In the recent political drama produced and directed by Messrs. Kariyawasam and Gammanpila over the fuel price hike, one revelation that ought to have rung alarm bells across the country but didn't, possibly due to being overshadowed by bigger “news” at the time, was the justification offered by the Energy Minister for the price hike. In his eagerness to defend the price increase as well as his suitability to hold that particular cabinet portfolio in light of Sagara Kariyawasam's demand that he resign, Udaya Gammanpila was probably unaware of the far-reaching consequences of his revelation that has now shaken the very foundation of the country's banking sector.
It was no doubt a rare moment of conscientiousness displayed by a cabinet minister when Gammanpila chose to be forthright on the fate of the country's economy in general and the Ceylon Petroleum Corporation (CPC) in particular, by confiding in the people that failure or delay to implement the fuel price hike would have led to the inevitable collapse of not only the state petroleum giant but also the local banking sector.
The two biggest local banks by way of capitalisation as well as deposits are the two state banks, Bank of Ceylon and Peoples Bank. They also happen to be the two biggest lenders to the tottering CPC, which has run up multibillion-rupee debts to the two banks, which in turn has compromised not only their stability and sustainability but also that of the entire banking sector and by extension the economy of the country.
Following Gammanpila’s revelation, an independent global rating agency last week warned that the country's biggest banks were the most susceptible to the “CCC” sovereign rating which is just a notch above default rating. Fitch and other global rating agencies, which have consistently been warning of an impending economic crisis further exacerbated by an excruciating foreign exchange situation, last week raised the red flag over the local banks’ exposure to heightened sovereign risk primarily based on the level of exposure to foreign currency-denominated government securities. According to the rating agency, as much as 40% of assets of the country’s top banks are directly linked to the “CCC”-rated sovereign.
It doesn’t take an Einstein to figure out that the situation could become untenable if urgent measures are not put in place to overcome the forex crisis which has been months in the making. Despite the crises, the Government will have to fork out a billion dollars this month to pay a maturing bond while total external debt due to be paid by 2026 stands at around $ 30 billion.
With current reserves down to just $ 4 billion, the only viable option for the Government, to at least temporarily tide over the looming crisis, is to reach out to lenders and explore the possibility of restructuring this mountain of debt it has on its hands. It is not going to be an easy task considering the fact that such an outcome would be music to the ears of at least one lender that accounts for around 15% of all debt. This particular lender has made a fine art of playing the waiting game until the debtor defaults to move in for the kill by acquiring valuable assets in lieu of payments. The preferred asset of course is prime real estate.
If the Government decides to move ahead with restructuring its debt, then what lies ahead is a veritable minefield that it will have to skilfully negotiate if it is to emerge unscathed from what looks like a brutal few months ahead. As things stand, and given the limited options at its disposal, debt restructuring seems inevitable, if not the only option on the table right now. Having come to the brink, with reliance on the money printer increasing by the day, it will take an extraordinary effort to not go over the edge and the resultant embarrassment of defaulting on payments. Should a default take place, it will effectively dissipate aspirations of a homegrown economic revival strategy, as it would shut the door to external funding. Of the limited options available, recourse to the International Monetary Fund (IMF) seems the most viable at this juncture, unless the Finance Ministry has a hitherto unheard of ace up its sleeve.
For a government that has been loath to even the thought of routinely engaging with the IMF, it seems like circumstances may well compel it to do so, but it will first have to swallow a huge chunk of its pride and ego. As the saying goes, beggars can’t be choosers. With the clock ticking, time is of essence. $ 30 billion by 2026 is not a long way off; just five years from now, averaging around $ 6 billion per year.
If the Government succeeds in restructuring its debt, it will provide breathing space at least for a couple of years, during which time Sri Lanka will hopefully be able to get its act together. But such an eventuality will also mean passing the burden on to the next administration which will be called upon to ultimately face the music. As to who will form that administration, only time will tell.
The Government has blamed the current crisis on the pandemic, lock, stock, and barrel. But there are examples from within the South Asian region itself that point to poor decision-making here as the main contributory reason for the crisis and not so much the pandemic. For instance, countries such as the Maldives, Pakistan, and Bangladesh have actually seen their foreign reserves grow significantly during the pandemic period while it has been the opposite in Sri Lanka, despite stringent import and foreign exchange controls in place. What is it that they did that Sri Lanka didn’t is the question that begs answering.
With the Government resorting to record-setting money printing over the last couple of weeks to offset the cash crunch, the side effects of that printing spree will surface only in the weeks and months ahead with the added liquidity adding to demand, further pushing up prices of consumer goods already at unbearable levels following the fuel price hike. Money printing has never been the answer to fundamental economic issues anywhere in the world and is an option that should only be a last resort considering its nasty side effects. There are examples of countries that have taken that disastrous route including Zimbabwe and Venezuela that are yet to recover from hyperinflation which has made the local currency worthless. It is an established economic fundamental that money printing must be matched by a corresponding increase in production. Not keeping to that basic economic principle will cost Sri Lanka dearly and early signs of that have already manifested in various forms, including the black market rate of the US dollar hitting Rs. 230.
It is indeed a matter for deep reflection that after 73 years of independence, a pandemic-battered Sri Lanka finds itself in a situation of economic strangulation where millions of its people cannot even afford a proper meal, unemployment is at a 10-year high, farmers have taken to the streets begging for fertiliser, and a food crisis is looming larger by the day, while on the other end of the spectrum, even the most wealthy are unable to spend their money on the luxuries they seek, owing to the forex and import restrictions. By the looks of it, things are bound to get a lot tougher before it gets better. A round of belt-tightening like never before is what is on the cards.
Crunch time for economy
03 Jul 2021
Crunch time for economy
03 Jul 2021
In the recent political drama produced and directed by Messrs. Kariyawasam and Gammanpila over the fuel price hike, one revelation that ought to have rung alarm bells across the country but didn't, possibly due to being overshadowed by bigger “news” at the time, was the justification offered by the Energy Minister for the price hike. In his eagerness to defend the price increase as well as his suitability to hold that particular cabinet portfolio in light of Sagara Kariyawasam's demand that he resign, Udaya Gammanpila was probably unaware of the far-reaching consequences of his revelation that has now shaken the very foundation of the country's banking sector.
It was no doubt a rare moment of conscientiousness displayed by a cabinet minister when Gammanpila chose to be forthright on the fate of the country's economy in general and the Ceylon Petroleum Corporation (CPC) in particular, by confiding in the people that failure or delay to implement the fuel price hike would have led to the inevitable collapse of not only the state petroleum giant but also the local banking sector.
The two biggest local banks by way of capitalisation as well as deposits are the two state banks, Bank of Ceylon and Peoples Bank. They also happen to be the two biggest lenders to the tottering CPC, which has run up multibillion-rupee debts to the two banks, which in turn has compromised not only their stability and sustainability but also that of the entire banking sector and by extension the economy of the country.
Following Gammanpila’s revelation, an independent global rating agency last week warned that the country's biggest banks were the most susceptible to the “CCC” sovereign rating which is just a notch above default rating. Fitch and other global rating agencies, which have consistently been warning of an impending economic crisis further exacerbated by an excruciating foreign exchange situation, last week raised the red flag over the local banks’ exposure to heightened sovereign risk primarily based on the level of exposure to foreign currency-denominated government securities. According to the rating agency, as much as 40% of assets of the country’s top banks are directly linked to the “CCC”-rated sovereign.
It doesn’t take an Einstein to figure out that the situation could become untenable if urgent measures are not put in place to overcome the forex crisis which has been months in the making. Despite the crises, the Government will have to fork out a billion dollars this month to pay a maturing bond while total external debt due to be paid by 2026 stands at around $ 30 billion.
With current reserves down to just $ 4 billion, the only viable option for the Government, to at least temporarily tide over the looming crisis, is to reach out to lenders and explore the possibility of restructuring this mountain of debt it has on its hands. It is not going to be an easy task considering the fact that such an outcome would be music to the ears of at least one lender that accounts for around 15% of all debt. This particular lender has made a fine art of playing the waiting game until the debtor defaults to move in for the kill by acquiring valuable assets in lieu of payments. The preferred asset of course is prime real estate.
If the Government decides to move ahead with restructuring its debt, then what lies ahead is a veritable minefield that it will have to skilfully negotiate if it is to emerge unscathed from what looks like a brutal few months ahead. As things stand, and given the limited options at its disposal, debt restructuring seems inevitable, if not the only option on the table right now. Having come to the brink, with reliance on the money printer increasing by the day, it will take an extraordinary effort to not go over the edge and the resultant embarrassment of defaulting on payments. Should a default take place, it will effectively dissipate aspirations of a homegrown economic revival strategy, as it would shut the door to external funding. Of the limited options available, recourse to the International Monetary Fund (IMF) seems the most viable at this juncture, unless the Finance Ministry has a hitherto unheard of ace up its sleeve.
For a government that has been loath to even the thought of routinely engaging with the IMF, it seems like circumstances may well compel it to do so, but it will first have to swallow a huge chunk of its pride and ego. As the saying goes, beggars can’t be choosers. With the clock ticking, time is of essence. $ 30 billion by 2026 is not a long way off; just five years from now, averaging around $ 6 billion per year.
If the Government succeeds in restructuring its debt, it will provide breathing space at least for a couple of years, during which time Sri Lanka will hopefully be able to get its act together. But such an eventuality will also mean passing the burden on to the next administration which will be called upon to ultimately face the music. As to who will form that administration, only time will tell.
The Government has blamed the current crisis on the pandemic, lock, stock, and barrel. But there are examples from within the South Asian region itself that point to poor decision-making here as the main contributory reason for the crisis and not so much the pandemic. For instance, countries such as the Maldives, Pakistan, and Bangladesh have actually seen their foreign reserves grow significantly during the pandemic period while it has been the opposite in Sri Lanka, despite stringent import and foreign exchange controls in place. What is it that they did that Sri Lanka didn’t is the question that begs answering.
With the Government resorting to record-setting money printing over the last couple of weeks to offset the cash crunch, the side effects of that printing spree will surface only in the weeks and months ahead with the added liquidity adding to demand, further pushing up prices of consumer goods already at unbearable levels following the fuel price hike. Money printing has never been the answer to fundamental economic issues anywhere in the world and is an option that should only be a last resort considering its nasty side effects. There are examples of countries that have taken that disastrous route including Zimbabwe and Venezuela that are yet to recover from hyperinflation which has made the local currency worthless. It is an established economic fundamental that money printing must be matched by a corresponding increase in production. Not keeping to that basic economic principle will cost Sri Lanka dearly and early signs of that have already manifested in various forms, including the black market rate of the US dollar hitting Rs. 230.
It is indeed a matter for deep reflection that after 73 years of independence, a pandemic-battered Sri Lanka finds itself in a situation of economic strangulation where millions of its people cannot even afford a proper meal, unemployment is at a 10-year high, farmers have taken to the streets begging for fertiliser, and a food crisis is looming larger by the day, while on the other end of the spectrum, even the most wealthy are unable to spend their money on the luxuries they seek, owing to the forex and import restrictions. By the looks of it, things are bound to get a lot tougher before it gets better. A round of belt-tightening like never before is what is on the cards.
Kapruka
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Discover Kapruka, the leading online shopping platform in Sri Lanka, where you can conveniently send Gifts and Flowers to your loved ones for any event. Explore a wide range of popular Shopping Categories on Kapruka, including Toys, Groceries, Electronics, Birthday Cakes, Fruits, Chocolates, Automobile, Mother and Baby Products, Clothing, and Fashion. Additionally, Kapruka offers unique online services like Money Remittance, Astrology, Medicine Delivery, and access to over 700 Top Brands. Also If you’re interested in selling with Kapruka, Partner Central by Kapruka is the best solution to start with. Moreover, through Kapruka Global Shop, you can also enjoy the convenience of purchasing products from renowned platforms like Amazon and eBay and have them delivered to Sri Lanka.Send love straight to their heart this Valentine's with our thoughtful gifts!