Statement on Sri Lanka Defaulting on Foreign Debt Payments by Eran Wickramaratne M.P., Former State Minister of Finance
On 12 April 2022, Sri Lanka suspended repayment on most of the government’s external foreign currency debt, including the International Sovereign Bonds (ISBs) and bilateral debt. With the end of the 30-days grace period since the ISB coupon payments due on 18 April 2022, Fitch and Standard & Poor credit rating agencies have moved Sri Lanka to Selective or Restricted Default (SD/RD) rating, officially signalling that for the first time in history Sri Lanka has defaulted on its external debt.
As the State Minister of Finance under the previous administration, we had identified that Sri Lanka’s economy and public finances were in a highly precarious position when we took office. As a result, supported by technical and financial assistance from the International Monetary Fund (IMF) as part of the Extended Fund Facility (EFF), we implemented a number of policy reforms to improve the situation including a new Inland Revenue Act, fuel pricing formula, Active Liability Management Act and Debt Management Strategy. The primary balance of the budget was turned from deficit to a surplus of 0.6% of GDP in 2018, with tax ratio at 12% of GDP.
We understood the need to maintain access to international capital markets to refinance our increasing external debt repayments, to maintain forex reserves at healthy levels and gradually reduce our external debt burden as a share of GDP. Resultantly, by November 2019 gross official reserves were at $7.5 billion despite rising debt repayments and the credit rating downgrade in early 2019 as a result of the attempted constitutional coup orchestrated by parties that are currently in government. . The fall out of the political volatility continued limiting our ability to push through the rest of our reform program, including an independent Central Bank and privatising Sri Lankan Airlines.
The progress achieved through consolidations in public finance and reforms were reversed within a matter of days following the November 2019 Presidential Election. The new Rajapaksa government debuted their cataclysmic mismanagement of policy and governance with massive tax cuts, impeding revenue generation adversely. Tax revenue dropped to a mere 7.7% of GDP by 2021. As a result, the IMF program was left incomplete and with credit ratings downgrades amidst the COVID-19 pandemic Sri Lanka lost access to international capital markets. CBSL was forced to abandon any semblance of independence, financing the budget deficit in the absence of tax revenue, and running down forex reserves to maintain debt servicing, imports and the rupee’s value. Despite repeated calls from all relevant parties for policy reversal and re-engagement with the IMF, the Rajapaksa government kept to its home-grown regime of mismanagement.
The Samagi Jana Balawegaya (SJB) is committed to supporting the Parliamentary process to find solutions for the economic crisis and provide social protection to the most vulnerable sections of our society. As a responsible opposition, we will support the government in reinstating the previous tax regime and other reforms required under an IMF programme. As a country, our commitment towards such a programme will open up avenues for much needed bilateral and multilateral bridge financing. These funds can be used to address the immediate shortages of essential goods faced by the Sri Lankan people. The IMF programme is also needed to signal to the international community that we are a responsible debtor as we negotiate with our creditors to restructure our external debt payments.
The SJB will also remain steadfast in its commitment to represent the voice of the people. The cry of the protest is for a new political culture, one of transparency and accountability. The SJB was formed on this principle and will not rest till the demands of the people are met.