October 19, Colombo (LNW) Sri Lanka, which entered a crucial debt restructuring agreement in September 2024, initially aimed for a 30% reduction in the net present value (NPV) of its debt under the ‘IMF baseline scenario.’ 

However, recent findings by Verité Research indicate that the country is likely to achieve a much lower reduction of 19.8%.

Based on official data, Verité’s analysis positions Sri Lanka in the fifth-highest (second-to-lowest) debt relief category, estimating a 19.8% reduction in NPV terms at a 5% discount rate, rather than the anticipated 30% reduction from the baseline scenario. 

The core issue lies in Sri Lanka’s arrangement with international bondholders, which includes a Macro-Linked Bond (MLB) that ties debt relief levels to the country’s future economic performance, particularly its GDP growth.

Verité Research warns that the current growth projections used by the Sri Lankan government are overly optimistic. 

The agreement indicates Sri Lanka expects to be in the third-highest debt relief scenario (baseline), but with the debt relief terms for official creditors undisclosed, there is a risk that the country could receive less than 20% in NPV reduction from these creditors as well.

The debt restructuring deal also introduces a Governance-Linked Bond (GLB), which restructures a portion of the $1,722 million in Plain Vanilla Bonds to include a future coupon step-down, offering a greater debt reduction than the alternative. 

This GLB option, initially proposed in April based on Verité Research’s recommendations, ties a decrease in bond coupon rates to specific governance actions, providing a potential upside for Sri Lanka if implemented.

The GLB instrument is seen as an opportunity for the Government of Sri Lanka (GoSL) to lower debt servicing costs while simultaneously enhancing governance and confidence in its future debt management strategies. 

The April proposal initially suggested structuring $0.5 to $1 billion of the Plain Vanilla Bonds as GLB with a 50-basis point coupon step-down by 2028, linked to three governance actions. 

The September Agreement has since expanded this flexibility, allowing GoSL to increase the amount of Plain Vanilla Bonds structured as GLB and the extent of the coupon step-down.The political environment has become more conducive to adopting the GLB structure, especially following the 

October 19, Colombo (LNW) Sri Lanka’s tea producers have been badly hit by previous government’s order to increase wages by 70%, although the industry recorded froth this year.

The US $1.3 billion industry produces popular Ceylon Tea and employs about 615,000 workers. The island annually exports about 95% of the 250 million kilos of tea it produces.

The previous government has ordered worker salaries be increased to 1,700 rupees ($5.66) per day from 1,000 rupeesa nd later revise dto Rs.1350 , which the industry says will increase tea production costs by 45%.

Sri Lanka’s tea crop has experienced a notable increase in production, despite facing adverse weather and other challenges.

 According to preliminary data from the Sri Lanka Tea Board, tea production in September reached a seven-year peak of 24.13 million kilos, marking a substantial 27.7% rise compared to last year’s figure of 18.9 million kilos.

During the first nine months of 2024, the tea crop saw a modest increase of 1.79% compared to the same period in 2022, indicating a gradual recovery following adverse policy impacts. Analysis by Forbes and Walker Research showed consistent growth across all elevations in September when compared to the same period in 2023.

High-grown tea production rose by 10.57% year-on-year to 4.59 million kilos, while medium-elevation tea increased by 38.04% to 4.10 million kilos. Low-grown tea also showed a significant rise of 31.75%, reaching 15.29 million kilos. However, green tea production fell by 6.82% year-on-year to 189,695 kilos, despite a slight improvement of 8.33% from September 2022.

 According to Asia Siyaka Commodities PLC, the low-grown tea figure for this year is the highest since 2017. The cumulative tea production for January to September 2024 totaled 196.22 million kilos, an increase of 2.73 million kilos compared to the same period last year.

 In a broader comparison, Forbes and Walker Research indicated that while most tea segments showed growth in 2024, high-grown and green tea production faced a decline. High-grown tea dropped by 8.43% year-on-year to 40.53 million kilos, while green tea saw a slight decrease of 1.07% to 1.68 million kilos.

 Industry growers have noted a significant rise in production costs, driven by increased prices for fertilizers, electricity, labor, and packaging. Despite these challenges, the Sri Lanka Tea Board reported that the total national production for 2023 was 256.04 million kilos, a modest increase from 251.84 million kilos in 2022.

 The tea industry aims to maintain production levels above 250 million kilos this year, as it continues to recover from previous lows and strives for stability.

October 19, Colombo (LNW) Sri Lanka’s micro, small, and medium enterprises (MSMEs) have urged the newly formed government to initiate critical reforms in MSME financing within the next 60 days, emphasizing the need for interest waivers to support struggling businesses.

The call for action comes as the temporary relief from the suspension of parate execution is set to expire on December 15, threatening the stability of many MSMEs.

 The Ceylon Federation of MSMEs, led by President Mahendra Perera, has appealed for the waiver of accumulated interest on loans taken from 2019 to 2024 to alleviate the financial pressure on these enterprises.

Perera emphasized that MSMEs should be granted long-term repayment options with interest rates capped at 10%, and suggested that total interest payments should not exceed 50% of the original loan amount.

The federation estimates that MSMEs currently owe around Rs. 250 billion, with 60% of these loans classified as non-performing, and the interest amounting to approximately Rs. 60-70 billion. 

Perera also recommended amending the outdated 33-year-old parate execution law, proposing its temporary suspension for a year, and suggested returning auctioned properties to original owners to facilitate debt repayment.

In addition, the federation’s Vice President, S.N. Raghvan, highlighted the need for a comprehensive overhaul in MSME financing. He argued that although banks have recorded high profits recently, MSMEs’ contribution to the country’s GDP has declined sharply, indicating a dire need for financial reforms.

Raghvan proposed utilizing the Employees’ Provident Fund (EPF) and Employees’ Trust Fund (ETF) to secure loans for MSMEs, similar to measures taken during the domestic debt restructuring process. He stressed the urgency of implementing these changes within the next 60 days to ensure MSMEs are prepared for the country’s external debt repayments set to begin in 2028.

He concluded that a robust and well-supported MSME sector is crucial to prevent future economic challenges, urging the government to lay the groundwork for long-term financial stability in the sector.

Looking ahead to Sri Lanka’s external debt repayments beginning in 2028, Raghvan asserted the need for a strong MSME sector to avoid another default. 

“When we reach 2028, the MSMEs need to be stronger and prepared to handle the payments we have agreed to start repaying. Give them the platform and financial support they need, so they can be ready for what’s ahead,” he said.

October 19, Colombo (LNW): The Ministry of Finance has clarified that recent reports about increased taxes on several imported goods are inaccurate. This clarification follows rumors that taxes on certain imported items were raised, effective from October 14 to December 31, 2024.

According to the Ministry, the confusion arose after the previous gazette on the special commodity levy expired on October 13, prompting a routine renewal of the gazette on October 14, 2024. The Ministry confirmed that the concessionary tax on imported lentils, which remains at 25 cents, has not been altered, along with tax rates for four other products.

This extension aims to support local industries, such as fishing and fruit cultivation, while also addressing foreign exchange concerns.

October 19, Colombo (LNW)The People’s Action for Free and Fair Election (PAFFREL) has urged candidates running for the general election to appoint a dedicated individual to manage their income and expense reports. PAFFREL Executive Director Rohana Hettiarachchi highlighted the importance of this step to avoid the challenges faced by some candidates during the last presidential election when submitting financial reports.

Hettiarachchi stressed that appointing a separate financial manager right after the election could help minimize difficulties and ensure smoother submission of financial documentation. He emphasized the need for candidates to be mindful of this issue to avoid any complications.

His remarks came in response to a media inquiry yesterday .

October 18, Colombo (LNW): Media Minister Vijitha Herath stated yesterday (17) that the government is prepared to release the reports of the Presidential Commission of Inquiry (PCoI) into the Easter Sunday attacks at the appropriate time. He emphasized that the reports would not be disclosed based on the demands of individuals but would be done responsibly.

Addressing the media, Minister Herath criticized former MP Udaya Gammanpila, comparing his behavior to a child seeking attention by throwing toys, and urged the public not to be alarmed by such actions. He assured that the reports would be submitted when necessary, in line with the government’s duty to handle the matter properly.

October 18, Colombo (LNW): Senior Professor Wasantha Athukorala from the University of Peradeniya’s Department of Economics and Statistics has disclosed that the current Sri Lankan government is forced to borrow extensively to repay loans incurred by previous administrations. Addressing concerns about large-scale borrowing, Professor Athukorala emphasized that much of the current borrowing is to settle Rs. 4,859 billion in maturing Treasury Bills and Bonds due over the next year.

He revealed that the previous government had borrowed approximately Rs. 800 billion per month from the domestic market without a clear repayment plan. As a result, the current administration must continue borrowing to service these debts, particularly the Treasury Bills and Bonds maturing in the coming months.

Professor Athukorala highlighted that between 2015 and 2019, nearly US$ 12 billion out of the US$ 17 billion borrowed through International Sovereign Bonds came from that period, accounting for 70% of foreign debt. With Sri Lanka’s credit rating downgraded, the country can no longer borrow from international markets, further complicating the repayment process.

Despite restructuring efforts, the country remains burdened by substantial loans from both foreign and domestic markets. Domestically, the government raises funds weekly through Treasury Bills and Bonds to cover financial obligations. Looking ahead, Sri Lanka will need to repay Rs. 3,774 billion in Treasury Bills from November this year to November next year, and Rs. 13,237 billion in Treasury Bonds by 2045, with Rs. 1,125 billion maturing next year.

Professor Athukorala stressed the importance of establishing a sustainable debt management plan. He suggested that the government gradually reduce monthly borrowings to Rs. 200 to 250 billion over the next five years to avoid future crises. He also noted that while previous governments misused borrowed funds, there are signs of reduced wasteful spending under the current administration, which is a positive development.