IMF Staff and Financial Advisors – Are they to manage the Sri Lankan economy?

 


Other than ad hoc statements made by some political leaders at the Parliament and media interviews on debt restructuring, international financial advisor appointed for that purpose and IMF programme, no official information is released on this subject by the Ministry of Finance (MoF) or the Central Bank in the capacity of the official fiscal agent and debt manager.

However, the two documents released by the MoF regarding the suspension of foreign debt service for the purpose of restructuring dated 12 April 2022 and RFP for international financial advisors for debt restructuring service dated 9 April 2022 reveal several concerns on the subject.

The objective of this article is to highlight several key concerns based on the contents of the two documents stated above.

The experience and scope of work of the financial advisor communicated in the RFP

Some of the contents in the RFP are commented as follows.

  • Experience sought from international financial advisors

The RFP states that international financial advisors should be with experience in advising sovereigns in managing their external debt in a sustainable manner having engaged in liability management.

However, the public is not aware of whether the financial advisor already appointed possesses the relevant experience. Further, whether the financial advisor is to comply with the provisions of the Active Liability Management Act of 2018 is not stated.

  • Evaluating of the debt stock in the background of maintaining sound macroeconomic fundamentals and advising the government on the strategies to be taken in managing the debt

Accordingly, sound economic fundamentals to be maintained by the debt stock are not defined or described in the RFP or any other government policy document. Therefore, the question arises whether the financial advisor is to determine sound macroeconomic fundamentals appropriate for Sri Lanka for his evaluation of the debt stock, both domestic debt and foreign debt, and advising the government on the strategies in managing the debt.

Therefore, the role of the financial advisor will also cover a macroeconomic policy component and, therefore, the validity of the fiscal and monetary policy framework and underlying targets to be set by the IMF programme may be contradicted by the financial advisor.

  • Evaluating the current fiscal position of the government and highlighting the key areas to be focused on in negotiations

This means that the Central Bank or Treasury still does not know the current fiscal position of the government and, therefore, the position evaluated by the financial advisor will be used in negotiations with creditors. Accordingly, the fiscal position/policy assessment agreed with the IMF may be different for the official document prepared by the financial advisor.

In that context, the medium-term fiscal strategy and the medium-term macro fiscal framework that are posted in the MoF website are not meaningful because the government now seeks assistance of financial advisors to present relevant frameworks inclusive of debt restructuring.

  • Designing a mechanism and processes to achieve the said economic and policy objectives in pursuing the said debt management and reform

When above three scope items are taken together, it appears that the financial advisor is expected to design the economic policy of the present government which should cover the recovery of the economy from the current crisis too, because the debt stock is to be evaluated to maintain sound macroeconomic fundamentals as defined by financial advisor.

  • Designing a mechanism to engage with IMF to best achieve the required fiscal targets of the government

This raises two major questions. First, is it the fiscal advisor that deals with the IMF to achieve fiscal targets preferred by the government? Second, don’t the MoF and Central Bank who have long experience in dealing with IMF programmes have the expertise to do this, especially when both the Secretary to the Treasury and the Governor having worked in the IMF as Executive Directors?

  • Assist in improving the medium and long-term debt management and reform strategies of Sri Lanka based on sound analysis in line with the macroeconomic assumptions

It appears that Sir Lanka does not have a proper medium and long-term debt management framework and, therefore, the financial advisor is expected to assist in improving the framework. The alleged foreign debt default and debt unsustainability are a direct result of it. However, the public does not have information on the presently available debt management framework. The Central Bank Annual Reports (including the Annual Report for 2021 issued after the debt default on 12 April 2022) have successively presented the availability of a prudent debt management strategy.

Therefore, the suitability of the Central Bank as the official debt manager in the past 72 years has to be now reviewed, given the debt default, the official acceptance of the IMF view on the debt unsustainability and the scope of the newly appointed financial advisor.

  • Recommending a strategy to achieve the best possible results in negotiations with the IMF and creditors

This means that the MoF and the Central Bank do not have the expertise in negotiations with the IMF or creditors. This is a pathetic situation. The question now arises is who is responsible for the protracted delay in the IMF programme and debt restructuring, whether the financial advisor or the Central Bank who represents the government in the IMF.

However, the Central Bank Governor and Secretary to the Treasury after attending the IMF World Bank Spring Meetings April 18-22 gave a wide media publicity that the IMF loan programme would be received in 3-4 months. This has not happened, and the present time target seems to be the end of this year.

Foreign Debt Service Suspension

The MoF policy document on debt service suspension issued on 12 April 2022 also contains several questionable items. Some of them are commented below.

  • Extraordinary steps taken by the government to avoid this resort (default of debt service)

Although MoF or Central Bank news sources are not available on such extraordinary steps, there is media news that sufficient funding lines were in the pipeline to continue debt service as usual during this difficult time and, therefore, debt default was unwarranted. As the default was announced by the Secretary to the Treasury and the Central Bank Governor jointly just after four days of their new appointments, it is highly likely that they have gone for arbitrary, sugar-rush public decision not legally authorized to them.

The policy document does not reveal those extraordinary measures or the default policymaking process including the approval of the Parliament being the public finance controller under the Constitution. What the MoF and Central Bank defaulted are the finance already approved by the Parliament under the national budget 2022. 

If they were not in a position to implement the approved budgetary provisions, either they should resign from new posts or seek the Parliamentary approval for amending the approved budgetary provisions. Therefore, it appears that they have assumed the duties of the new public positions with the mutual expectation/plan to default debt so that their offices will be free from the debt servicing difficulties.

  • Condition imposed to creditors who wish to receive debt service in Rupees

One condition is such repayments being consistent with the Central Bank’s monetary policy. I am at loss to understand why such debt swapping could be inconsistent with the monetary policy when money underlying remains in the country. In fact, repayment in foreign currency will have adverse impact on the monetary policy as such funds lead to foreign currency outflows causing a decline in net foreign assets of the banking system and reduction in the domestic currency liquidity. 

As one month time from each repayment date has been given to such creditors to apply for the option, the MoF by now should know the details on the progress of this option. However, conditions such as monetary policy consistency may have discouraged creditors for seeking this option.

  • Preparation of a full economic recovery programme

The MoF has stated that debt service suspension is a temporary expedient until a full economic recovery programme is prepared with the assistance of the IMF and other official partners. However, there is no information whether the MoF or Central Bank has commenced preparation of the full economic recovery programme referred to here.

  • Discussions with the IMF to present a comprehensive plan to creditors

Accordingly, the MoF has stated that the government will discuss with the IMF and present a plan to creditors for restoring external debt to a fully sustainable position. It also states that a comprehensive external debt restructuring programme consistent with the parameters of the IMF-endorsed economic adjustment programme will be discussed with creditors.

However, the media news now available is that the IMF requires debt restructuring plan agreed with the creditors to approve the IMF programme. Therefore, there will not be an agreed IMF programme soon to negotiate with the creditors for a debt restructuring programme as stated in the MoF debt suspension document. As such, the country is now trapped between the IMF, creditors and financial advisor on the debt restructuring task. 

The Governor at a Bloomberg interview held today (23 August 2022) stated that financial assurance (i.e., debt restructuring for the debt sustainability) from external creditors would be necessary for seeking the approval for the IMF programme from the IMF Executive Board. Meanwhile, the Governor states that the economy is getting back towards the recovery with the inflation trending down even without a need for short-term foreign borrowing. If so, debt default, import controls and request for IMF programme could be wrong policy decisions.

  • Compliance with the principles of intra-creditor equity
However, the MoF has already offered differentiated treatments to some creditors such as central bank swap lines and Sri Lanka Development Bond holders and this matter has already been raised in the case filed in a New York court. 
  • Releasing the debt sustainability analyses in the MoF website

The MoF has stated that it would post in the website debt sustainability analyses or similar assessments made by the IMF staff or financial advisors in connection with the economic adjustment programme. However, accordingly to the Governor’s interview with the CNBC on 21 July 2022, Sri Lankan authorities have submitted to the IMF and creditors an overall macroeconomic stabilization programme including monetary policy reform, fiscal policy reform and reform of strategic state enterprises. 

One IMF staff visit was completed on 30 June. It was later stated that the staff level agreement would be ready after the staff visit 20-30 June and Executive Board’s approval would be due soon after the staff level agreement.

However, as media reported, another IMF staff visit is due today. However, the IMF has all data base for Sri Lanka reported weekly, monthly, etc., and the macroeconomic management problem and debt unsustainability have already been assessed by the IMF. It is only desk-based research as the IMF approach of macroeconomic assessment and data are highly simple. Therefore, the second IMF staff visit is just a bureaucratic red tape of the IMF.

However, nothing is posted in the MoF website so far on any assessments. It is also surprised why such international agreements regarding national macroeconomic management plans are finalized and signed with the international bodies without any observations or concurrence from the Parliament or without any information released to the public.

Final Comment

When the official statements and press information relating to debt restructuring and IMF financial programme are investigated, it is observed that the most information is nothing but technical jargon used to confuse the public. Although the relevant authorities had brave talks of debt restructuring and IMF programme earlier, it now reveals that the IMF programme could be by the end of this year, subject to the completion of the debt restructuring programme.

Meantime, the financial advisor has been given a mandate to decide the national economic policy including sound macroeconomic fundamentals appropriate for Sri Lankan economic recovery. I am at a loss to understand whether this international financial advisor is a member of the divine community to have the knowledge on every economic aspect of Sri Lanka to design strategies and advise the government as stated in the RFP.

Further, it is pathetic that a large network of Sri Lankan policy economists and financial experts employed in the government, especially in the Treasury and Central Bank, has been pushed off to the corner whereas the IMF staff team and financial advisor are assigned with the compilation of the debt restructuring and macroeconomic stabilization/adjustment programme for the recovery of the economy. As such, Sri Lankan policy economists may have become data collectors to feed the IMF and financial advisor.

It is well known that the Central Bank employs internationally trained economists for debt sustainability and macroeconomic management. However, the economy now has got into triple crises, i.e., debt, hyper-inflation/cost of living and depression, that may last decades for the full recovery whereas services of foreign experts such as IMF staff teams and financial advisors are sought to design the recovery plan and strategies. As such, Sri Lankan policy authorities seem to have entrusted the country's macroeconomic management with the foreign experts. 

Therefore, the optimism and sentiments conveyed by the policymaking authorities on the early recovery of the economy from the present triple crises are nothing but willful deceit of the general public.

(This article is released in the interest of participating in the professional dialogue to find out solutions to present economic crisis confronted by the general public consequent to the global Corona pandemic and subsequent economic disruptions and shocks both local and global.)

 

P Samarasiri

Former Deputy Governor, Central Bank of Sri Lanka

(Former Director of Bank Supervision, Assistant Governor, Secretary to the Monetary Board and Compliance Officer of the Central Bank, Former Chairman of the Sri Lanka Accounting and Auditing Standards Board and Credit Information Bureau, Former Chairman and Vice Chairman of the Institute of Bankers of Sri Lanka, Former Member of the Securities and Exchange Commission and Insurance Regulatory Commission and the Author of 10 Economics and Banking Books and a large number of articles published)

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