MARWAAN MACAN-MARKAR, Asia regional correspondent

BANGKOK — Sri Lanka’s failure to settle interest payments on sovereign bonds and its subsequent ratings downgrade have drawn unflattering comparisons with the economic meltdown in Lebanon.

The South Asian nation on April 18 failed to pay interest of $78.13 million on $1.25 billion of bonds. Standard & Poor’s followed up this week with a downgrade to a “selective default” rating — the latest knife in the back of the debt-ridden economy.

Foreign investors who had bought the island’s international sovereign bonds (ISBs) were angry that they were misled by promises the debt would be paid. The principal cheerleader was Nivard Cabraal, the then central bank governor. Throughout he stood by views he had expressed to Nikkei in a February interview: “I am determined to pay [ISB holders.]”

“The market was expecting the April 18 coupon to be paid because of assurances by government officials that funds were available,” a London-based emerging markets investor holding Sri Lankan ISBs told Nikkei Asia. But it was “an illogical promise, Lebanon-level illogical,” he added, referring to the Middle Eastern nation that defaulted on its foreign loan payments in 2020.

Sri Lanka’s financial authorities informed international lenders a week before the coupon payment that the country was strapped for foreign reserves. In an $81 billion economy, those reserves had slumped to $200 million, money that is now critical to buying food and other necessities.

That made the country, which must settle foreign debt of $6.9 billion this year, a sovereign defaulter for the first time.

Through July 25, Sri Lanka is on the hook to pay off a $1 billion ISB and make interest payments on other multibillion-dollar ISBs. But since 2020, when ratings agencies downgraded the country’s debt to junk status, the familiar route of borrowing from international capital markets to pay off maturing ISBs has been shut to Sri Lanka.

By the end of that year, the country’s foreign debt was $38.6 billion, or 47.6% of the central government’s total debt, according to the International Monetary Fund.

Now new Finance Minister Ali Sabry is learning that international financial remedies can be slow and daunting. Economic analysts in Colombo, the country’s commercial capital, said the preliminary round of discussions Sabry had with IMF officials in Washington was a “reality check” for a government “not aware about a lot of things.”

These blind spots ranged from “the dangerous macro position that the economy was heading towards, the implications of taking foreign reserves to the brink … a debt default … and the time taken to get an IMF program,” said Anushka Wijesinha, co-founder of the Centre for a Smart Future, a Colombo-based public policy think tank. “The reality is certainly just sinking in, and I think everyone needs to be ready for an extended period of very challenging domestic economic conditions.”Protesters shout slogans and wave Sri Lankan flags during a demonstration in front of the Presidential Secretariat in Colombo on Monday.   © EPA/Jiji 

Sabry returned home empty-handed because the fund was requiring Sri Lanka to restore its debt to sustainable levels to qualify for a financial bailout.

“Any release of funds from the IMF is preconditioned to the fact that [Sri Lanka’s] debt needs to be sustainable,” Sabry, a senior lawyer and confidant of ultranationalist President Gotabaya Rajapaksa, told local media over the weekend, following his talks with the fund.

He had flown to the U.S. in the hope of securing $4 billion in emergency financing to help pay for enough food, fuel and pharmaceutical imports to get Sri Lanka through the year. These essentials are increasingly scarce and costly. In March headline inflation reached a record 21.5%.

Meanwhile, government policy flip-flops have left the population in economic pain, sparked unprecedented protests across the country and stirred up rage directed at the hawkish president.

While Sabry was in Washington from April 18 to April 22, the IMF gave him a list of what the government needed to do to address Sri Lanka’s twin deficits, its widening budget deficit and unbridgeable current-account deficit.

The IMF said Sri Lanka must implement a “credible and coherent strategy to restore macroeconomic stability,” Masahiro Nozaki, the IMF’s Sri Lanka mission chief, said in a statement. The strategy should also include “stronger social safety nets to mitigate the adverse impact of the current economic crisis on the poor and vulnerable.”

The government’s decisions to default on foreign loans and seek IMF assistance mark an about-face for Rajapaksa, who for months stubbornly resisted taking these steps despite repeated calls from independent economists that he do so.

While Sabry was in Washington conducting begging-bowl diplomacy, including with South Asian neighbor India, Rajapaksa admitted to making policy errors.

“During the last two and a half years we had vast challenges,” Rajapaksa said during an address to a new 17-member cabinet — the second group of appointees after his first cabinet resigned en masse in early April because of growing public anger. “[They included] the COVID-19 pandemic as well as the debt burden, and some mistakes on our part.”

The heavy economic price Sri Lanka is paying for the government’s delay has not been lost on opposition parliamentarians.

“If they went to the IMF earlier, we would not have defaulted on our loans and it would not have been so detrimental,” said Harsha de Silva, an economist and lawmaker with the opposition Samagi Jana Balawegaya party. “The people have realized the economic reality and consequence of bad policies — suffering [to] no end, no food, no fuel and no medicines.

NIKKEI ASIA

Minister of Public Security and Tourism Prasanna Ranatunga says that the number of tourists has decreased due to the social problems and protests caused by the economic crisis.

The Minister states that for the first time since the resumption of the tourism industry, less than a thousand tourists have arrived daily this week.

He says the country’s economy can only be strengthened if an environment conducive to tourism is created.

Minister Ranatunga says that only through this can a solution be found to the dollar crisis.

Meanwhile, he points out that there is no possibility of resolving the current economic crisis through protests as well as riots.

By Jorgelina do Rosario

LONDON (Reuters) – Social unrest, political uncertainty and a complex web of creditors could scupper Sri Lanka’s push for a swift overhaul of its $12 billion overseas debt, analysts warn, saying the South Asian nation is fast running out of road.

A mix of Japanese, Chinese and Indian loans, a pile of bonds held by overseas investors and talks on an International Monetary Fund (IMF) bailout have added complexity to the South Asian nation’s worst financial crisis since independence in 1948.

S&P Global Ratings on Monday cut Sri Lanka’s foreign-currency debt rating to “selective default” after it missed interest payments.

In a flurry of activity over the past week, the World Bank agreed to provide $600 million to help pay for essential imports, the IMF said the government must raise interest rates and taxes and adopt flexible exchange rates, and Sri Lanka said it has begun debt-refinancing discussions with China.

“The IMF response has been very positive and the sense we get is they will try to expedite a programme within their parameters,” cabinet spokesman Nalaka Godahewa told Reuters. “We are in discussions with India, the World Bank and (Asian Development Bank) for additional support, so Sri Lanka is in a better position now to manage until IMF funds come.”

The Finance Ministry declined to comment.

The economy of the nation of 22 million people melted down after a large 2019 tax cut by President Gotabaya Rajapaksa drained government coffers and COVID-19 hit the lucrative tourism industry. Foreign reserves fell 70% over the past two years to $1.93 billion, leaving Colombo struggling to pay for such essentials as fuel, medicines and food.

Facing soaring inflation in addition to shortages, thousands have been protesting for weeks, demanding the resignation of Rajapaksa and his brother, the prime minister.

Colombo hopes it can conclude the IMF aid talks in about six months but it cannot control how long negotiations will take.

“Six months is quite ambitious,” said Guido Chamorro, emerging market portfolio manager at Pictet Asset Management, which holds the country’s bonds. “Sri Lanka resisted for years to go to the IMF, and that means that the Fund is going to ask for reforms to be completed before it provides a package.”

But investors may not be that patient.

“Waiting six months with the current state of affairs is not something viable, as we see a very fast and fluid situation on the ground,” said Joe Delvaux, portfolio manager at Amundi Asset Management, which holds the country’s bonds.

The government has yet to pick financial and legal advisers, a key step before debt talks with overseas creditors.

Godahewa, who is also the country’s media minister, said the government has had more than 50 responses to its search for financial and legal advisers, “and we will proceed quickly”.

CHINA’S ROLE

Sri Lanka is seeking about $3 billion in bridge financing. In addition to the World Bank pledge, India has committed $1.9 billion and is in talks for an additional $1.5 billion in credit for fuel and other essential imports.

Many of the government’s recent decisions have “added more pressure to the debt sustainability,” said Nathalie Marshik, head of emerging market sovereign research at Stifel.

Only recently have policymakers taken concrete steps to pave the way for the country’s 17th IMF programme, devaluing the rupee by around a third in early March and nearly doubling interest rates with a 700 basis-point hike this month.

It is not clear how Sri Lanka can ramp up revenues after posting a 2021 fiscal deficit of over 10% of GDP, given opposition to reversing tax cuts after a hike in fuel and cooking gas prices worsened public discontent.

“Measures would likely hurt the pockets of most of the population,” said Pictet’s Chamorro.

China’s influence is visible: The world’s second-largest economy has invested in such projects as highways, a port, an airport and a coal power plant.

Cabinet spokesman Godahewa said the government’s “only concern is the position of China”, adding, “We will have to use our good relationship with China.”

Sri Lanka owes Beijing some $6.5 billion in financing from development bank loans to a central bank swap, according to the Institute of International Finance (IIF).

“The IMF needs assurances that China, India and Japan will provide some type of financing,” said Sergi Lanau, deputy chief economist at the institute.

Recent talks on Suriname’s debt, with a combination of Paris Club support for an IMF programme and Chinese participation, are a “case to look at closely”, said Stifel’s Marshik.

But not all debt talks where China was a major creditor have seen quick progress recently. Beijing only last week agreed to join Zambia’s creditor committee, two years after the southern African country’s default.

And that was despite Zambia, unlike Sri Lanka, qualifying for an overhaul under the Common Framework – a G20 initiative designed to streamline restructurings for poorer nations.

Sri Lanka’s investors are in wait-and-see mode until there is more clarity on what an IMF programme would look like, but time is running out.

“Sri Lanka has a $2.5 billion gap to be filled for 2022 and 2023,” said the IIF’s Lanau, adding Sri Lanka needs at least $1 billion from the IMF. “The country needs fresh money to spend. If not, it’s going to collapse.”

(Reporting by Jorgelina do Rosario in London; Additional reporting by Uditha Jayasinghe in Colombo; Editing by Karin Strohecker and William Mallard)