Developing countries facing debt problem

According to Reuters, the persistent and damaging debt problems gripping a number of developing nations will be a core topic during the G20 summit in Delhi next month. Following is the recap of economies in the countries currently facing problems:

ZAMBIA

Zambia was the first African country to default during the COVID-19 pandemic and after a long-awaited burst of progress in recent months finally looks to be closing in on a repair plan.

In June, it clinched a US$6.3 billion debt rework deal with the Paris Club creditor nations and its other big bilateral lender China. The details are still being worked on, but the government also hopes to reach a deal in the coming months with the international funds that hold its unpaid sovereign bonds.

The progress has also been cheered as a success for the struggling G20 Common Framework initiative, which was set up during the pandemic to try to streamline debt restructurings but has been hard to make work in practice.

SRI LANKA

Sri Lanka announced a debt overhaul plan at the end of June and has continued to make progress since, albeit not everywhere.

Nearly all holders of its domestic, dollar-denominated Sri Lanka Development Bonds (SLDBs) agreed to exchange their bonds into five new Sri Lankan rupee-dominated notes that will mature between 2025 and 2033.

Another part of the domestic debt plan has faced delays, though, with a key deadline on a Treasury bond exchange delayed three times and now set for Septemer 11, 2023.

Central bank chief Nandalal Weerasinghe has said the country's big foreign creditors such as India and China are awaiting the conclusion of the domestic debt operation before continuing discussions.

He said negotiations will be held in parallel with the first review of its US$2.9 billion International Monetary Fund (IMF) bailout program due from 14-27 September. Failure to complete the domestic debt overhaul by then could result in delays both in terms of IMF disbursements and talks with creditors.

GHANA

Ghana defaulted on most of its external debt at the end of last year. It is the fourth country to seek a rework under the Common Framework and is aiming to reduce its international debt payments by US$10.5 billion over the next three years.

Its progress has been relatively swift compared to the likes of Zambia. The government recently agreed to tackle roughly US$4 billion of its domestic debt via a pension fund debt swap operation and a dollar-denominated bonds exchange.

It has sent a restructuring plan to its official sector - wealthier government - creditors and its finance minister has said he also expects to reach a deal with the country's bondholders by the end of the year.

The funds know it will require them to write off money but hope it could also include a recovery instrument that would mean Ghana pays back more of that money over time if its economy recovers quickly.

PAKISTAN

Pakistan needs upwards of $22 billion to service external debt and pay other bills for fiscal year 2024.

A caretaker administration is in charge until an election that must take place by November. Inflation and interest rates are at historic highs, and it is struggling to rebuild from devastating 2022 floods.

In June 2023, Pakistan reached an 11th-hour deal with the IMF for a US$3 billion bailout, and Saudi Arabia and the UAE followed with US$2 billion and US$1 billion cash infusions.

Reserves, which had fallen to US$3.5 billion, had rebounded to US$7.8 billion by late August. Observers say it could have enough to make it to the elections but there are major questions about how long it will be able to avoid default without huge support.

TUNISIA

The North African nation, reeling from multiple hits since a 2011 revolution, is facing a full-blown economic crisis.

Most debt is internal but foreign loan repayments are due later this year and credit ratings agencies have said Tunisia could default.

President Kais Saied has slammed the terms required to unlock US$1.9 billion from the IMF as diktats that he will not meet.

Saudi Arabia pledged a US$400 million soft loan, and a US$100 million grant, but the tourism-dependent economy continues to grapple with shortages in imported food and medicine. The European Union has offered about US$1.1 billion (one billion euros)in support but that appears to be mostly pegged to the IMF deal or reforms.

EGYPT

Egypt remains another of the big countries seen as at risk of falling into trouble. North Africa's largest economy has around US$100 billion of hard currency - mainly dollar-denominated - debt to pay over the next five years, including a meaty US$3.3 billion bond next year and the government spends over 40% of its revenues just on debt interest payments.

Cairo has a US$3 billion IMF program and has devalued the pound by roughly 50% since February 2022. But a privatization plan is still on the go-slow and last month it veered away from its IMF plan by saying it would keep subsidized electricity prices unchanged until January.

Some of its government bonds are changing hands at half their face value and analysts think a key factor in whether it can get back on track is the amount of support wealthy Gulf nations such as Saudi Arabia provide going forward.

EL SALVADOR

El Salvador has shifted from doom and default to bond market darling, propelled by two surprise debt buybacks and the appointment of a former IMF official as adviser to the finance ministry.

In summer 2022, its 2025 eurobond fell to just under 27 cents on the dollar, weighed down by high debt service costs and worries over its financing plans and fiscal policies.

The same bond traded at 91.50 cents on August 31, and its debt-to-GDP ratio stood at 77% in December 2022, the lowest since 2019, and is forecast to drop another percentage point this year, according to Refinitiv data.

It’s now relatively light debt repayment schedule through 2027, and the sky-high popularity of President Nayib Bukele, has assuaged fears the country could default.

KENYA

The East African nation's public debt stands at nearly 70% of GDP, according to the World Bank, putting it at high risk of debt distress.

President William Ruto's government has moderated spending and proposed a raft of tax hikes, assuaging some concerns of an imminent default.

The African Development Bank is in talks with Kenya over US$80.6 million to help it plug its financing gaps this year, and it is also discussing budgetary support from the World Bank.

But concerns remain; Ruto's political opposition has opposed many of his tax hikes, and protests have forced him to pause some reforms, such as fuel subsidy cuts.

UKRAINE

Ukraine froze debt payments in 2022 in the wake of Russia's invasion. It has said it is likely to decide early next year whether to try to extend that agreement or begin looking at potentially more complex alternatives.

Top institutions estimate the post-war rebuild cost will be at least one trillion euros, and the IMF estimates Ukraine needs $3-$4 billion a month to keep the country running.

If the war with Russia is not won or at least eased to a much lower intensity by next year, its debt restructuring dilemma will also have to factor in the November 2024 US Presidential election and the degree of support it would receive should Donald Trump or another Republican candidate win office.

LEBANON

Lebanon has been in default since 2020 with few signs its problems will be resolved any time some.

The IMF has issued stark warnings, but one bit of progress in the last couple of months has been a proposal by the central bank to lift the long-time peg on the country's local currency,

 

Iran hosts Asian Clearing Union summit

The 51st Asian Clearing Union (ACU) summit, mainly focusing on de-dollarization, kicked off on Tuesday at the Central Bank of Iran (CBI).

On the first day of the two-day event, expert committees from the delegations attending the summit held meetings to discuss preliminary issues.

The summit is attended by the governors of the central banks of the ACU member countries in addition to Russia.

The Governor of the Central Bank of Russia Elvira Nabiullina arrived in Tehran on Monday to attend the event.

In the 51st ACU summit, the members are set to discuss various issues including the amendment of the Union's statutes in order to facilitate the acceptance of new members, and determining the new currency basket of the member countries in order to settle exchanges without the need for euro or the dollar.

Exploring the feasibility of using digital currencies of central banks for cross-border payments and the unveiling of the interbank messaging network of the member states of the Union are also among the major topics on the summit’s agendas.

Asian Clearing Union is a payment arrangement whereby the participants settle payments for intra-regional transactions among the participating central banks on a net multilateral basis.

The main objectives of the clearing union are to facilitate payments among member countries for eligible transactions, thereby economizing on the use of foreign exchange reserves and transfer costs, as well as promoting trade and banking relations among the participating countries. 

Currently, the members of ACU are the central banks of Iran, India, Bangladesh, Bhutan, Maldives, Nepal, Pakistan, Sri Lanka, and Myanmar.

The central banking authorities of member countries have issued detailed instructions and modalities for channeling monetary transactions through the ACU. Membership in the ACU is open to central banks located in the geographical area of ESCAP and non-ESCAP.

 

China attains status of ‘Lender of Last Resort’

China has become a major rescue lender for heavily indebted countries. In 2022, loans to countries in debt distress accounted for 60% of China’s overseas lending portfolio – up sharply from just 5% in 2010.

Over the past two decades, Chinese institutions have provided US$240 billion in rescue lending to 22 developing countries. Of that sum, US$170 billion was provided through the People’s Bank of China’s swap line network – a system whereby central banks agree to exchange currencies.

The rest was offered through other means such as bridge loans or balance of payments support by Chinese state-owned banks and enterprises, including the China Development Bank. These loans are provided, generally with high interest rates, mostly to middle-income countries, which account for four-fifths of China’s overall lending. Low-income countries are given grace periods and maturity extensions.

These loans, often doled out as part of China’s Belt and Road Initiative, have been highly criticized for creating debt traps for cash-strapped borrowers. Countries like Sri Lanka, Zambia and Ghana are currently in talks with Beijing to restructure their debt.

More governments are struggling to make payments amid a global downturn. There is growing concern about China’s ability to refinance the loans and avoid financial problems at home if debtors can’t repay them.

 

Sri Lanka to receive first tranche of IMF bailout funds in two days

Sri Lanka will get the first $330 million tranche of the International Monetary Fund's bailout in the next two days, the global lender said on Tuesday, putting the onus on the cash-strapped nation to rein in its debt to sustainable levels.

Economic mismanagement coupled with the impact of the COVID-19 pandemic left Sri Lanka severely short of dollars for essential imports at the start of last year, tipping the island nation into its worst financial crisis in seven decades.

The IMF's Executive Board on Monday approved a nearly US$3 billion bailout for Sri Lanka with the endorsement expected to catalyze additional external support for the country to the tune of US$3.75 billion from the likes of the World Bank, the Asian Development Bank and other lenders.

The office of the country's president, Ranil Wickremesinghe, said the program will enable it to access up to US$7 billion in overall funding.

"Sri Lanka is no longer deemed bankrupt by the world," Wickremesinghe said in a video statement released by his office. "The loan facility serves as an assurance from the international community that Sri Lanka has the capacity to restructure its debt and resume normal transactions."

The IMF funding will, however, not immediately help millions of Sri Lankans, who are being squeezed by soaring costs of living, high income taxes of up to 36% and a 66% increase in power tariffs. The economy is expected to shrink by 3% this year after contracting 7.8% in 2022.

Half of the families in Sri Lanka have been forced to reduce the portions they feed their children, according to a survey by Save the Children released this month.

Shehan Semasinghe, Sri Lanka's state minister of finance, said the IMF bailout was absolutely essential for the country.

"But now we have to patiently focus on very difficult reforms going ahead. We have to continue to work together to rebuild Sri Lanka's economy and move it towards recovery," he said in a statement late on Monday.

The Colombo Stock Exchange All-Share index was down 0.6% as of 0629 GMT, while the Sri Lankan rupee strengthened 6.45% against the dollar.

Bonds were up by 0.73 cents to 1.50 cents across tenors, with the March 2029 bond leading the gains.

Peter Breuer, Senior Mission Chief for Sri Lanka, Asia and Pacific Department at IMF, said debt sustainability was one of the key criteria for the IMF to approve a bailout for any economy.

Going forward, Sri Lanka's disbursements from the bailout package would be tied to reviews that take place every six months, Breuer said, adding that the IMF has not set any growth target but has put in place an inflation band of 12-18% for the country to achieve by end of 2023.

Sri Lanka's retail prices have eased from last year's peaks but still hover over 50%.

Securing financing assurances from China and India and all its major bilateral creditors was key to Sri Lanka's efforts of unlocking the IMF bailout and putting its economy back on track.

The island nation aims to announce a debt-restructuring strategy in April and step up talks with commercial creditors ahead of an IMF review of the bailout package in six months, its central bank governor told Reuters earlier this month.

"We need to keep in mind that it's still going to be a difficult road no matter how much potential funds or support is being thrown at Sri Lanka," Katrina Ell, senior economist at Moody's Analytics, told Reuters.

"Ultimately, it comes down to them being able to successfully address some of the systemic problems in terms of economic management, fiscal management."

 

 

 

 

Sri Lanka: China offers to fully finance Hambantota refinery

According to Colombo Gazette, Chinese Sinopec has offered to fully finance the construction of a refinery in Hambantota, Sri Lanka.

During a discussion with representatives of the Sinopec Group held at the Presidential Secretariat, President Ranil Wickremesinghe said that the Government has taken a principled decision to expand the distribution of fuel which is expected to commence shortly.

The representatives from the Sinopec Group confirmed their readiness to invest in the import, storage, distribution, and marketing of fuel to cater to Sri Lanka’s energy requirements.

The representatives informed the Sri Lankan Government that their organization has adhered to the existing system and has applied accordingly. They further conveyed their readiness to fully finance the construction of a refinery in Hambantota, which has been identified as a central energy hub by the Government.

Moreover, the representatives stated that their company is prepared to respond to future solicitations that align with the aspirations of the country.

They also presented their proposal to the President who spoke about the import, storage and distribution of petroleum products.

Expressing his views, President Ranil Wickremesinghe stated that Sri Lanka expects rapid development following the program with the International Monetary Fund.

President Wickremesinghe also expressed his desire to promote and attract foreign businesses to operate within the country in the future.

Minister of Power and Energy Kanchana Wijesekera, Senior Advisor to the President on National Security and Chief of Presidential Staff Sagala Ratnayake, Secretary to the President Saman Ekanayake, Secretary of the Treasury Mahinda Siriwardena, Secretary of the Ministry of Power and Energy Mapa Pathirana and government officials and representatives of the Sinopec Group participated in the discussion.

 

IMF flags debt restructuring hurdles

There are some disagreements over restructuring debt for distressed economies, the chief of the International Monetary Fund said on Saturday on the sidelines of a G20 meeting.

India's G20 presidency comes at a time when its South Asian neighbors Sri Lanka, Bangladesh and Pakistan are seeking urgent IMF funds due to an economic slowdown caused by the COVID-19 pandemic and the Russia-Ukraine war.

China, the world's largest bilateral creditor, urged G20 nations on Friday to conduct a fair, objective and in-depth analysis of the causes of global debt issues as clamor grows for lenders to take a large haircut, or accept losses, on loans.

"On debt restructuring, while there are still some disagreements, we now have the global sovereign debt roundtable with consideration of all public and private creditors," IMF Managing Director Kristalina Georgieva told reporters after the roundtable she co-chaired with Indian Finance Minister Nirmala Sitharaman.

"We just finished a session in which it was clear that there is a commitment to bridge differences for the benefit of countries."

Apart from restructuring debt, regulating cryptocurrencies is another priority area for India, which Georgieva agreed with.

"We have to differentiate between central bank digital currencies that are backed by the state and stable coins and crypto assets that are privately issued," Georgieva said.

"There has to be very strong push for regulation... if regulation fails, if you're slow to do it, then we should not take off the table banning those assets, because they may create financial stability risk."

 

 

 

Sri Lanka: China offers debt moratorium

The Export-Import Bank of China has offered Sri Lanka a two-year moratorium on its debt and said it will support the country's efforts to secure a US$2.9 billion loan from the International Monetary Fund (IMF), according to a Reuters report.

India wrote to the IMF earlier this month, saying it would commit to supporting Sri Lanka with financing and debt relief, but the island nation also needs the backing of China in order to reach a final agreement with the global lender.

China's January 19, 2023 letter sent to the finance ministry may not be enough for Sri Lanka to immediately gain the IMF's approval for the critical loan, a Sri Lankan source with knowledge of the matter said.

Regional rivals China and India are the biggest bilateral lenders to Sri Lanka, a country of 22 million people that is facing its worst economic crisis in seven decades.

According to the letter, the Export-Import Bank of China said it was going to provide an extension on the debt service due in 2022 and 2023 as an immediate contingency measure based on Sri Lanka's request.

At the end of 2020, China EXIM bank had loaned Sri Lanka US$2.83 billion which is 3.5% of the island's debt, according to an IMF report released in March 2022.

"...you will not have to repay the principal and interest due of the bank's loans during the above-mentioned period," the letter said.

"Meanwhile, we would like to expedite the negotiation process with your side regarding medium and long-term debt treatment in this window period."

Sri Lanka owed Chinese lenders US$7.4 billion, or nearly a fifth of its public external debt, by the end of last year, calculations by the China Africa Research Initiative showed.

"The bank will support Sri Lanka in your application for the IMF Extended Fund Facility (EFF) to help relieve the liquidity strain," the letter said.

The Sri Lankan source, who asked not to be identified because of the sensitivity of the confidential discussions, said the island nation had hoped for a clear assurance from Beijing on the lines of what India provided to the IMF.

"China was expected to do more," the source said, "This is much less than what is required and expected of them."

Sri Lanka's central bank chief P. Nandalal Weerasinghe said on Tuesday that the country hoped for assurances from China and Japan, another major bilateral lender, soon and complete debt restructuring in six months.

 

Is China following debt trap policy?

A recent announcement by China that it is forgiving 23 loans for 17 African countries may be motivated by accusations of debt-trap diplomacy, say some analysts.

Critics have long accused Beijing of practicing debt-trap diplomacy, suggesting it deliberately lends to countries that it knows cannot repay the money, thereby increasing its political leverage. 

China vehemently rejects this, alleging it’s a way for the United States to discredit Beijing, Washington’s main challenger in the quest for influence in Africa.

China’s decision to forgive the zero-interest loans is, in part, aimed at countering the debt-trap narrative, said Harry Verhoeven, senior research scholar at Columbia University in New York.

“It is not uncommon for China to do something like this, forgive interest-free loans, now obviously it is connected to the overall debt-trap diplomacy narrative in the sense that clearly there’s a felt need on the part of China to push back,” Verhoeven said.

China’s announcement did not specify the countries or the amount of loan forgiveness, but analysts say that since 2000, China has regularly forgiven loans that are nearing their end but have a small balance.

“This is not a loan cancellation, but the cancellation of the remaining unpaid portion of interest-free loans that have reached maturity, that is if a loan was supposed to be fully paid off over 20 years, but it still has an outstanding balance, they cancel that outstanding balance,” Deborah Brautigam, Director of the China Africa Research Initiative at Johns Hopkins University’s School of Advanced International Studies. Brautigam’s research shows that between 2000 and 2019, China canceled at least US$3.4 billion of such debt in Africa.

While this applies to the Chinese government’s interest-free loans, it is not the case with the country’s interest-bearing commercial loans, which can be restructured but are never considered for cancellation, analysts explained.

Verhoeven said the sums of money involved in the 23 loans forgiven would likely be modest, but the politics of such gestures are noteworthy because for many years the Chinese would kind of shrug at various aspects, various lines of criticism, pertaining to their engagement in different African countries. But with the debt-trap allegations, China has belatedly woken up to the fact that this is a bit of public relations nightmare, said Verhoeven.

China has also been playing a role in restructuring the external debt of some African countries such as Zambia, which became the first African country to default on its debt during the pandemic. China, along with France, is chairing a committee to deal with debt relief efforts. The move, welcomed by the International Monetary Fund, is ongoing.

China is Zambia’s biggest creditor. Lusaka owes some US$6 billion to Chinese entities. In July, Zambia’s Finance Ministry announced it was canceling US$2 billion of undisbursed loans from its external creditors, US$1.6 billion of which are from Chinese banks. The move stopped construction of infrastructure projects largely funded by a Chinese bank, the South China Morning Post reported.

Shahar Hameiri, a political economist from the University of Queensland in Australia, agreed that the latest move by Beijing in forgiving African nations’ interest-free loans was probably just a goodwill gesture.

“The bigger loans are likelier to be restructured, if repayment problems loom, as we saw in Zambia,” said Hameiri

Senior officials in the United States have regularly warned developing countries, particularly in Africa, about the dangers of Chinese loans, and a 2020 State Department document, titled “The Elements of the China Challenge,” referred to China’s “predatory development program and debt-trap diplomacy.”

On a visit to the continent this month, the US Ambassador to the United Nations, Linda Thomas-Greenfield, touched on the idea that the wealthy and powerful have extracted Africa’s natural resources for their own gain. And it continues today through bad deals and debt traps. She did not mention China by name.

African politicians themselves have had mixed reactions to the debt-trap theory, with some, such as Ethiopia’s Ambassador to China, Teshome Toga Chanaka, refuting the idea, saying, “A partnership that does not benefit both will not sustain long.”

Others, including Kenya’s new President-elect, William Ruto, and Angolan opposition presidential candidate Adalberto Costa Jr., have expressed concern over taking Chinese loans.

The debt trap allegations have infuriated Beijing, which says Western private lenders are responsible for the bulk of poor countries’ debt and charge much higher interest rates.

The US allegation against China is simply untenable, Chinese Foreign Minister Wang Yi said this month.
Chinese state media constantly run articles aiming to debunk the narrative.

A number of economists and researchers are also saying the debt-trap narrative against China is unfounded.

“The debt-trap idea is that Chinese banks had ulterior motives, deliberately lending to countries when they knew those countries couldn’t repay,” Brautigam said.

“The reality is that like bondholders, which hold the majority of Africa’s debt, Chinese banks lent to countries that looked quite promising. All of these creditors have belatedly realized that risk profiles can shift dramatically in a short period of time.”

China restructured or refinanced about US$15 billion in African debt between 2000 and 2019, Brautigam’s research has found. She did not find that China had been involved in any asset seizures.

Echoing Brautigam, Hameiri said, “There is scant evidence that China has pursued ‘debt-trap diplomacy’ the idea that it would on purpose issue loans to ensnare recipients in unsustainable debt, in order to seize strategic assets or exercise control over their governments.”

Chinese lending has at times been problematic, Hameiri wrote, because in a frenzy to issue loans, Chinese lenders often spent little time considering debt sustainability. Chinese lending has contributed to debt problems in a number of countries, although it is not necessarily the only or even the primary cause as in Sri Lanka.”Some critics blamed China for the crisis in Sri Lanka earlier this year, when the cash-strapped government – which had defaulted on its debt – was deposed by mass protests. Beijing also is Colombo’s biggest bilateral creditor; however, Sri Lanka’s largest foreign lending source is in sovereign bonds.

Verhoeven said the growth in sovereign bonds has been an important factor in African nations’ debt too and rejected the Chinese debt-trap narrative.

“When it comes to China, the debt-trap narrative suggests … this is being done on purpose,” to get countries to vote with China in the UN General Assembly and to reduce Western influence, he said.

There “is little actual evidence that China’s been doing this for political gain,” Verhoeven said, “which is not to in any way say that Chinese lending is all fine, or that it’s always responsible or the best thing for countries to do, far from it.”

Since China has now been burned several times regarding its lending, with several countries defaulting on the loans, plus its own economic difficulties at home, there is certainly a sense that the good old days of 10 or 15 years ago where it could sort of give out loans left and right … are over,” said Verhoeven.

Japan seeks to organize meeting of creditors to Sri Lanka

Japan is seeking to organize a Sri Lanka creditors' conference, hoping it could help solve the South Asia nation's debt crisis, but uncertainties cloud the outlook for any talks.

Tokyo is open to hosting talks among all the creditor nations aimed at lifting Colombo from its worst debt crisis since independence, but it is not clear whether top creditor China would join and a lack of clarity remains about Sri Lanka's finances.

Japan would be willing to chair such a meeting with China if that would speed up the process for addressing Sri Lanka's debt, estimated at US$6.2 billion on a bilateral basis at the end of 2020.

President Ranil Wickremesinghe told Reuters last week that Sri Lanka would ask Japan to invite the main creditor nations to talks on restructuring bilateral debts. He said he would discuss the issue with Prime Minister Fumio Kishida in Tokyo next month, when he is expected to attend the funeral of the assassinated former premier Shinzo Abe.

Tokyo, the number two creditor, has a stake in rescuing Sri Lanka, not just to recoup its US$3 billion in loans but also its diplomatic interest in checking China's growing presence in the region.

S&P Global this month downgraded Sri Lanka's government bonds to default after it missed interest and principal payments. The island nation of 22 million people off India's southern tip, with debt at 114% of annual economic output, is in social and financial upheaval from the impact of COVID-19 pandemic on top of years of economic mismanagement.

An International Monetary Fund (IMF) team met Wickremesinghe on Wednesday to discuss a bailout, including restructuring US$29 billion in debt, as Colombo seeks a US$3 billion IMF aid program. 

The president met the same day with Japan's ambassador.

Tokyo believes a new platform is needed to pull creditors together.

Sri Lanka is running out of time since it defaulted on its debt. The priority is for creditor nations to agree on an effective scheme.

Japan is keen to move this forward. But it's not something Japan alone can raise its hand and push through, the cooperation of other nations was crucial.

Japan's Foreign Ministry declined to comment. Sri Lanka's central bank and Finance Ministry did not immediately respond to requests for comment. An IMF spokesperson declined to comment.

Concerns include rivalry and territorial tensions between big creditors China and India, while Sri Lanka would have to commit to reforming its finances and disclose more information about its debt, the sources said.

Last month, shortly after Wickremesinghe took office when his predecessor fled the country, Chinese President Xi Jinping wrote to him that he was ready to provide support and assistance to the best of my ability to President Wickremesinghe and the people of Sri Lanka in their efforts.

Getting Beijing's cooperation on a debt restructuring was complicated by factors such as a large number of lenders.

A Chinese foreign ministry spokesman told Reuters that Beijing was willing to stand with relevant countries and international financial institutions and continue to play a positive role in helping Sri Lanka respond to its present difficulties, relieve its debt burden and realize sustainable development.

Japan hopes to see a new debt restructuring framework resembling one set up by the Group of 20 big economies targeting low-income countries. Sri Lanka does not fall under this "common framework" because it is classified as a middle-income emerging country.

It must be a platform where all creditor nations participate to ensure they all shoulder a fair share in waiving deb. Until these conditions are met, it would be difficult for any talks to succeed.

The common framework, launched by the G20 and the Paris Club of rich creditor nations in 2020, provides debt relief mainly through extension in debt-payment deadlines and reduction in interest payments.

Some people involved think an initial creditors' meeting could be held in September, but one source said it would "take a little while, possibly several months".

Restructuring talks are only possible after the IMF scrutinizes Sri Lanka's debt, the sources said.

 

 

Chinese ship allowed to dock in Sri Lanka port

Reportedly, Chinese research ship, The Yuan Wang 5 has been given permission to dock on the condition it would not carry out research while in Sri Lankan waters. The ship has been allowed to remain in the Chinese-run port until August 22. 

India had previously voiced concerns that the ship would be used to spy on its activities, said media reports.

Foreign security analysts quoted by Reuters describe the Yuan Wang 5 as one of China's latest generation space-tracking ships, used to monitor satellite, rocket and intercontinental ballistic missile launches.

Several Indian media reports described it as a dual-use spy ship. Shipping analytics websites call it a research and survey vessel.

One report by Indian news site NDTV said the government in Delhi was concerned about the possibility of the ship's tracking systems attempting to snoop on Indian installations while on its way to Sri Lanka.

Earlier in July, an Indian foreign ministry spokesman said the government was monitoring the ship's planned visit, adding that Delhi would protect its security and economic interests.

According to a Reuters report, India had lodged a verbal protest with the Sri Lankan government against the ship's visit.

Earlier this month, Sri Lanka's foreign ministry had asked China to defer the ship's port call, saying it needed to take further consultations.

China responded, saying it was completely unjustified for certain countries to cite so-called 'security concerns' to pressure Sri Lanka - though it did not name any specific country. Sri Lanka later announced that the vessel would be given permission to dock.

 

Sri Lanka crisis: A warning to Pakistan and Bangladesh

Sri Lanka is in the midst of a deep and unprecedented economic crisis that has sparked huge protests and seen its president quit after fleeing the country - but other countries could be at risk of similar troubles, according to Kristalina Georgieva, Managing Director, International Monetary Fund (IMF).

"Countries with high debt levels and limited policy space will face additional strains. Look no further than Sri Lanka as a warning sign," said Kristalina.

She said developing nations had also been experiencing sustained capital outflows for four months in a row, putting their dreams of catching up with advanced economies at risk.

Sri Lanka is struggling to pay for crucial imports like food, fuel and medicine for its 22 million people as it battles a foreign exchange crisis. Inflation has soared about 50%, with food prices 80% higher than a year ago. The Sri Lankan rupee has slumped in value against the US dollar and other major global currencies this year.

Many blame ex-President Gotabaya Rajapaksa for mishandling the economy with disastrous policies whose impact was only exacerbated by the pandemic.

Over the years, Sri Lanka had built up a huge amount of debt - last month, it became the first country in the Asia Pacific region in 20 years to default on foreign debt.

Officials had been negotiating with the IMF for a US$3 billion bailout package. But those talks are currently stalled amid the political chaos.

The same global headwinds - rising inflation and interest rate hikes, depreciating currencies, high levels of debt and dwindling foreign currency reserves - also affect other economies in the region.

China has been a dominant lender to several of these developing nations and therefore could control their destinies in crucial ways. Buy it's largely unclear what Beijing's lending conditions have been, or how it may restructure the debt.

Where China is at fault, according to Alan Keenan from International Crisis Group, is in encouraging and supporting expensive infrastructure projects that have not produced major economic returns.

"Equally important has been their active political support for the ruling Rajapaksa family and its policies... These political failures are at the heart of Sri Lanka's economic collapse, and until they are remedied through constitutional change and a more democratic political culture, Sri Lanka is unlikely to escape its current nightmare."

Worryingly, other countries appear to be on a similar trajectory.

Pakistan

Fuel prices in Pakistan are up by around 90% since the end of May, after the government ended fuel subsidies. It's trying to rein in spending as it negotiates with the IMF to resume a bailout program.

The economy is struggling with the rising cost of goods. In June, the annual inflation rate hit 21.3%, the highest it has been in 13 years.

Like Sri Lanka, Pakistan also faces low foreign currency reserves, which have almost halved since August last year.

It has imposed a 10% tax on large-scale industry for one year to raise US$1.93 billion as it tries to reduce the gap between government revenue and spending - one of the IMF's key demands.

"If they are able to unlock these funds, other financial lenders like Saudi Arabia and the United Arab Emirates may be willing to extend credit," Andrew Wood, sovereign analyst at S&P Global Ratings said.

Former Prime Minister Imran Khan who vowed to fix some of these problems, was ousted from power although the faltering economy is not the only reason for that.

Again China plays a role here, with Pakistan reportedly owing more than a quarter of its debt to Beijing. "Pakistan appears to have renewed a commercial loan facility vis-a-vis China and this has added to its foreign exchange reserves and there are indications they will reach out to China for the second half of this year," Mr Wood added.

Bangladesh

With reserves dwindling, the government has acted fast to curb non-essential imports, relaxing rules to attract remittances from millions of migrants living overseas and reducing foreign trips for officials.

"For economies running current account deficits - such as Bangladesh, Pakistan and Sri Lanka - governments face serious headwinds in increasing subsidies. Pakistan and Sri Lanka have turned to the IMF and other governments for financial assistance," said Kim Eng Tan, a sovereign analyst at S&P Global Ratings.

"Bangladesh has had to re-prioritize government spending and impose restrictions on consumer activities," he said.

Rising food and energy prices are threatening the pandemic-battered world economy. Now developing nations that have borrowed heavily for years are finding that their weak foundations make them particularly vulnerable to global shock waves.

Is Bangladesh heading toward a Sri Lanka like crisis?

According to a report in South Asia Journal, like Colombo, Dhaka has also taken on massive foreign loans to embark on what critics call ‘white elephant’ projects. The economic turmoil in Sri Lanka should serve as a cautionary tale for Bangladesh, say experts.

Soaring prices of essential items are bringing enormous pain to economically weaker sections of Bangladeshi society. Sri Lanka has been mired in economic turmoil over the past few months, with the country battling severe shortages of essential items and running out of petrol, medicines and foreign reserves amid an acute balance of payments crisis.

The resulting public fury targeting the government triggered mass street protests and political upheaval, forcing the resignation of Prime Minister Mahinda Rajapaksa and his Cabinet, and the appointment of a new Prime Minister.

Many in Bangladesh fear that their country could face a similar situation, given the rising trade deficit and foreign debt burden.

Bangladesh imported goods worth US$61.52 billion during the first nine months of the 2021-22 fiscal year, a rise of 43.9% as compared to the same period last year.

However, exports rose at a slower pace of 32.9% while remittances from Bangladeshis living abroad — a key source of foreign exchange — dropped about 20% in the first four months of 2022 from the year before, to US$7 billion.

Muinul Islam, a Bangladeshi economist and former professor at Chittagong University, fears that the trade deficit could grow in the coming years as imports are increasing at a faster pace than exports.

“Our imports are set to reach US$85 billion by this year, while exports won’t be more than US$50 billion. And, the trade deficit of US$35 billion can’t be bridged by remittances alone,” Islam told adding: “We will have to live with around a US$10 billion shortfall this year.”

The expert also pointed out that Bangladesh’s foreign exchange reserves have fallen from US$48 billion to US$42 billion over the past eight months. He is worried that they may drop further in the coming months, likely down another $4 billion.

“If the trend of more imports against exports continues and we fail to minimize the gap with the remittances, our foreign reserves will go down to a dangerous level in the next three to four years,” he stressed, underlining that this would lead to a significant devaluation of the nation’s currency against the US dollar.

Bangladesh, like Sri Lanka, has also taken on foreign loans in recent years to fund what critics call “white elephant” projects, which are expensive but totally unprofitable.

These unnecessary projects could cause trouble when the time comes to repay the debts, Islam said.

“We have taken a loan of US$12 billion from Russia for a nuclear power plant which has a production capacity of just 2,400 megawatts. We can repay the debt in 20 years but the installments will be US$565 million per year from 2025,” he pointed out. “It’s the worst kind of a white elephant project.”

In total, the country will likely have to repay US$4 billion per year from 2024, as installments for foreign loans, Islam estimated.

“I fear Bangladesh won’t be able to repay those loans at that time because of the shortage of income from the mega projects,” he stressed.

Prime Minister Sheikh Hasina’s government has taken several steps to slash spending and save foreign currency reserves.

Nazneen Ahmed, Bangladesh economist at the United Nations Development Program (UNDP) office in Dhaka, said that the government has to make sure the projects are completed without additional cost and delay.

“We have to finish the mega projects carefully. There is no room for negligence and corruption. Those projects should neither be delayed nor the existing budget be increased,” she said, adding, “If we can finish them on time, only then will we be able to repay the loans we have taken for them.”

Adding to the problems of debt and deficit is the surge in prices of essential items.

The Russia-Ukraine war, which began at the end of February, has compounded the inflationary pressure.

Bangladesh has been particularly vulnerable as the country imports significant amounts of goods like cooking oil, wheat and other food items, as well as fuel.

Ahmed said that poor people are suffering the most because of the skyrocketing prices of these items.

“The government has to offer commodity goods subsidized to the poor people. Additional financial support should also be provided to them under a social security system,” she noted.

But the expert remains optimistic about the South Asian nation’s prospects, saying that the current economic indicators could improve as the global economy recovers from the COVID pandemic-induced downturn.

“We have been observing inflation worldwide during the COVID recovery phase. The Ukraine war has added more uncertainty to it. And the economic crisis in Sri Lanka has also created fear among us,” she told adding, “Still, if nothing big happens within the next few years, the global economy will recover again.”

Prime Minister Sheikh Hasina’s government has taken several steps to slash spending and save foreign currency reserves.

It has decided to suspend foreign trips of officials and postponed some less important projects that require imports from other countries.

Hasina has also urged citizens to do their bit, by practicing austerity and being careful about spending decisions.

“The Prime Minister earlier gave some directives to the government officials on practicing austerity. She called upon the private sector and the people to be economical,” Bangladesh’s Planning Minister M A Mannan said during a press conference in Dhaka.

Islam said that the government needs to be extremely careful with economic management, given the widespread suffering on account of soaring price rises, which could aggravate the already high political tensions in the Muslim-majority country.

“Bangladesh’s last election was not good. It was a fraudulent one. Another national election is due in the next two years. So the political situation will remain tense anyway. The economic uncertainty could fuel it even more.”

While the experts don’t see any imminent economic crisis, they believe that good governance and financial management are needed to ensure Bangladesh doesn’t end up facing a situation that Sri Lanka now finds itself in.

 

Governor State Bank of Pakistan, new Chairman of Asian Clearing Union (ACU)

Dr. Murtaza Syed, Acting Governor State Bank of Pakistan (SBP) assumed the charge of Chairman of the Board of Directors of the Asian Clearing Union (ACU) in the 50th meeting of the ACU Board held in Islamabad on May 13, 2022 in both physical and virtual modes.

Established in 1974 with permanent headquarters in Iran, the Asian Clearing Union (ACU) is a payment arrangement system whereby member countries settle payments for intra-regional transactions among their central banks on a net multilateral basis. Currently, the Central Banks of Bangladesh, Bhutan, Iran, India, Maldives, Myanmar, Nepal, Pakistan and Sri Lanka are members of the ACU. The main objectives of the clearing union are to facilitate payments among member countries for eligible transactions, thereby economizing on the use of foreign exchange reserves and transfer costs, as well as promoting trade and banking relations among the participating countries. 

The Secretary General of ACU, Mrs. Lida Borhan Azad, presented the annual report on the operations of the union for the year 2020, which the Board approved and adopted.

The Board reviewed progress on the ongoing projects being undertaken by the union. It reviewed a new web based messaging system and constituted a sub-committee to finalize the recommendations for its implementation within six months. The Board also considered the report on issues faced by traders under the ACU mechanism and decided to implement the recommendations in the next three months. 

While appreciating the report on the use of domestic currencies for settlement of trade transactions prepared by the Reserve Bank of India (RBI), the Board requested RBI to convene a virtual seminar to enable member countries to gain a fuller understanding of the proposed mechanism. The Governors and head of the delegations of the countries also gave a broad overview of the economic development in their respective economies and shared their experiences in addressing the challenges emerging in the post COVID-19 global landscape.

Governor Central Bank of Myanmar, Than Nyein, Vice Governor Central Bank of Iran, Dr.Mohsen Karimi, Chief Economist Central Bank of Bangladesh Md. Habib ur Rehman, and Executive Director Nepal Rastra Bank Ramu Paudel participated in the meeting physically. Governor Dr. P. Nandalal Weerasinghe, and Deputy Governor of Central Bank of Sri Lanka, T.M.J.Y.P Fernando, Governor Maldives Monetary Authority Ali Hashim, Ms. Yangchen Tshogel Central Bank of Bhutan and Executive Director RBI Radha Shyam Ratho, attended the meeting virtually.

At the conclusion of the Board meeting, Mrs. Lida Borhan Azad relinquished the charge of Secretary General of the ACU after distinguished service of the Union for 15 years. While appreciating the services of Mrs. Lida Borhan, the Board appointed Farhad Morsali as the new Secretary General of the ACU, as recommended by the Central Bank of Iran.

The meeting ended with all member countries emphasizing their commitment to further enhancing their trade and banking relationships. It was decided that central bank digital currencies (CBDCs) would be the special topic on which research would be conducted during Pakistan’s chairmanship of the ACU over the next twelve months.

Indian media finds similarity between Sri Lankan and Pakistani economic catastrophe

According to oneindia, both Pakistan and Sri Lanka have plunged into a crisis and the blame lies entirely on the Chinese debt. The situation in these two countries has now forced nations like Maldives, Bangladesh and Nepal to think again on the Chinese infrastructure and also being part of the BRI initiative.

In Sri Lanka the blame clearly lies on Rajapaksa who began leaning towards the Chinese heavily much to the displeasure of India. The nation brought upon itself immense economic stress by taking high interest loans from China in the name of developing infrastructure.

Pakistan on the other hand has more than 10% of its debt owed to China. Imran Khan has been blamed squarely for the economic mess the country is in today.

Due to these high value debts the country has not only fallen economically, but has also plunged into political crisis. Khan is making matters worse by whipping up public sentiments and blaming the situation on a foreign conspiracy against him and his government.

Both Pakistan and Sri Lanka face complex situations as the United States has a great amount of control on the global financial institutions. This would make it harder for the two nations as they have shifted their loyalties to China.

Colonialism proliferating, though in a different form

It may not be wrong to say that the World War-III started no sooner did World War-II ended. Under the new arrangement countries are not conquered using military but by subjugating their sovereignty.

In the past the World Bank and the International Monetary Fund used to take control of policy making of recipient countries but now power of these countries to make decision are curtailed by establishing the World Trade Organization (WTO).

After the World War-II, super powers namely USA, USSR, and later on China have emerged. While USSR faced disintegration after its failed attempt to get access to warm waters by attacking Afghanistan, China preferred to focus on becoming an economic power. The USA got a free hand to establish its hegemony.

China is a perfect example of ‘If you can’t kill your enemy, make him friend but never forget you have to kill him one day’. USA has emerged a major investor in China and also a major buyer of made in China products. The policy is driven by the lust to control Chinese economy.

Economic sanctions are imposed on countries trying to the US policy but all the decisions are driven by protecting its own interest and/or its peripheries. This is evident from the latest US decision to exempt India, Malaysia, South Korea, South Africa, Sri Lanka, Turkey and Taiwan buying oil from Iran. These countries are either the major buyers of made in USA arsenal or supplier of goods and services to the super power.

United Nations (UN) has also become subservient as most of the decisions are made by the permanent members enjoying veto powers. Any decision by the international community can be turned down by these countries.  However, if a rubber stamp is needed, UN endorses military action, the most recent examples being Libya and Syria. Iran has been facing economic sanctions for more than three decades.

Different blocs have been created for the collective exploitation and now to establish US hegemony and developing regional powers. India has been given the status of regional super power. Commonwealth keeps on reminding the sovereign countries that they were British colonies and are still under the thumb of Monarchy.

Economic assault has been initiated under the WTO that gives legal cover to the financial atrocities of the developed countries. These countries control economies of poor sates through multinational companies (MNCs). This is best understood when one looks at the balance sheets and profit and loss statements of Fortune-500, which has further reduced to Fortune-50 companies,

But armies still play key role in conquering countries, with US leading Nato member counties. Usually the campaign starts in the name of restoration of democracy. Regime Change Plans are executed by funding rebels and proving them arsenal. This is in no way any attempt to make their lives better but to keep the armament factories running at full capacities.