BANGKOK — Debt-ridden Sri Lanka has stepped into uncharted waters. Negotiations begin this week in Washington between government officials and the International Monetary Fund for a relief program, against the backdrop of protests at home and the decision to stop paying its overseas debts.

It is the 17th time the Indian Ocean nation has sought a financial lifeline from the fund, the second-highest frequency in Asia, after Pakistan. The planned default, however, is a first, leaving holders of its hard currency-denominated bonds expecting a debt restructuring in which they will take a haircut on what they are owed.

Nandalal Weerasinghe, a veteran central banker and economist brought out of retirement this month to be governor of the Central Bank of Sri Lanka, has his sights on calming creditors.

He told reporters after raising interest rates by a record 700 basis points in one of his first acts, “[This] will give a strong message to the international investors, to our creditors and to the markets that we are going to get out of this crisis as soon as possible.”

His stance has set him apart from his politically tainted predecessor, Nivard Cabraal, whose views mirrored the ultranationalist vision of President Gotabaya Rajapaksa and who eschewed engagement with the IMF in favor of homegrown solutions like cutting imports and making bilateral currency swap deals with the likes of China to build foreign exchange reserves.

For the markets, the lead-up to Sri Lanka’s historic failure to make an interest payment due April 18 is a chronicle of a default foretold.

An international sovereign bond (ISB) maturing in July had been trading at 54 cents to the dollar even before the default plan was announced, reflecting the risk of a significant haircut. A $1.25 billion bond maturing in 2023 was trading at 47 cents to the dollar.

“Existing market prices were significantly down, and bondholders knew a default was on the cards,” said Murtaza Jafferjee, managing director of JB Securities, a financial consultancy in Colombo.

Sri Lanka’s foray into the international capital markets began in 2007, while the country was at the end of a nearly three-decade civil war and under the presidency of Mahinda Rajapaksa, Gotabaya’s popular elder brother. International investors clamored for that first $500 million bond for its high yield, an 8.25% coupon rate.

“It was oversubscribed, a real success story, but it led to a borrowing binge,” said a veteran commercial banker in Colombo, recalling a wave of further issues with coupons averaging 6%. “We were partying without thinking when to repay.”

Sri Lanka has been grappling with its history of “twin deficits” — trade and budget deficits — and its cycle of borrowing to settle older loans was possible only as long as rating agencies gave the country a good grade for an emerging market. After all three main agencies had downgraded Sri Lanka’s sovereign ratings to junk by early 2020, the door to the capital markets slammed shut.

Nearly 70% of the government’s revenue was going toward debt interest payments by 2020 after it slashed taxes, worsening the budget deficit to over 10% of GDP for 2021 and 2022. COVID-19 caused receipts from tourism to plummet, robbing the country of a key source of foreign earnings to build currency reserves. Likewise, the pandemic disrupted the foreign exchange that came from remittances of migrant workers employed abroad.

By the end of last month, the $81 billion economy’s usable foreign reserves had slumped to just $200 million, from $7.6 billion in December 2019. Official reserves stood at $1.7 billion, but that included a $1.5 billion swap with the People’s Bank of China that has conditions attached, according to bankers in Colombo.

Food, fuel and pharmaceutical shortages in the import-dependent country and a spike in inflation — including food inflation at over 30% by March — turned public anger against the ruling Rajapaksas, the country’s most influential political clan. The idea of paying foreign debt while people went hungry became untenable.

Amid calls for the president to step down, Gotabaya’s entire cabinet resigned, and he has appointed a four-member rump to replace them, including a confidant, Ali Sabry, as finance minister. On April 12, a five-page document released by the Ministry of Finance said the Sri Lankan government will “suspend normal debt servicing of all affected debts for an interim period.”

The move has raised the stakes in the talks with the IMF, which will begin at the fund’s spring meeting on Monday.

The fund has already offered Sri Lanka economic benchmarks that need to be met to restore macroeconomic stability and debt sustainability. The country needs to raise income tax and value-added tax (VAT), fund staff members have said. It must implement a tighter monetary policy to contain rising headline inflation, now at 18.8 %, the highest in Asia. It must have a flexible exchange rate to rebuild international reserves and phase out the central bank’s direct financing of budget deficits, the IMF said in a report released in March.

But it will be bitter medicine for a Sri Lankan public already battered by economic hardship. “Raising interest rates will bankrupt small businesses, the backbone of the economy, and increasing VAT at a time of a crisis will affect more people,” said Ahilan Kadirgamar, a political economist at the University of Jaffna in northern Sri Lanka. “This is going to be a long, painful process.”

Bondholders will also be key stakeholders. By the end of 2020, a year into Gotabaya’s term, the country’s foreign debt was $38.6 billion, accounting for 47.6% of the central government’s total debt, according to the IMF. International sovereign bonds made up the largest share, at $14 billion, followed by $8.8 billion in loans from multilateral lenders and $6.2 billion in bilateral debts. The top 20 ISB holders included BlackRock, Allianz, UBS, HSBC, JPMorgan Chase and Prudential, according to Advocata Institute, a Colombo-based think tank.

Weerasinghe said he is seeking to appoint international legal and financial advisers as the country readies for intense negotiations. Bond market analysts are building models to judge how much investors will have to write off and what kind of payment schedule they can expect on the restructured bonds.

The political pressure building up against the government has not been lost on markets. “We believe investors are worried that the IMF talks and restructuring negotiations may be disrupted in the absence of a unified government that can ratify the economic adjustments and commit to the implementation of reforms,” Avanti Save, credit strategy research director at Barclays, wrote in a note to clients.

Investors reached by Nikkei Asia echoed those sentiments. “The bondholders will be looking to the IMF talks to assess the deal and whether the government is capable of implementing the reforms,” said one Hong Kong-based fund manager who has invested in Sri Lanka’s international bonds. “They will use that to figure out what kind of haircut lies ahead — a reasonable one, or something worse.”

NIKKEI ASIA

New ministers of the Cabinet were appointed without regard to seniority and every minister should be working without seeking any additional privileges, said President Gotabaya Rajapaksa, addressing the occasion of swearing in new Cabinet of Ministers today (18).

The President urged every minister to commit themselves to honest, efficient and clean administration.

The President also urged the new Cabinet to turn the public institutes under them into bodies without corruption and committed to public service.

No changes were made in the Premiership, Finance Ministry and the Foreign Affairs Ministry.

MIAP

The Court today (18) denied a request to impose a travel ban on former Finance Minister Basil Rajapaksa and former Finance Secretary S.R. Attygalle.

Keerthi Thennakoon, a provincial governor of the previous government, had made this request to the Court and Maithri Gunaratne, another former provincial governor of the previous government, appeared in Court on his behalf.

A vacation court is functioning today and only one of the five Colombo Magistrate Courts operates. Colombo Additional Magistrate Harshana Kekunawala, who served as its Judge, denied the above request.

MIAP

The bus fares are likely to be revised completely over any revision taken place on fuel prices at the Ceylon Petroleum Corporation (CEYPETCO), said Gemunu Wijeratne, Chairman of the All Ceylon Private Bus Owners Association, speaking to a briefing held in Colombo today (18).

Should the CEYPETCO prices increase in comparison with the recent price revision at the Lanka Indian Oil Company (LIOC), the bus fares may double the price, he warned.

He added that diesel for buses has to be obtained from the LIOC filling stations as there are are no CEYPETCO filling stations in many parts of the country at present, pointing out that bus fares in these areas may be revised based on the situation.

MIAP

Countries importing textile products from Sri Lanka have now started moving towards Indian exporters as Sri Lanka continues to reel under its worst economic crisis, said the Ministry of Textile official on Friday.

Speaking to ANI, UP Singh, Secretary, Ministry of Textile said, “Some countries who were earlier importing from Sri Lanka, have started contacting India, as Sri Lanka is under its worst economic crises. Some orders have already been given to companies in the Tirupur district of Tamil Nadu. Tirupur is the hub of the textile industry in Tamil Nadu.”

Singh said that last year’s textile sector export was around USD 43 billion and this year the target has been set for 100 billion. He said India currently produces more than 340 lakh bells of cotton, but consumption is going to be more than production due to the order diversion from Sri Lanka due to the crisis.

“Conversely, our importers had to pay 11 per cent duty leading to high input cost which makes them uncompetitive. So our importers were demanding the government to lift the import duty. Vietnam, Bangladesh, Sri Lanka and Pakistan were getting the advantage in certain markets like European Union and the UK and our exporters were at disadvantage,” Singh said.

“Our exporters have to pay 9.5 per cent export duty which these countries do not have to pay. Now adding these 11 per cent import duty and 9.5 per cent export duty on cotton, it becomes very difficult for our textile exporters to compete with such countries. Since now we do not have to pay import duty on cotton, this will certainly make our exporters more competitive,” emphasized the Textile Secretary.

A Sakthivel, President, Federation of Indian Exporters Organisation said, “Buyers are now started making queries with Tirupur Exporters Association and other places in India because the situation in Sri Lanka is bad. Some queries may turn into orders. This is an opportunity. Good talks are happening and we expect some orders to divert from Sri Lanka to India.”

He said Indian exporters are getting queries from countries like the United Kingdom and European Union Countries. “Their queries are mainly for woven items, shirts, t-shirts and some baby garments. We are hopeful that these queries will turn in orders,” Sakthivel hoped.

Sri Lanka is facing its worst economic crisis since independence with food and fuel shortages, soaring prices and power cuts affecting a large number of the people in the island nation.

Sri Lanka’s economy has been in a free-fall since the onset of the COVID-19 pandemic, leading to the crash of the tourism sector.

Sri Lanka is also facing a foreign exchange shortage, which has affected its capacity to import food and fuel. The shortage of essential goods forced Sri Lanka to seek assistance from friendly countries.

Economic Times

Doctors across Sri Lanka say hospitals are running out of medicines and essential supplies as the country’s economic crisis worsens. They fear a health catastrophe if international help doesn’t arrive soon.

“Day by day things are running out. If we get to the point where it’s zero, then I don’t know what will happen,” says Dr Gnanasekaram anxiously.

As secretary of Sri Lanka’s Association of Medical Specialists, the surgeon has been busy compiling lists of which medicines are running low at hospitals in the capital Colombo.

“We are short of medical drugs, anaesthetic drugs, implants, suture materials. We are nearly exhausting the stock.

“Healthcare services are going to collapse unless there’s immediate relief,” he says.

I meet Dr Gnanasekaram between consultations – he says he’s hoping this interview will encourage international donors to come forward.

If supplies aren’t replenished soon, the doctor warns of dire consequences.

“If that happens there may be a situation where we won’t be able to save patients’ lives.”

Sri Lanka is in the midst of its worst economic crisis in history. The country imports around 85% of its medical supplies. But with foreign currency reserves running low, essential drugs are now difficult to obtain.

At his office in Sri Lanka’s largest children’s hospital, Lady Ridgeway, medical director Dr Wijesuriya shows me a piece of paper with a list of essential drugs on it.

Next to the name of the medicine, there’s a column showing availability.

Some like atracurium – used in anaesthetics – have only two months of stock left. But as I scan the list further, other drugs are in even shorter supply.

There’s only two weeks left of the painkiller fentanyl, while three different types of antibiotics are already “out of stock”.

For now Dr Wijesuriya says he’s managing these shortages with substitutions. He remains optimistic that the government will find a way to get him what is needed for his patients.

Frontline doctors are far less upbeat. Many say they’ve been told by the government they can’t speak openly to the media about the situation, with only union representatives and hospital directors authorised to do so.

In a statement Sri Lanka’s government initially denied medicines were running out, even as doctors reported problems.

A day later the Department of Government Information issued a correction, admitting there is a shortage of some drugs and equipment.

Documents seen by the BBC, interviews with medical unions and testimony from frontline doctors reveal that hospitals across the nation are in desperate need of a range of life-saving drugs and equipment.

Medical staff have told the BBC the crunch in supplies has forced them to suspend non-essential operations, and reuse or ration some equipment.

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Dr Nishan (not his real name) works at a cancer hospital in the Eastern province.

“In two weeks’ time we may have to stop most surgeries and only do emergencies,” he told me as he reeled off a list of essentials like IV fluids, paracetamol, and antibiotics that his team are struggling to get hold of.

“There may be a time when we have to even stop treating cancer patients,” he warned.

Dr Nishan is from an area hit hard by the country’s civil war. Working as a doctor in conflict has its many challenges, but this economic crisis comes with many others.

“During the war we had limitations, but we could still get things from the ministry in Colombo,” he said.

“But now even the health ministry doesn’t have supplies. During wartime we were not so frustrated and desperate as we are now.”

Sri Lanka runs a free national healthcare system, which millions of people on the island rely on.

Kasun (not his real name), who works at a hospital in the Southern province, said it’s only a matter of days before drugs run out unless supplies come in.

“We are being told to use what we have sparingly, but there’s no real solution. I feel helpless.”

The largest doctor’s union on the island, the Government Medical Officers’ Association (GMOA), has blamed the crisis on poor financial and economic management and is calling on people from overseas to donate supplies.

It has published an extensive list of items which are desperately needed, which includes antibiotics, paracetamol, blood pressure medicine and anti-depressants.

WhatsApp groups of Sri Lankan doctors around the world are busily trying to source drugs, as the diaspora pitches in to help at this desperate time.

Dr Saman Kumara, president of the Perinatal Society of Sri Lanka, recorded a desperate video message last week, pleading for ET tubes to help newborn babies breathe.

“We have almost used all the stocks and no ET tubes will be available in a few weeks,” he said. Dr Kumara said he had instructed staff to clean and sterilise tubes in case they needed to be reused.

After his message went out, doctors around the world sprang into action to help. Within 24 hours, he said he was donated an “adequate amount” of ET tubes for his hospital.

But he says other shortages remain, and is working with the Save A Baby charity to help co-ordinate efforts.

Dr Anver Hamdani, who was recently appointed by the Sri Lankan health ministry to co-ordinate efforts to keep healthcare services running, told the BBC he and his colleagues are working to overcome the shortages.

He’s hoping pledges from overseas governments including a credit line from India, the main supplier of Sri Lanka’s medicines, plus donations which are coming in, will prevent the looming crisis.

“We have to admit this is a challenging period – there is a reasonable amount of shortage of certain things.

“It is not yet under control, it in the process of being controlled,” he said conceding that once the short term supply problem was fixed, a sustainable financing solution will still need to be found.

Sri Lanka’s medical crisis is compounded by the added pressure staff themselves are having to face.

Kasun says workers at his hospital have been told overtime payments will be cut as budgets are strained.

Like millions across the country doctors are struggling to obtain the basics. Many say they are queuing for hours to get fuel for their cars to get to hospital.

“It’s becoming very difficult to live, salaries aren’t going up but the cost of living has skyrocketed,” he said.

As millions have taken to the streets to protest at rising food and fuel prices, doctors, nurses and medical students have joined the demonstrations.

Back at his office Dr Gnanaksekaran pleaded to the world for help.

“We need supplies to come in whatever form, whether it’s another country’s government, or an individual donation.

“As professionals we are apolitical, but we are concerned about our patients.

“We just want to be able to treat them – we don’t want them to die.”

BBC