• Good news for the people has to be something to do with their daily lives
• No transparency where Opposition is concerned regarding debt agreements
• The bilateral creditors have included a clawback clause in their agreement
• Need to reach deal without dragging discussions and get out of default rating 
• IMF’s primary objective is debt sustainability; SJB’s primary objective is growth

While the developments related to Sri Lanka’s debt restructuring negotiations and agreements reached thus far are being portrayed as ‘subha aranchiyak’ or ‘good news,’ the people are looking for a real ‘subha aranchiya’ that improves their daily lives, asserted Samagi Jana Balawegaya (SJB) MP and parliamentary Committee on Public Finance (COPF) Chair Dr. Harsha de Silva, in an interview with The Sunday Morning.

“The ‘subha aranchiya’ has to be for the people. It has to be something to do with their lives – that they can afford to have three meals a day, for example. The technical jargon can be called a ‘subha aranchiya,’ but I don’t think that resonates with the people,” he emphasised.

The secrecy surrounding the agreements reached also came under fire by the MP, who in his capacity as COPF Chair recently refused the President’s request to call the committee to approve of the bilateral debt deal, given that the agreement has not been seen by the committee. 

“The document is being shared among those different creditor groups and completely hidden from the Parliament. It is obviously with the Government but there is no transparency where we are concerned,” he noted.

Emphasising that reaching a debt restructuring deal and getting out of the default rating were essential, he however questioned whether an agreement was going to be arrived at based on the election timetable as opposed to the best deal for the country.

In the course of the interview, Dr. de Silva also spoke on the bilateral creditors’ clawback clause and what changes an SJB government would make in the ongoing International Monetary Fund (IMF) programme.

Following are excerpts of the interview:

As Chair of the COPF, you refused the President’s request to call the committee to approve of the bilateral debt deal, given that the agreement has not been seen by the committee. What is COPF’s stance on this at present?

Our stance remains the same. Unless these agreements are submitted to the committee, the committee cannot review them.

Why is there so much secrecy surrounding this and has the Opposition been briefed on debt negotiations in any way beyond the information in the public domain?

There is something called comparability of treatment and that obviously is only relevant to the external creditors. They are trying to make sure that they have comparability. It does not seem to include the local creditors at all. Therefore, whatever happens to the Employees’ Provident Fund (EPF) or the domestic restructure, etc. is irrelevant. 

The document is being shared among those different creditor groups and completely hidden from the Parliament. It is obviously with the Government but there is no transparency where we are concerned.

What is your assessment of the debt restructuring developments thus far?

I have openly said that the bilateral creditors have included a clawback clause in their agreement. Even though the bondholders may agree to a 28% haircut now, it gets implemented only in 2028 and it is dependent upon the value of our Gross Domestic Product (GDP) by 2027 measured in US Dollars. That is called a Macro-Linked Bond (MLB). 

Depending on what that value is, the haircut will differ. The 28% will stay only if our GDP remains at something like $ 88 billion. But all projections are that it will be about $ 100 billion or even more. 

Of course the caveat is if we have a government that disrupts the whole thing and we fall again, then of course we will get a 40% haircut, but that makes no sense because, if we fall from here, the country will have gone to the dogs. That’s another matter. If it comes up to $ 100 billion, then the haircut will fall to 14.96%. 

The bilateral lenders have added that clawback clause so that despite whatever they agree on now – the postponement of debt with an interest rate of 2.1% – if by any chance the bondholders don’t have to give up 28% but rather get away with 14.96% or some other figure that is less than 28%, then the bilateral debt holders will relook at this whole agreement and seek equal treatment or comparative treatment as the bondholders as of 2028. 

They will have 90 days to negotiate this deal and if the Government fails to agree, then this deal becomes null and void. This is probably the first time that a bilateral agreement or Official Creditor Committee (OCC) agreement has such a clause that is linked to the MLBs of the bondholders. Therefore, we need clarity on this. 

I am saying that this is what is in this agreement and the Government is neither agreeing or disagreeing with me. The Government is keeping quiet and nothing is moving forward.

What does the Opposition intend to do about this?

First of all, we need a deal. That’s a given. We can’t continue to drag on these discussions – every day, additional interest gets added on. We need to get out of this situation and we also need to get out of the default rating that we are in. With the default rating, investors don’t want to come and even if they come they ask for the sun and the moon.

Adani’s 8.26 US cents is a good example. What they are saying is, ‘You people are a default rating country, how do we know whether we will get paid? Therefore we are going to add a risk premium.’ But if we are an investment-grade country, that won’t happen. 

Those types of indirect benefits are also attached to getting out of the default rating other than the direct benefit of us being able to get back to the global capital markets. We need to have a deal and quickly get out of the default rating. 

However, if the agreement is going to be arrived at based on the election timetable, then I am wondering – as are many others – whether this is just to show that there has been success in the negotiation as opposed to the best deal for the country.

How long do you think it will take for the rating agencies to upgrade Sri Lanka?

They may take Sri Lanka out of default soon after the OCC and commercial debt restructuring agreements are signed. We may get a ‘C’. But it will take much longer, perhaps a couple of years, before at least a ‘CCC’ rating is obtained to get back into the market.

The developments related to the negotiations and agreements reached are being portrayed as ‘good news’ or ‘subha aranchiyak’. Do you accept that this is good news in any way?

The ‘subha aranchiya’ or good news has to be for the people. The people are desperate. The people’s ‘subha aranchiya’ has to be something to do with their lives – that they can afford to have three meals a day, for example. That is the type of ‘subha aranchiya’ that the people are waiting for.

The technical jargon can be called a ‘subha aranchiya,’ but I don’t think that resonates with the people. The people are looking for a real ‘subha aranchiya’ for them. 

How do you view the ongoing IMF programme and what areas would an SJB government look to amend?

The IMF programme has a fundamental flaw and we have expressed this to the IMF itself.

The IMF believes that debt is debt and growth is growth. We differ from that because debt, for us, is domestic debt and foreign currency debt. Our problem is really with foreign currency debt.

Now to repay foreign currency debt, we need growth. Growth can be broken into two – tradeable growth and non-tradeable growth. Tradeable growth means what happens with exports, the growth that comes through dollar revenue. Non-tradeable growth is what happens internally – construction and so on, where the revenue is in LKR, not in USD.

What we need to focus on is foreign debt and export-driven growth. Not just debt repayment and growth. Therefore, in order to create export-led growth or dollar-revenue growth, we have to incentivise the export sector. To do that, the incentives structure for export-driven growth will have to change.

That’s the fundamental flaw that we see in this IMF deal. For the IMF, it looks as if debt sustainability is the primary objective, but for us the primary objective has to be growth. That is a fundamental change that we will make in relation to the IMF agreement. 

Beyond that, there will be adjustments in taxes, etc., but still within the envelope that we have agreed upon. There will be internal adjustments to relieve the middle class of the massive tax burden, yet at the same time without disturbing the overall numbers that we have promised.