How will Sri Lanka repay its new loans

Tuesday, 3 May 2022

The country’s delegation to the International Monetary Fund (IMF) reached Washington to discuss receiving financial assistance to overcome the current financial crisis. The delegation comprised all new members, headed by Minister of Finance Ali Sabry, Central Bank Governor Nandalal Weerasinghe and Finance Ministry Secretary Mahinda Siriwardena. They were received cordially by the IMF members who promised support to overcome the country’s tragic financial situation.

 

Indian support

Without making news at the IMF discussion was a high-level Indian economic delegation headed by Indian Finance Minister N. Sitharaman who pledged support to Sri Lanka.

At a meeting with Finance Minister Ali Sabry, Sitharaman has assured India’s fullest support to develop the Sri Lankan economy and build a stronger bond between the two nations. Sitharaman also assured that India will support towards expediting an Extended Fund Facility (EFF).

At the IMF meeting Sri Lanka requested early financial assistance to overcome immediate issues with India backing up. IMF officials have stated, normally financial assistance is offered after long discussions and agreements, but under the current scenario special concession could be considered. 

New development

But a new development, IMF has questioned how Sri Lanka will expect to repay the loans from IMF, in addition to current loans for which Sri Lanka has already requested time extensions for payments and other concessions.

 

The country’s financial situation

The country is in a financial mess with inability to balance the budget, also foreign currency, a situation continued for decades. After independence the country’s income exceeded expenditure only for two years. All others the budget was a deficit balanced with borrowings. After a 30-year costly war, the Government engaged in massively expensive projects yielding poor returns with foreign borrowing as Mattala airport, Hambantota harbour, International Cricket stadium, etc., mostly around Hambantota.

In 2003, Prime Minister Ranil Wickremesinghe considered Government staff of 800,000 was too many and reduced to 650,000. But current employee numbers total 1.6 million, with an additional 300,000 in State corporations and their salaries need to be paid.

Meanwhile, a major part of foreign earnings continue from exports of tea, rubber and coconut along with tourism and garment exports. In addition, locals employed in the Middle East mostly as housemaids, send earnings to their families, contributed to FE needs.

Politicians received duty-free imports of large expensive vehicles, extended to senior staff and others, in addition to three-wheelers and motorcycles to lady staff. The result is practically every family owns a vehicle, showing their financial capacity. By April 2016, the three-wheeler population exceeded 1.2 million indicating a 12-fold increase within nine years.

 

President Gotabaya’s blunders

When Gotabaya took over Presidency, his economic knowledge was poor and he had to depend on his advisors, but those who prepared his election manifesto moved away. Among his new decisions were disregarding IMF agreement signed by the previous regime. The first budget included massive tax reductions to large companies, abolishing taxes as PAYE, NBT, withholding tax, capital gains, bank debit tax and reduction of VAT rate, reducing State income drastically, resulting in a 33.5% decline in taxpayers. The action moved the country towards bankruptcy.

When the COVID pandemic hit the country, it was forced to lockdown; with intensive anti-COVID vaccinations Sri Lanka was among the first countries to eliminate the pandemic, but at a massive cost. Meanwhile Government servants who stayed at home were paid their full salaries, while most countries reduced staff salaries to bare survival levels.

The President’s election manifesto indicated moving over to organic fertiliser over a 10-year period, but in April 2021 he announced suddenly of moving over to organic fertiliser and the imports were banned. The farmers were caught unaware during the middle of Yala season. The next Maha season was a complete failure which led to farmers to protest all over the country. A week ago the President reversed his fertiliser policy, but fertiliser would arrive only for next Maha. The situation led to a sharp drop in rice production and a shortage, leading to price increases. The market shortages were filled with imports.

 

70% renewable energy

The manifesto also included moving over to 70% renewable energy by 2030. But there was hardly any progress due to obstructions by CEB engineers. The ministers are without technical knowledge, their secretaries and high officials all arts graduates, who excelled at the Administration Service examination, but without technical knowledge. If the President’s policy was properly implemented our financial issues and power cuts could have been averted (later).

 

Oil and gas price increase

All over the world the COVID pandemic reduced demand and badly affected the oil and gas industry with prices crashing. Oil producers were unable to stop production due to technical reasons, all storage facilities were full. Resulting in oil tankers used as storage. With ending of COVID, those lost are attempting to recover with price increases in oil, gas, coal, also transport costs. Meanwhile the Russia-Ukraine war has worsened the situation.

In October 2018 Mangala Samaraweera introduced a fuel price formula making prices fluctuate with purchase prices, but is currently removed. If same was continued fuel and gas price protests would have been avoided. Also increasing prices would force users’ consumption reduction, reducing demand on FE. Now Litro gas price has been increased but public expected the increase. Massive subsidies on oil and cooking gas contributed towards bankruptcy.

Power generation with imported oils constitute a major part of electricity. With fuel price increases generating costs have risen over Rs. 50 a kWh, with high dollar prices. Last year, the country had heavy rainfall and most hydro reservoirs were full. Unfortunately, during December a power plant in Norochcholai generating 300MW crashed for unknown reasons and stored water in reservoirs was used. Dry season commences from January and hydro-power makes a fair contribution. With hydro resources down, the electricity situation became critical from January leading to a crisis with 12-hour power cuts.

 

Dollar shortage

The country’s FE earnings are mostly from plantations as tea, rubber and coconut, garment exports, tourism, also remittances from workers abroad. The COVID pandemic affected the tourist industry; meanwhile, workers employed abroad found sending their dollars to the black market gave their families extra rupees. The worsening situation made ships carrying oil and gas wait outside until payments were made, costing additional dollars.

Luckily India came to the rescue, but in time repayments need to be made, with possibility of increasing influence and Sri Lanka becoming a puppet of India.

Crashing of economy

A number of educated persons suggested requesting help from International Monetary Fund, but Ajith Nivard Cabraal, the Governor of Central Bank was completely against it, claiming the situation could be brought under control, also by money printing. Finally with oil and gas shortages, power cuts leading to massive protests, the President was forced to get rid of Ajith Nivard Cabaral.

Finance Minister’s visit to IMF

With the leaving of Cabraal, the President offered the position to Nandalal Weerasinghe, former deputy governor for eight years from September 2012 and resident in Australia, who accepted the position. When the President offered the Finance Minister post to parliamentarian Ali Sabry, he accepted but resigned. His resignation was not accepted and both left for the IMF meeting in Washington, scheduled to commence on 11 April. Discussions with IMF needs a proper government and the Cabinet and the Deputies took oaths on the same day, few hours earlier with time difference.  

Discussions with IMF

Discussions with IMF was cordial, but the Finance Minister informed them of the country’s inability to pay the current year’s loans and wished for renegotiations. The loan holders have agreed to negotiate but IMF help will be on hold until agreements are reached.

Meanwhile, the local team negotiated with World Bank, Asian Development Bank and have agreed immediate assistance for urgent areas and more with progress.

The country is supported by India, US, China, and other countries to recover from the immediate crisis, but cannot expect their help forever. Thus early recovery from the crisis is essential, local funds as well as foreign currency. IMF help will be based on how the country proposes to come out of the mess.

Background of IMF assistance

Prior to discussions, IMF had sent detailed observations on Sri Lanka’s economic situation and suggestions to overcome them. When our team met the IMF delegation they seem to have substantially accepted the report; otherwise such cordial discussions would not be possible.

The IMF report indicated around 40 State organisations need extensive rehabilitation. The actions will require reducing costs as excess staff, OT and allowances, proper use of vehicles, office space and establishing an efficient administration system to deliver the organisation’s objective.

Most important, IMF questioned how Sri Lanka will expect to repay the loans expected, in addition to loans requested for rescheduling and other concessions. Now the discussions with IMF are complete and the team has returned.

Local reactions

The team will enlighten the Cabinet of Ministers first, thereafter the Parliament. The parliamentarians will learn of IMF’s demands of balancing the budget, local as well as foreign exchange. They will learn of expected rehabilitation on around 40 State organisations and the expected trimming of costs. Meanwhile the Secretary of Finance has already sent a circular on trimming down costs.

When details come to light, the politicians who demand formation of a joint administration will abandon the idea.

Balancing the budget

The Finance Minister expects to reverse tax cuts introduced earlier. The balancing act would require massive trimming of expenditure and staff. The public service which had 600,000 in 2003 had moved over to 1.9 million. As permanent staff cannot be terminated casual staff may need discontinuation. In addition, for other staff no salary increases for a few years. This was practiced by number of countries during the COVID pandemic.

The price increase of oil resulted protests countrywide and the gas price too have increased. But soon they will adjust themselves to new norms. Short distance travel become a walk instead a three-wheeler. Gas cylinder kept in the kitchen, but most cooking with firewood.

Public will protest and demand facilities given to Parliamentarians be trimmed and the government will have no choice.

Improved foreign currency earnings

At a recent TV discussion a senior member from garment sector informed, they could easily double the exports if the shortage of workers are addressed. Currently millions of Samurdhi recipients are undeserving, only a small percentage really deserve. If undeserving are removed family members would be forced to find employment giving garment sector their workers.

In addition, tourism sector would develop fast with higher Dollar value, if protests and shortages are eliminated.

The Renewable Energy sector with possibility of most contribution was neglected over 7 years due to incompetence of our politicians.

RE to replace oil based power

The IMF wished to know how the loans already taken and expected in the future be settled. Most logical solution is to replace oil based power generation currently delivering major part of electricity be replaced with Renewable Energy. The massive foreign exchange spent in purchasing oil and coal could be saved to settle loans.

Renewable Energy

RE consist of hydro-power, solar and wind power, bio-energy and small hydro-power plants. Large hydro-power plants are already utilised. Solar, wind-power, small hydro and bio-energy plants under 10 MW capacity are allowed under the private sector.

Country’s first solar power plants started in 2010 and the producers were paid Rs.22.50 per unit, later lowered to Rs. 16.50. Wind power plants allowed in 2012 produce 150 MW of power. In 2014 CEB engineers complained that wind power producers were paid too high and stopped further plants. If wind power producers were paid a reasonable rate and allowed to continue, now would have over 1,000 MW of power. Solar power is only during day-time from around 9 AM to 4 PM, wind power during day and night but wavering.

From January 2017 CEB stopped acceptance of all RE projects claiming their 20 year generation plan for 2018/2037 did not include Renewable Energy.

President Gotabaya’s Vision included 70% RE by 2030, and the President called a meeting with CEB and relevant ministries and explained, the vision was disregarded. Their claim was under Section 5 of Ceylon Electricity Act of 2009 any policy to be accepted, the policy paper need to be presented to the Cabinet of Ministers, accepted and be gazetted. This happened only in September 2021, but CEB’s 20 year plan for 2022/2041 is yet to be presented.

Meanwhile, Auditor General’s report to the Parliament in February disclosed that by 2019 there were 1,374 prospective investors having paid a fee, capable of producing 4,015 MW of electricity are awaiting CEB acceptance. But the Parliament failed to take the report for discussion.

Availability of resources

The country is blessed with daily sunshine and lying on the wind corridor between ours and southern mountains of India are capable of producing over 100 times the country’s electricity requirement with locals waiting to invest. In addition, the government signed two agreements with Indian Adani group to construct solar and wind power projects 500 MW each. Thus being self-sufficient in electrical power is not an issue.

Solving the issue

The country imports over two shiploads of fuel a week and most are used by power plants for electricity generation. With development of renewable energy, oil imports could be reduced along with Dollar requirement.

Cabinet paper and acceptance

CEB has already proved that they are reluctant to move over to renewable energy and will make every possible excuse to avoid.

Thus the Minister of Power and Energy need to initiate and get approval a Cabinet paper highlighting following.

1. Instead of the current 20-year generation plan, prepare new plans for

a. The country to achieve 70% electricity requirement with RE in five years (2027).

b. Achieve 80% electricity requirement with RE in 8 years (2030).

2. Immediately commence solar power installations to achieve 1,000 MW by December 2022.

3. Investors who already submitted RE proposals, in evaluation multiply their payable rates for electricity generated by 1.5 times.

4. Allow installation of solar panels on large storage buildings beyond their electricity consumption.

5. Make necessary improvements to electrical power transmission network to accept renewable energy.

After Cabinet acceptance gazette the contents and copy to ECB.

Discussion

The country’s finances are in a disastrous state forcing the country to go to IMF for assistance. Their first condition a stable government, without discussions. Even with protests no politicians seem to understand the tragic situation.

The practical way to earn additional Dollars is to improve the local garment industry by reducing Samurdhi recipient numbers, which would greatly reduce Government expenses.

Also when protest marches disappear, with higher value for Dollar tourists would find the country more attractive. The most prudent way to save Dollars is moving over to renewable energy, reducing fuel imports massively used by electricity generating power plants. 

The country’s large hydro-power locations are already developed, only possibility are solar, wind and bio-energy. The proposals for a large number of investors with own funding were blocked by CEB. With the devalued Dollar their proposed rates need to be multiplied by 1.5 times. Otherwise CEB will wish for retendering, delaying projects by years. Thus Cabinet proposals, acceptance and gazetting urgently as shown before are required, to push CEB engineers into action.

Already US Aid and Germany have promised funds for solar panel imports. The solar panel importers could be requested to import solar panels. CEB could immediately accept rooftop solar producers to go ahead, in addition to roofs of large warehouses. Connections by December would eliminate power cuts during the next dry season from January.

With increasing completion of RE projects, import of oils for power generation will go down heavily and the savings could be used to repay IMF and other loans.

The delay of accepting RE proposals were due to bribe-taking by some CEB senior engineers from private power producers. Thus CID investigations into assets of CEB engineers occupying senior positions will help push others into motion.

With establishing RE projects the country could reach 80% renewable energy by 2030 as originally proposed by President Gotabaya. Meanwhile, India has proposed a 500 MW electrical power-line connection to share electrical power between the two countries. When carried out the county could be totally based on RE power.