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China to place moratorium on all debts for 2-years

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To offer debt relief from a different perspective – Ali Sabry
Foreign Minister Ali Sabry
Foreign Minister Ali Sabry

The Chinese debt relief is likely to be from a different perspective than what the IMF has set out as an acceptable debt restructuring. China has already shown a willingness to place a moratorium on all debts for a period of 2-years. The lender is also willing to have further debt-to-equity swaps, provide additional lending to the Colombo Port City project, and act as a guarantor on freshly issued Sri Lankan debt.

Foreign Minister Ali Sabry expects the IMF arrangement to be finalized before the 31st of March following which there will be a large improvement in the economy. There are already signs that speculation of this improvement has brought about an interest in the economy.

Sabry was speaking on 4 February to Al Jazeera. Concerning the IMF agreement Sabry said, “ The sooner the better.” He noted that the deviation between what the IMF set out and what China was willing to offer were technicalities and that in effect both approaches relieved the economy from unsustainable levels of debt.

The economy has shrunk on its inability to roll over debt obligations which in turn has ballooned debt to GDP figures. The Central Bank acted to exacerbate the problem by not building long-term reserves like other countries that have weathered the fallout from COVID-19 and the Russia-Ukraine war well.

Sabry rubbished claims that things would get worse. If you take a June 2022 figure as a base you see both inflation falling drastically and the economy expanding. Sabry said, “People should have to continue to have faith and channel funds from the banking system. Tourism continues to improve.”

Sabry further noted the depth of other financing assurances that would come about following an IMF agreement. He said, “We aren’t getting the IMF loan to pay salaries.” Following the IMF agreement, the government has already received assurances from amongst others the Asian Development Bank for direct support to bridge the budget deficit. There will be a resumption of government capital spending by June of this year.

Sabry noted that analysis figures notably by way of WHT and income tax on the interest income would bring about huge windfalls to the government. Sabry said, “We are going to increase revenue by 50%.” The figures will become more apparent in the coming months in line with collection cycles. At a granular level, many state institutions will also see improved cashflows reaping the benefits of Voluntary Retirement Schemes and reduced abuse of overtime.

Sabry reiterated that Sri Lanka would regain access to long-term financing very quickly. He said, “We need to resume servicing the loans. Projects are standing suspended.” This in turn reduces the contribution to the economy by way of capital investment.

Sabry said, “The Chinese government has continuously said that they won’t let Sri Lanka down.” As with the Port City, it is expected that to prevent disruption of development the Chinese government will lend directly to the Port City entity which in turn will make disbursements for the acceleration of construction. Sabry said, “Eventually we are confident that China will stand with Sri Lanka.” China thinks in terms of generations and not 5-year-horizons.

Sabry blamed populism and isolationist policies for the current economic malaise. He said, “Over a long period, the populist policies have brought us to this situation.”

Sabry reiterated that President Gotabaya Rajayapaksa’s track record on COVID-19 and war are exemplary. The economic policies that brought about the crisis were issues that Rajapaksa inherited. TP

Monday, February 6, 2023 – 01:00

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