India lacks the bargaining chips it can draw upon in areas such as funding, infrastructure technology, military support and natural resources," said Ryohei Kasai, a visiting associate professor at the Center for South Asian Studies at Gifu Women's University. "It is clear to its neighbors that India's means are limited, and it is merely engaging in 'lip service diplomacy.'"

He added, "Indian diplomacy is overrated, and its substance will come under increasing scrutiny in the future.⍐"

பாதுகாப்பு படை பிரதானிகள் சம்பிரதாயபூர்வமாக ஜனாதிபதி அநுரகுமார திசாநாயக்கவுடன் சந்திப்பு

புதிய ஜனாதிபதியாக நியமனம் பெற்றதன் பின்னர் நாட்டின் பாதுகாப்பு படைகளின் பிரதானிகள் சம்பிரதாயபூர்வமாக இன்று (04) ஜனாதிபதி அலுவலகத்தில் முப்படைத் தளபதி ஜனாதிபதி அநுரகுமார திசாநாயக்கவை சந்தித்து கலந்துரையாடினர்.

அதன்படி பாதுகாப்பு பதவி நிலை பிரதானி ஜெனரல் ஷவேந்திர சில்வா, இராணுவ தளபதி லெப்டினன் ஜெனரல் விக்கும் லியனகே, விமானப்படைத் தளபதி எயார் மார்ஷல் உதேனி ராஜபக்‌ஷ மற்றும் கடற்படைத் தளபதி வைஸ் அட்மிரல் பிரியந்த பெரேரா ஆகியோர் ஜனாதிபதியை சந்தித்து சினேகபூர்வமாக கலந்துரையாடினர்.

இதன்போது நினைவுச் சின்னங்களும் பரிமாறிக்கொள்ளப்பட்டன.

Following his appointment to office, Sri Lanka’s new President Anura Kumara Dissanayake met with
Sri Lanka’s Chiefs of Defence Forces, including the alleged war criminal, and
Chief of Defence Staff, General Shavendra Silva.

Chiefs of Defence Forces Pay Traditional Courtesy Call on President Anura Kumara Dissanayake

Following the appointment as the new President, the Chiefs of Defence Forces paid a traditional courtesy call on President Anura Kumara Dissanayake today (04) at the Presidential Secretariat.

Accordingly, Chief of Defence Staff General Shavendra Silva, Army Commander Lieutenant General Vikum Liyanage, Air Force Commander Air Marshal Udeni Rajapaksa and Navy Commander Vice Admiral Priyantha Perera met with the President and engaged in a cordial conversation.

To mark the occasion, commemorative tokens were also presented.

War Criminal Silva:

Silva led the notorious 58 Division as the government launched a massive military assault. That culminated in the massacre of tens of thousands of Tamils during the 2009 Mullivaikkal Eelam genocide. They oversaw the repeated bombing of hospitals, widespread sexual violence, torture and the execution of surrendering Tamils.

On the campaign trail, Dissanayake vowed that he would “not seek to punish” the perpetrators of war crimes during the genocidal conflict. However, his ascendancy to the presidency comes as there is growing international pressure to advance accountability for mass atrocities in Sri Lanka.

Mullivaikkal Genocide

Sri Lanka’s Bond Deal Should Not Set a Precedent

Rather than reducing the risk of future debt trouble, Sri Lanka’s macro-linked bonds set up the risk that Sri Lanka will fall back into debt trouble in 2029 or 2030.

Sri Lanka’s macro-linked bonds (MLBs) are, in fact, not really macro-linked bonds.

After 2027, they are standard fixed-income instruments which provide no help in the event of future shocks. The final restructuring terms are just left open until just after Sri Lanka’s IMF program ends, and the creditors and Sri Lanka have agreed that the final terms will largely be a function of Sri Lanka's dollar GDP between 2025 and 2027.

The new bonds thus aren’t true state-contingent instruments.

Payments after 2027 aren’t linked to real GDP growth, tourism inflows, or the price of Sri Lanka’s oil imports. Theorists who extol the advantages of state-contingent instruments shouldn’t be fooled. Bond traders still need to worry about the risk that the payments will reset up based on Sri Lanka’s economic performance between 2025 and 2027—a period when risks are low because Sri Lanka is more or less fully funded by the official sector. Good performance over the next few years thus creates more risk of trouble after 2028, as external debt service ratchets up during a period when Sri Lanka is expected to be back financing in the international bond market with a debt to GDP ratio of around 100%.

The new bonds are thus structured to game the IMF's fiscal targets and increase the return bondholders get out of Sri Lanka’s debt exchange rather than to insulate Sri Lanka against future risks (details of the proposed bonds are here).

The innovation in the macro-linked bonds is that the terms of the exchange aren’t fixed until after Sri Lanka’s current IMF program has expired.

a) If all follows the IMF’s (relatively conservative) macroeconomic and exchange rate forecasts, the bondholders get the base case bond—so $12.5 billion in bonds with an average coupon of around 6.5 percent are swapped into $9 billion of new bonds with an average coupon of around 6 percent, and past-due interest (PDI) is settled with a modest discount. In the base case—with GDP averaging $89 billion over the next year—there is a little bit of true debt reduction, as the coupon on the new bonds is below the coupon on the old bonds.

b) If GDP averages $92 billion over the next three years (as seems likely with dollar GDP at $94 billion in the first quarter of 2024), the stock of the new bonds rises to $10 billion and the average post-2027 coupon increases to 6.6 percent.

c)If GDP averages more than $100 billion between 2025 and 2027, the stock of new bonds increases to $10.65 billion, and the average coupon increases to 8 percent. In that case, there is essentially no long-term debt relief as the higher coupon offsets the lost face value.

In the latest proposal, there is also a bit of downside protection for Sri Lanka. The bonds reset only if the real economy has in fact grown from 2024 to 2027. If GDP falls to $85 billion (well below the IMF’s conservative forecast), the stock of new bonds falls from $9 billion to $7.5 billion.

The risk here should be obvious—a strong Sri Lankan currency could drive nominal dollar GDP higher during the program period (when official inflows and limited debt service provide a stable source of foreign exchange on top of exports) even in the absence of any true increase in Sri Lanka’s external payment capacity. Conceptually, dollar GDP isn’t even the actual source of increased external debt service capacity, as a high calculated dollar GDP can reflect an overvalued exchange rate that makes it harder to generate the actual foreign exchange needed to service external debt, a classic consideration that was left out of the IMF’s “fiscal only” market-access debt sustainability framework.*

It is worth stepping back a bit here to go over the IMF’s debt targets for Sri Lanka.

The targets are set exclusively in fiscal terms, so they define limits on overall government debt rather than external government debt.

The targets also allow a quite high level of debt-to-GDP and foreign currency debt service (the foreign currency debt service limit is a component of the broader limit on Sri Lanka’s forecast gross fiscal financing need): specifically, public debt needs to be under 105 percent of GDP in 2027 and under 95 percent of GDP in 2032, the gross financing need needs to be under 13 percent of GDP on average between 2028 and 2032, and foreign currency debt service needs to be under 4.5 percent of GDP between 2028 and 2032. Given how the targets have been defined, a higher dollar GDP mechanically translates into a higher permitted level of foreign currency debt service (to state the obvious, foreign exchange debt service capacity rises with dollar GDP not with exports or foreign currency reserves).

Broadly speaking, the IMF set extremely generous targets for overall debt to GDP in the program—a low-income country would be expected to get general government debt under 55 percent of GDP by the end of the program, and external debt to GDP down to 30 or 40 percent of GDP. At the end of the program, in 2027, Sri Lanka’s public debt-to-GDP is estimated to be over 105 percent; the binding 95 percent target was set for five years later in 2032.

But the IMF’s initial GDP forecast was as conservative as debt to GDP target was generous. Sri Lanka wasn’t forecast to return to its pre-crisis level of dollar GDP even by the end of its IMF program. The bondholders argued, unsurprisingly, that the low level of GDP in the IMF baseline unfairly limited the available debt service for foreign creditors. The GDP forecast has subsequently been adjusted up (to around $90 billion over the next three years, on average) without any downward adjustment in the debt to GDP targets—which has the effect of reducing the amount of debt relief that Sri Lanka needs from all its external creditors in the baseline.

There seems to be a strong desire from all parties involved to declare victory, collect some fees (the consent fee for the bonds is $225 million), start collecting past-due interest, and move on. The IMF is arguing that the current debt restructuring process is now starting to work.** The Paris Club, India, and the Export-Import Bank of China (Exim) have done their separate deals (on undisclosed terms, and yes, that is a problem, see my paper with Sean Hagan). Market analysts think the bonds should trade at around 60 cents on the dollar, even at a relatively high 11 percent exit yield.

So, my guess is that there will be a lot of pressure to let this deal sail through.

But there are two reasons for concern.

The first is obvious: the macro-linked bonds structure essentially makes a generous debt-to-GDP target even more generous. The structure of the IMF’s debt targets set completely aside what I consider to be the core issue, namely whether $45 billion of debt is too much for an economy that struggles to generate foreign exchange and has no history of collecting tax revenues. In the upside scenario, the coupon on the $10.5 billion in new bonds is approximately $870 million per year, which is higher than the $770 million contractual coupon on Sri Lanka’s defaulted bonds. Sri Lanka’s difficulties are thus being treated by both the IMF and its creditors as problems of extended illiquidity, not a problem of fundamental solvency—a judgment that I question given the rise in Sri Lanka’s gross (and net) external debt over between 2012 and 2022.***

The IMF’s market access framework through doesn’t look at the absolute size of external debt relative to measures of external payment capacity. It only looks at the size of the gross financing need, or more precisely, the size of the gross financing need relative to the size of the domestic banking system. That is a pretty narrow basis for assessing fiscal solvency as, for example, it leaves out interest payments relative to tax revenues, and Sri Lanka’s Achilles’ heel, as Theo Maret has emphasized, has long been its low levels of tax collection. Government revenue was around 10 percent of GDP before the COVID-19 Pandemic, and it fell to ridiculously low levels thereafter, thanks to a poorly timed tax cut and even with the IMF program adjustments was still just under 10 percent of GDP in 2023. The stock of high coupon bonded debt after 2027—and the need to refinance that debt at high debt-to-GDP levels—thus pose a set of classic fiscal risks.

The second issue is one of symmetry. In the upside scenarios, both the stock of bonds and coupon increase. In the downside scenario, the coupon is constant. As a result, the $570 million coupon in the base case (the one used in the IMF debt sustainability analysis) rises to $870 million in the upside scenario and falls only to $470 million in the downside scenario. Looking at all debt service, the upside in 2028 for the bonds is over $500 million (0.45 percent of estimated GDP) while the maximum downside adjustment is less than $200 million (0.2 percent of estimated GDP).

Moreover, the probability distribution for a payout is skewed toward the upside. The bondholders are correct in arguing that the IMF’s forecast for dollar GDP during the program period are a bit conservative. The problem is what happens after the program ends and Sri Lanka, in theory, has to survive on its own in the market with high levels of public external debt and overall public debt.

Absent disclosure of the terms of the China Exim restructuring and the Paris Club/India deal, it is hard to know whether there will be concerns about comparability. The NPV relief provided by the bonds may be significantly higher than the NPV relief provided by the official creditors in the base case.

But the asymmetry in the bondholder deal could still be an issue—as the bonds almost certainly will get a lot more in both the near and medium term if GDP hits the $100 billion threshold. The bonds are also getting most of the near-term cash flow (over $700 million a year) out of a total external debt service envelope for bonds, the China Development Bank (CDB), and bilateral claims of $900-975 million; bilateral creditors and the CDB have more of the restructuring stock—at least $16 billion relative to the $14.5 billion of bonds including PDI—so there is, as usual, a big tilt toward the bonds in the near-term cash flows.

Put simply, “comparability” under the current formula requires more NPV effort from the bonds given the cash flow tilt toward the bonds, which may or may not be the case. We don’t know the NPV relief in the official deal, or how the official sector will assess the greater upside provided in the private deal.

But the most important issue is a broader one. A rise in GDP—if it isn’t just a function of an overvalued exchange rate—frees up additional resources for a host of uses. Under the IMF’s framework, higher dollar GDP increases Sri Lanka’s calculated capacity to service foreign currency debt in a linear way—$10 billion more in GDP means $450 million more in estimated debt service capacity.*** The proposed macro linked bonds give all of that upside to one group of external creditors, at least between 2029 and 2032. The bondholders get something like 80 percent of the notional upside from higher dollar GDP while being at most one third of the overall external debt stock ($14.5 billion of $43 billion).

Put differently, if Sri Lanka’s (dollar) GDP increases by 10 percent (versus the baseline), debt service on external bonded debt rises by 50 percent, not by a more reasonable linear 10 percent.

That raises one final point:

Sri Lanka has a relatively high level of external debt: $43 billion, which will rise to at least $45 billion in the IMF program period, as future Fund disbursements, $2.5 billion in multilateral development bank (MDB) fiscal financing, and the recognition of past-due interest offset the reduction in the bond’s face value. Sri Lanka also has an exceptionally low level of reserves. A $100 billion economy should have around $15 billion of reserves—Sri Lanka now has $5 billion, $3 billion of which are borrowed. Sri Lanka actually defaulted back in 2022 because it ran out of reserves, a fact that is glossed over in the IMF’s fiscally-focused debt sustainability framework.****

Net external debt—a concept that the IMF’s market access framework doesn’t incorporate—is thus high. Sri Lanka has certain inelastic import needs (fuel) together with a modest export base (goods exports are only $10 billion or so; total foreign exchange proceeds are around 20 percent of GDP).*****

Sri Lanka is thus an economy that cannot—in my view—easily support a lot of expensive external debt.

So, I do worry that the IMF assumes a return to external market access in 2027 with a debt-to-GDP level that will be over 100 percent in the IMF’s base case and could be over 90 percent even in an optimistic case. The potential spike in debt service in 2029 also stands out as an obvious source of risk. The macro-linked bonds could easily become high-rate, relatively rapidly-amortizing bonds just when Sri Lanka loses the lifeline from its IMF program.

State-contingent instruments were originally viewed as a mechanism to reduce risk by aligning payments to payment capacity. Lots of academics still find them appealing for that reason. But in practice, they have generally become instruments that add to, rather than reduce, the risk of future default.  

To borrow a phrase from Michael Pettis, the macro-linked bonds create a “volatility machine” just as Sri Lanka (in theory) is set to exit from its IMF program.

That is a problem.

* IMF staff have resisted suggestions that they should review their current debt framework and do a better job of of incorporating external debt variables into the medium-term module of the new market access debt sustainability framework.  External variables actually enter into the confidential short-term assessment of risk, but the medium-term assessment defines parameters for a debt restructuring—the long-term module appears to have little substantive value. I also worry, more generally, that the IMF staff has lost interest in balance of payments issues, in part because the balance of payments has dropped out of a lot of PhD programs.

** Much of the debate on the debt restructuring architecture has focused on the G-20’s “Common Framework” which only applies to low-income/IDA eligible countries. Sri Lanka was just a bit too wealthy to qualify for the Common Framework.  This has two concrete implications:

a) China’s official creditors were not required to participate in a single official creditors’ committee with the traditional bilateral creditors (i.e., the Paris Club; in Sri Lanka’s case, the biggest traditional creditor is Japan).  The Export-Import Bank of China negotiated separately in this case, and the China Development Bank is part of the commercial rather than the official restructuring.

b) Countries outside the Common Framework aren’t assessed using the IMF’s low-income country debt sustainability framework. The “retro” low-income country framework focuses on external debt and generally is more constraining; the “modern” market access country framework doesn’t have the cliff effects of the low-income country framework but also entirely drops balance of payments-based measures of debt.

*** The general government’s external debt table includes the central bank’s swap liabilities, which is commendable.

**** Ecuador, interestingly, has a very similar external debt profile to Sri Lanka despite a very different overall public debt profile. Both Sri Lanka and Ecuador have relatively large stocks of external debt and very few reserves, and a reasonably high share of each countries’ debt is relatively expensive commercial debt. Both countries are examples of why looking more holistically at debt-payment capacity matters. The issue for Sri Lanka should be whether its relatively high level of domestic debt makes it too risky to also carry a relatively high level of external debt; the issue for Ecuador is whether its lack of a domestic buffer (thanks to dollarization) makes it too risky to carry its current stock of foreign external debt even with a low level of domestic public debt.  I am not convinced that the IMF's current framework draws out these questions in an effective way, as it (intentionally) blurs the line between domestic and external debt.

***** The macro-linked bonds have a high risk of being viewed as a sophisticated version of the initial bank flow rescheduling that marked the first phase of the 1980s emerging market debt crisis. That rescheduling was defined by a belief on the part of creditors that the country only faced a liquidity problem, and thus an unwillingness to give up on principal (the banks also needed time to rebuild their own capital). The actual resolution of the crisis required a truly fixed payment schedule that the country could meet, which created a realistic upside for both creditors and the country⍐.

Blog Post by Brad W. Setser July 16, 2024 1:10 pm (EST)