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PHO Chandrawansa, former exchange controller
The $500 million International Sovereign Bond Settlement on January 18, 2022 was a routinely budgeted debt repayment approved by Parliament out of a total of approximately $7,100 million in foreign currency debt service payments and 3 trillion local rupees. deadline 2022.
According to published information, this amount of USD 500 million represented approximately 7% of the Sri Lankan government (government) foreign exchange debt service and approximately 2.3% of the total debt service in 2022.
Pursuant to Section 113 of the Monetary Law Act, the Central Bank of Sri Lanka through its Public Debt Department (PDD) manages public debt as an agent of the government. It is therefore the responsibility of the government, and not of the CBSL, to borrow and repay the public debt.
As an agent, the Central Bank must act under the direction and instructions of the government with regard to the management of the public debt and cannot unilaterally decide to pay or not to pay a government debt. In addition, it is the government that makes funds available for servicing domestic and external debt from funds specifically earmarked by Parliament for this purpose.
If, therefore, for any reason the government were to decide not to repay its debt, that should be a decision of the government. If the government so decides, the government, through the Ministry of Finance (MOF), must order the Central Bank not to repay all or part of the government debts. Moreover, if such an important and vital decision were to be made, it would obviously have to be the government that also bears the responsibility for the repercussions that would follow such a failure.
The above position is clearly confirmed by the fact that it was the Ministry of Finance that announced the new “Interim External Public Debt Service Policy” on April 12, 2022. Through the statement of this new policy, all exchange debt repayments to be settled by the government to date were to be stopped immediately and subsequently restructured. This announcement, among other things, stated: “It will therefore be the policy of the Government of Sri Lanka to suspend normal debt servicing of all affected debts (as defined below), for an interim period pending an orderly restructuring. agreement on these obligations in a manner consistent with an IMF-supported economic adjustment program Government policy as discussed in this memorandum will apply to the amounts of relevant debt outstanding as of April 12, 2022. facilities and any amounts disbursed under existing credit facilities after that date are not subject to this policy and should be managed as normal”. The full MOF statement is reported by Daily FT at: https://www.ft.lk/top-story/Sri-Lanka-declares-bankruptcy/26-733409
It should therefore be clear that until the above decision to default with effect from 12 April 2022 was taken by the government, it was the binding duty and responsibility of the borrower (i.e. i.e. the government) and its agent (i.e. the Central Bank) to take all steps to honor the repayments of all government debts falling due up to that date.
In addition, Finance Minister Basil Rajapaksa had also specifically given a clear assurance to Parliament regarding the reimbursement of ISBs when closing the budget debate on December 10, 2021 (as reported in Hansard page 2830) as follows: “Frankly, we are facing a massive economic crisis. We are also facing a crisis in foreign exchange reserves. However, as Minister of Finance, with the permission of the President and the Prime Minister, I must confirm very solemnly before this august assembly that we will pay every dollar that must be paid next year. I give this assurance with responsibility. First, we have to pay $500 million in January. Then we have to pay 1000 million dollars in July. In the meantime, we have to pay further interest and principal payments as part of the service of our debt. I confirm to this august assembly that we will pay for all this. We have a plan to do this. We will implement this plan”.
As we know, when sovereign loans in foreign currency are not repaid, the credibility of the country will be lost. The country’s international credit rating will be reduced. Foreign direct investments and foreign currency loans will be delayed. The country will likely lose access to international capital markets for many years. Local banks will have difficulty opening letters of credit and carrying out foreign exchange transactions. Foreign currency funding from local banks will be reduced by international lenders. Most forex-funded infrastructure projects will come to a halt. Some forex creditors will take legal action to recover their debts and the government will incur huge legal costs.
Some creditors could request the restructuring of local debt, which, if done, could have serious socio-economic consequences. Thousands of small and medium enterprises and entrepreneurs are at risk of collapse. Hundreds of thousands of livelihoods will be threatened. Inflation will accelerate. Interest rates will rise sharply. The issuance of Treasury bills at the Central Bank (money printing) could increase significantly. The local currency will lose its value. Government local currency payments, including salary and pension payments, will be highlighted.
It must therefore be understood that defaulting on sovereign debt is a very complicated matter with serious consequences. It should also be understood that whether or not to settle the sovereign debt of the country or a specific part of it, is not a matter where a single individual or even the CBSL can arbitrarily decide. Nonetheless, various individuals and even some opposition MPs have claimed that the $500 million ISB settlement maturing on January 18, 2022 was made at the request and/or sole discretion of the Governor of the CBSL, Ajith Nivard Cabraal. , in order to allow certain unspecified investors to make improper profits, ignoring the advice of various so-called “experts”.
Ironically, when it was first believed that the Sri Lankan government might default on the January 2022 ISB, most of these so-called experts had previously warned of the serious consequences of default. However, when it was later learned that the government had obtained the funds to settle the BSI, the same people strongly and publicly advised the sovereign default, and inexplicably criticized the then governor when their new “advice” default has not been taken into account.
In this context, the good faith of some of these people should be called into question because they would have known very well that, in accordance with the offering circular for the $500 million ISB dated July 11, 2016, the government Sri Lankan had solemnly assured all potential investors of this bond that “the full faith and credit of the Democratic Socialist Republic of Sri Lanka will be pledged for the due and punctual payment of principal and interest on the bonds”. Furthermore, the same people would also have been aware that it is not possible to have selective defaults of particular sovereign loans, since many loan agreements with international creditors contain “cross-default” clauses which have a considerable scope.
In any event, at the time in question (January 2022), the official policy of the government was to pay its sovereign debt, a policy which MOF and CBSL (as agent) had faithfully and diligently followed ever since. independence. Needless to say, such a deeply entrenched policy could not and should not have been unilaterally rescinded by the Governor and the CBSL Monetary Board on January 18, 2022, under pressure from some people and politicians. It is therefore fortunate that the Governor and the Currency Board at the time did not listen to the unsolicited advice of these individuals and politicians (who may even have been motivated by various dubious agendas), for such advice would never have had to be monitored by state officials. without formal instruction or official decision from the Government (the Borrower).
In fact, for the sake of argument, if the Governor and the Monetary Board had not, for whatever reason, enforced government policy and defaulted on the payment of CIT in January 2022, the same people who today hui’s vehement critics of the former governor for the government’s payment of CIT, would likely have lambasted and held him responsible for the calamitous consequences that usually follow a sovereign debt default.
Accordingly, the Governors preceding the current Governor and relevant CBSL staff are to be commended for diligently following government policy and assisting the government and the Ministry of Finance in settling its foreign exchange debt repayments over a very long period of time. stressful. By doing so, they helped the government prevent irrevocable, permanent and catastrophic damage from being inflicted on the Sri Lankan economy.
