Sri Lankan default should be an eye opener for Pakistan

As Sri Lankan officials arrive Washington to meet with the International Monetary Fund amid an economic and political crisis, the main question they’ll need to answer is how the country plans to manage its billions in debt.

Reportedly, Sri Lanka is seeking up to US$4 billion this year to help it import essentials and pay creditors. To get any of that through the IMF’s various programs, the government of President Gotabaya Rajapaksa must present a sustainable debt program. That’s a standard requirement for aid from the lender of last resort, even if a shortage of food, fuel and medicine is pushing the country toward a humanitarian crisis.

The downward economic spiral — dwindling foreign reserves and soaring inflation — has triggered political unrest in Colombo, where Rajapaksa has resisted calls to step down despite growing protests and a loss of coalition partners in parliament. Over the weekend, the army denied speculation it planned to crack down on protesters, while the local stock exchange announced it would shut this week amid the uncertainty.

The outlook makes a default inevitable, as  acknowledged by S&P Global last week when it downgraded Sri Lanka’s credit rating and warned of another cut if the nation misses coupon payments due on Monday. Meanwhile, investors are trying to figure out how much they might recover on $12.6 billion of foreign bonds, and if there’s even profit to be made.

The country’s dollar bond due July 2022 indicated 5.2 cents higher on Monday to trade at 46 cents on the dollar, after a sharp drop Friday.

Here are some IMF funding options in play as talks are due to start this week:

Emergency Assistance

IMF members can access one-off emergency loans, with few conditions, through the lender’s Rapid Credit Facility and Rapid Financing Instrument. However, this payout is capped at 50% of a state’s quota for a year, which in Sri Lanka’s case works out to US$395 million — or 289 million in special drawing rights, the IMF’s unit of account. The nation has declared that it will prioritize payments for food and fuel imports over debt servicing.

But even for that, Colombo needs to take steps toward restructuring its debt, which the IMF staff last month determined was unsustainable.

“When the IMF determines that a country’s debt is not sustainable, the country needs to take steps to restore debt sustainability prior to IMF lending,” Masahiro Nozaki, the IMF’s mission chief for Sri Lanka, said in an emailed response to questions. “Thus, approval of an IMF-supported program for Sri Lanka would require adequate assurances that debt sustainability will be restored.”

Meeting the criteria could include even initial steps like hiring advisers, which the government is pursuing. The administration has set a Friday deadline for applications from financial and legal advisers, extending its original date by a week. That makes Finance Minister Ali Sabry’s stated goal of securing emergency funds as early as a week after negotiations start look optimistic.

Given Sri Lanka has a US$1 billion bond maturing in July and more repayments over the course of 2022, it will probably need access to the IMF’s Stand-By Arrangement. Termed as its “workhorse” instrument, Sri Lanka would be eligible for a loan of as much as 435% of its quota — roughly US$3.4 billion, net of repayments — for up to 36 months.

The payout can be front-loaded if the need is dire, but is contingent upon the borrower agreeing to conditions such as specific revenue and deficit targets.

Central bank Governor Nandalal Weerasinghe said last week that it was too early to estimate a value of the lending that Sri Lanka could get from the IMF or to confirm the type of program that the lender could agree to.

While he said that an Extended Fund Facility — which allows longer repayment periods — may be best suited to the country, it typically requires deeper structural reforms. Sri Lanka had that facility approved in 2016, and a Stand-By Arrangement before it during the financial crisis of 2009.

Weerasinghe noted that Sri Lanka in the 2009 loan was approved for access to 400% of its quota.

“I do not see why we cannot get at least that amount,” he said. “Now the financial gap is much much higher.”

Keeping deficits in check will entail extending the maturity of existing debt and smaller interest payments. When the government last week announced it would halt debt payments and warned it was heading for an unprecedented default, Weerasinghe said authorities were seeking to negotiate with creditors.

Nomura Holdings Inc. envisions an Ecuador-style restructuring where Sri Lanka will swap notes for longer-dated bonds with lower coupon rates and some reduction to principal. Barclays Plc said Sri Lanka could roll all of its debt into a new bond with a final maturity in 2037 and semi-annual amortizations starting in 2027; coupons could be in the range of 4% to 5%, lower than its current average 6.6%.

Rajapaksa’s government has also appealed to China, one of its biggest creditors, for an additional US$2.5 billion in support. While President Xi Jinping has pledged to help, an apparent reluctance reflects both a rethink in its external lending practices and a hesitancy to be seen interfering in messy domestic political situations.

Earlier this month, Jin Liqun, President of the China-backed Asian Infrastructure Investment Bank, encouraged Sri Lanka to turn to the IMF. Neighbor India is also assisting Sri Lanka with credit lines to purchase food and fuel.

Sabry, the Finance Minister, said last week that the country will hold talks with other lenders, including the World Bank and Asian Development Bank, adding that the country is committed to honoring its debt. “We will pay every dollar we borrowed,” he said.

As Sri Lanka is set to start IMF talks, what are its options?

Sri Lanka is seeking up to US$4 billion to pay for essentials and pay creditors, but it must show IMF a sustainable debt plan.

Pak-US relation after the election

Elites as well as commoners of Pakistan while passing time in their drawing room talks often indulge in discussions on a variety of topics. These range from civil-army relations to Pak-India border situation to proxy wars going on in the neighborhood. However, lately the talks also drift to the outcome of US elections and US-Pakistan relations in the aftermath. The diversity of discussion depends on the knowledge of the participants about the facets of the US foreign policy.

The commoners often have the consensus that historically the successive governments in Pakistan have been towing the US foreign policy agenda since independence. They also say that Pakistan’s foreign policy has mostly remained under the shadow of US foreign policy. However, there have been good and bad patches, good during the time US needs Pakistan and bad when the US focus shifts away from the region where Pakistan is located.

During cold-war era as well as Afghan war, Pakistan was often termed key partner in war against terror, but mantra of many US senators and congressmen remains ‘do more’. Pakistan has played a contradictory role in Afghanistan, a friend as well as a foe. Pakistan with the help of Taliban fought against Russian troops but post 9/11 it was asked to fight the same Taliban.

The US is often termed the biggest democracy of the world, which also take active part in ‘regime change’ programs around the world to dislodge ‘dictators’. However, it is worth noting that the US has supported three dictatorial regimes in Pakistan, spread over nearly thirty years. Supporting these regimes was need of the super power, as it believes that negotiating with a dictator is easier as compared to an elected/democratic government, which is accountable to the masses.

This is not unique, the US has been installing, supporting and even prolonging and dislodging dictators’ rule in many countries in the name of ‘regime change’. Surprisingly, the biggest democracy of the world does all this but its citizens and/or elected representative, in one way or the other, endorse acts of ruling junta. One may say that the deception prevails over only because of the much talked about liberal media that is not free in real sense.