The landscape of sovereign borrowing has evolved from a small group made up of multilateral organisations, a few commercial banks, and the ‘Paris Club’ of rich countries to something much more complicated. In recent decades, emerging markets and developing economies have borrowed proportionately more from international bond markets with their dispersed private investors, and tapped new non-Paris Club lenders like China. From the sovereign’s perspective, this makes a potential debt restructuring operation particularly complicated.
Efforts to attract FDI should be coupled with building effective policy strategies that instill and maintain credibility. Indeed, this is all the more important as Sri Lanka appears to be firmly against an International Monetary Fund (IMF) bailout. An IMF programme is mostly useful in firming up sovereign credit ratings and reviving the sentiments of investors. But investor sentiments can also improve if governments put forward and implement credible policy strategies. By contrast, the CBSL’s policy rate adjustment to anchor expectations, for instance, will not stick if direct financing of fiscal spending is to continue under yield control measures. Instead, market convictions on the credibility of the policy mix will drive economic fundamentals. As Sri Lanka readies to transition out of pandemic-related emergency support, some notion of fiscal and debt sustainability to anchor confidence should be the priority in Budget 2022 preparations.
Latest Edition of Talking Economics Digest Now Online! – Transitioning to a High Middle Income Economy
As Sri Lanka moves towards achieving high middle-income status, the country is faced with both challenges and opportunities. To leverage the maximum advantage presented by these favourable circumstances and overcome the obstacles, reforms are needed in almost all aspects of the economy. In this context, the 17th Edition of the Talking Economics Digest centers on the theme of ‘Transitioning to a High Middle Income Economy.’
As Sri Lanka, like many other developing countries, escalates its engagement with China’s ambitious Belt and Road Initiative (BRI), the question of debt entrapment requires a more rigorous review. Criticism of Chinese loan disbursements have focused not only on the volume of funds, but also on the terms. However, the author argues that, Chinese loans are not the primary cause of Sri Lanka’s debt imbroglio; but, they have contributed to, and possibly aggravated, the problem.
The Sri Lankan rupee (LKR) has depreciated by 10% in nominal terms by end September 2018, posing significant economy-wide risks in view of a hefty total external debt stock at 60% of GDP at end 2017. In this context, the author argues that the Sri Lankan economy is set to face testing times; dollar revenues need to be generated to match dollar-denominated debt service as never before.