With less than a month before presidential elections are called, President Ranil Wickremesinghe has highlighted the success of his presidency as rescuing Sri Lanka from its international bankruptcy status that prevents it from doing business with the rest of the world. The signing of the agreement on international debt restructuring for USD 5.8 billion with the Official Creditor Committee consisting of several foreign governments that have given bilateral loans to Sri Lanka was celebrated in numerous ways. The president himself made a speech to the nation and firework exhibitions took place in various towns to mark the occasion. The president made it clear that he was the architect of Sri Lanka’s economic recovery. This puts upon him a greater responsibility to engage with the people, listen to them and explain to them what it all means.

President Wickremesinghe said, “I believed in my ability to save our country and its people from the economic abyss. I had a comprehensive work plan and a deep understanding of the strategies that other nations had employed to emerge from similar crises. Furthermore, I had faith that with my planned policies and dedication, the economy could be revitalised.” The signing of the debt restructuring agreement received immediate plaudits from the countries that matter most to Sri Lanka at this time. US Ambassador Julie Chung welcomed the news stating “This is a positive step forward in Sri Lanka’s economic recovery and resilience, helping build more confidence in Sri Lanka’s fiscal environment. The US encourages Sri Lanka to continue the reform process, adopting transparent and sustainable changes that foster long-term prosperity and growth.” Similarly, Japan, India and the IMF also expressed their satisfaction with the progress that Sri Lanka was making.

However, there was also a second agreement that Sri Lanka signed with China’s Exim Bank for USD 4.2 billion which has caused concern among the same parties that congratulated the President and the Sri Lankan negotiating team on reaching agreement with the Official Creditor Committee (OCC) which did not include China. They have demanded “comparability of treatment” with other creditors, including China. In particular, they have requested details of Sri Lanka’s other debt deals, and “all information necessary for the OCC to ensure comparability of treatment”. The details of the negotiations in both cases are not known, but will most probably be revealed as the parliamentary debate takes place this week. This tension reflects the serious problem of lack of transparency in the government’s financial transactions that runs across the board.

No Haircut
President Wickremesinghe was cryptic when he said, “With these agreements, we will be able to defer all bilateral loan instalment payments until 2028. Furthermore, we will have the opportunity to repay all the loans on concessional terms, with an extended period until 2043.” He did not say what these concessional terms were nor did he mention what the “haircut” would be. While the amount that would be subject to concessional repayment is USD 5.8 billion the total foreign debt was in the region of USD 40 billion at the time of the economic collapse in 2022. Last year when the government was negotiating with the creditors there was optimism that a “haircut” in the range of 30 percent would be possible. Specific to debt restructuring, a haircut is the reduction of outstanding interest payments or a portion of a bond payable that will not be repaid.

According to research studies done by international researchers in the field, creditors offering debtors concessional terms in order to facilitate the repayment of loans taken is a common occurrence. In this context, the international support given to the Sri Lankan government seems to be much less than was expected, or even what is fair. A research study published last month in Germany states “We study sovereign external debt crises over the past 200 years, with a focus on creditor losses, or “haircuts”. Our sample covers 327 sovereign debt restructurings with external private creditors over 205 default spells since 1815. Creditor losses vary widely (from none to 100%), but the statistical distribution has remained remarkably stable over two centuries, with an average haircut of around 45 percent.” Graf von Luckner C.M. Meyer J. Reinhart C.M. Trebesch C., Publication Date, 06/2024, https://www.ifw-kiel.de/publications/sovereign-haircuts-200-years-of-creditor-losses-33019/ The expressions of international support would be more meaningful if they contribute to getting Sri Lanka much better terms for its debt restructuring.

Due to the lack of information about the benefits to Sri Lanka of a reduction in the debt burden that would make an immediate impact on their lives, the president’s victory speech did not gain much traction among the general public. The public displays of celebratory fireworks in many parts of the country did not obtain any significant public participation. The fact is that the economic life of the people will not change either immediately or even in the short term, except marginally through changes in the controlled price of some commodities such as occurred with petrol. Those whose salaries have remained stagnant over the past two years have to cope with basic costs of living that have increased two to three-fold. Unlike Kenya where mobs went on to the streets to protest against the increases in the cost of living and high taxes, the vast majority of Sri Lankan people have borne their difficulties in silence and in the privacy of their homes.

Stock Answer
Organised groups such as student unions and trade unions, however, are bringing the grievances of people out into the open. The teachers protest which was ended by tear gas and water cannons fired upon them by the police was an example. Dr Ahilan Kadirgamar, who teaches economics at the University of Jaffna has written, in his Kuppi Talk column in The Island of 25 June)” “The IMF-led austerity programme, despite many promises to preserve social spending, inevitably leads to cuts in the real value of social spending, as reflected in the recently released Finance Ministry Annual Report for 2023. Between 2021 and 2023 the cost of living in Sri Lanka increased by 100 percent, or if we look at it in dollar terms, the value of the Sri Lankan rupee declined by fifty percent from Rs 200 to Rs 300 per dollar. However, during this period the nominal spending increase for general education was only 22.5 percent and for higher education was a mere 13.1 percent” as against the 100 percent inflation.

In simple terms, there is no money left in this depleted education budget for salary increases to be made, or for the government to even keep to the commitments it made to teachers in the past. Dr Kadigamar further notes that “For decades, Sri Lanka has been reducing its spending on education. In fact, expenditure on education has spiraled downwards over the decades from close to 5 percent of GDP in 1970 to 1.2 percent in 2022, one of the lowest today in the world.” The government’s current approach to education, as spelled out by the president, is to hand it over to the private sector. However, the withdrawal of the state from the provision of education services will be injurious to those from less well-off families in the context of the commercialisation of education as a profit making business and not a social service. In a general context of grave economic hardship there is a need for more government investment in education for the economically disadvantaged and not less.

Teachers came out onto the streets in their thousands to protest last week against the government’s failure to address their concerns. There is no question that teachers are today a grossly underpaid sector though tasked with educating the younger generations to meet the challenges of the future. They were dispersed by the security forces with tear gas and water cannons. This harsh treatment of protestors has become the stock answer of the government to those who wish to make use of their democratic rights to question the government and to gather together to do so. It would be better if the president, as the key person behind the economic transformation of the country, were to talk to the protestors or at least to their leaders, hear them out and let them vent their grievances. When signing agreements that will bind the country for the future it is important for the government to take the people, and the opposition political parties, into its confidence and seek to obtain their support as well. This is the only way that solutions will last the test of time and be sustainable.