LONDON/COLOMBO (Reuters) – Sri Lanka’s International Monetary Fund bailout plan could be a turning point in its worst economic crisis, but far-from-stable politics and a need to get debt relief from competing powers China, India and Japan means some of the hardest work is still to come.
President Ranil Wickremesinghe knows a lot of circles will need to be squared for IMF’s $2.9 billion lifeline to become a reality.
Spending cuts, tax hikes and debt write-downs are a common formula for bankrupt countries, but crisis veterans say there are some uniquely difficult elements here.
An impoverished population that forced former President Gotabaya Rajapaksa to flee in July still needs to accept Wickremesinghe, seen by many as of the same political ilk and a man who faces a bristling opposition.
The country’s borrowings are so complex that estimates of the total range anywhere from $85 billion to well over $100 billion. To get it to a sustainable level Beijing, New Delhi, Tokyo, multilaterals and global asset managers must all swallow losses.
“This one of the biggest messes I’ve ever seen,” said Renaissance Capital’s chief economist Charles Robertson who has watched emerging market crises unfold for decades.
“The government destroyed its revenue base with unsustainable tax cuts, it tried to hold the currency when tourism revenues collapsed and now it has no reserves in the bank and a population facing widespread poverty.”
Estimates from the United Nations say the crisis has left more than a quarter of Sri Lanka’s 22 million population struggling to secure adequate, nutritious food.
The IMF’s 4-year rescues plan provisionally agreed last week demands serious fiscal repair work and more autonomy for the central bank, which was ordered to frantically print money under Rajapaksa.
To hit the IMF’s target of lifting its primary budget surplus to 2.4% by 2025, Sri Lanka would get its economy growing by around 6%, something not achieved for about five years. This year it expected to contract at least 8%.
COURTING ASIA’S HEAVYWEIGHTS
Just as challenging, the IMF wants Colombo to secure “financing assurances” – Fund speak for debt relief and new loans – from regional heavyweights China, Japan and India who have long jostled for influence.
The World Bank estimates Beijing’s lending, which has funded costly projects from ports to stadium, adds up to $7 billion, or 12% of Sri Lanka’s $63 billion external debt. Japan has provided another $3.5 billion while India has given around $1 billion.
Without the “assurances” from those countries, the Fund’s money cannot flow, IMF Mission Chief Peter Breuer stressed.
“Finding creative ways to have a collaborative platform to advance these debt restructuring discussions is very useful,” Breuer told Reuters. “How debt relief is distributed amongst creditors…that is something we don’t insert ourselves into.”
UNCOMMON FRAMEWORK?
The crisis has culminated in Sri Lanka’s starkest crisis first debt default since independence from Britain in 1948. The rupee almost halved in value since the central bank abandoned its peg in March, basic goods have become scarce and inflation is now running at 64%.
Economists say the restructuring could have been far simpler if the country had been part of the G20 “Common Framework” plan – a programme set up at the height of COVID-19 to help debt-crippled countries. At the time, Sri Lanka was classified as a middle-income country and did not qualify.
China automatically provides debt relief alongside “Paris Club” countries and private sector creditors under that arrangement. Colombo’s absence from the setup means an alternative is needed.
Step up Japan – which is now pushing for China, India and others to join talks. Beijing, which did not respond to a request for comment, has not yet signalled if it will, although there are hopes its lead role in Zambia’s restructuring may encourage it to do so. India has not commented so far.
Pessimists worry though that if China doesn’t take a writedown others won’t either, including global asset managers who hold nearly $20 billion of Sri Lanka’s international bonds.
“China is the largest creditor country. Without its participation, any scheme won’t succeed,” a Japanese government official who requested anonymity said.
DOOM LOOP
Another problem is what to do about the country’s $50.5 billion of “local” debt mostly dominated in rupee and largely held as capital by commercial banks and local pension funds.
Sanjeewa Fernando, Head of Research at CT CLSA Securities said it won’t be a straightforward decision, especially with elections looming in 2024.
“From a realistic point of view, banks are preparing for a 40% haircut (on Sri Lanka’s international bonds and ‘development’ bonds which are also dominated in dollars) as a base case scenario,” he said.
Even that might not be enough though, given the IMF wants the debt-to-GDP ratio slashed to under 100% from 140% currently.
That would put domestic debt in play but David Beers, a Senior Fellow at the London-based Center for Financial Stability who has compiled a global database of sovereign defaults said there are always tradeoffs.
“If the domestic debt is predominately held by domestic banks and you get haircuts, then that eats into their capital,” he said, adding that they might then require bailouts which add to the government’s costs again.
Kenyans react as Supreme Court clears William Ruto’s pathway to presidency
Ruto’s supporters have praised the court’s decision after Raila Odinga claimed he was cheated out of victory in the tight race. Ruto has since taken a conciliatory tone with the opposition as he prepares to take office.Kenya’s marathon election process has reached a conclusion after weeks of uncertainty, with the Supreme Court upholding William Ruto’s victory in the Augus Ruto’s supporters reacted with song and dance following Monday’s decision, with the president-elect now set to be sworn in on September 13, becoming Kenya’s fifth president since independence in 1963.
“I’m so happy today, so happy,” one supporter told DW in Nairobi. “William Ruto is a man who can work for Kenya. We’re sure he’s going to take the economy of Kenya to the next level.”
The Supreme Court’s verdict deals a blow to challenging candidate Raila Odinga, who alleged fraud in the voting process after losing by less than two percentage points in a tightly-fought race. The veteran politician had previously claimed he was also cheated out of victory in the 2007, 2013 and 2017 general elections.
Shifting alliances
Odinga filed a petition against the poll outcome, with his lawyers presenting boxes of evidence to the court to defend their case. However, according to governance expert Javas Bigambo, Odinga’s lawyers simply didn’t do enough to convince the judges, with Chief Justice Martha Koome – who led the seven-member bench – describing some of the claims as “nothing more than hot air.”
“It may have been very important to gather sufficient evidence to lead to the nullification of the election as [Ruto] had desired,” he told DW. “I say this because none of the prayers, not a single prayer by the petitioners have been granted.”
In response to the ruling, Odinga expressed his disappointment, but swiftly promised to use it as a stepping stone for even more reforms in Kenya’s democratic space.
“We find it incredible that the judges [ruled] against us on all nine grounds and resulted to unduly exaggerated language to refute our claims,” he said.
“[However] we have always stood for the rule of law and the constitution. In this regard we respect the opinion of the court, although we vehemently disagree with their decision.”
In an interesting development, since Ruto was declared the winner on August 15, allegiances have been shifting gradually among members of the political class – and even Odinga’s staunchest supporters.
“I fully supported Raila’s coalition,” a former Odinga supporter told DW. But how things stand now, I have decided to stop supporting him and I have accepted that Raila has lost.”
Praise for the judiciary from Ruto’s camp
Ruto said he welcomed the court’s verdict with “tremendous humility,” and praised the Kenyan judiciary as a beacon of constitutionalism.
“[The judges’] professionalism has elevated the stature of the judiciary, enhanced the place of the petition process in legitimizing election results as the true reflection of the people’s decisions, and afforded the nation an opportunity to reflect, debate and come to terms with the implications of the last election,” he told reporters at a press conference shortly after the verdict.
The sentiment was echoed by Javas Bigambo, a lawyer and governance expert who hailed the work of the judges by relying purely on the presented material evidence.
“This decision has raised the threshold of election nullification, [so] that [finding] anomalies withing the process — or even in the forms when it comes to matters of tallying — may not really warrant a nullification of a presidential election result,” he told DW.
Outgoing president Uhuru Kenyatta promised to “oversee a smooth transition to the next administration,” however he pointedly did not congratulate Ruto by name.
Kenyatta gave his endorsement to Odinga following a bitter-falling out with Ruto in recent years.
Kenyatta also infamously referred to the Supreme Court judges as “crooks” back in 2017 when his own win was nullified after the court found the election process to be full of “irregularities and illegalities,” prompting a fresh vote.
Reflecting on election chaos
The chairman for the Independent Electoral and Boundaries Commission (IEBC), Wafula Chebukati, meanwhile opened up on the challenges he and his team faced before, during and after the August 9 polls.
“In this general election, the abuse of IEBC staff reached an unimaginable scale,” he said.
“Including but not limited to the assault and injury of the chairman, commissioners Abdi Guliye and Boya Mulu, the commissions secretary and Chief Executive Officer, Marjan Hussein Marjan, at the national tallying center during the declaration of the results.”
Before the results were made official, there were chaotic scenes, with scuffles breaking out in the tallying hall. Chebukati condemned the violence and stressed that staff members of the IEBC should not have to put themselves at such risk.
What comes next?
Since the vote and the Supreme Court’s ruling, Ruto and his team have been careful to strike a conciliatory tone with the opposition.
“I extend a hand of brotherhood to all my competitors and to all their supporters,” said Ruto. “We are not enemies, we are Kenyans.”
Ruto currently has the support of the majority of the parliament. After his swearing in, he will nominate individuals to be a part of his cabinet.
Ndindi Nyoro, a supporter of Ruto and an MP for the Kiharu Constituency, told DW the new government is keen to oversee a growth in agriculture which would significantly reduce the costs of living, as well as providing more affordable housing.
“We are looking into uplifting the majority of town dwellers in Kenya [so that they] have a place to call home,” he said. “[We will create] employment for the majority of the youth who will be engaged in the creation of that space.”