Signs of spill-over?

The International Monetary Fund (IMF) chief Kristalina Georgieva has cited the example of the unprecedented economic crisis in Sri Lanka to warn other countries that they could also face a similar situation in the face of high debt levels and limited policy space. The comments from the IMF MD came as Sri Lanka is going through its toughest economic crisis and is in a hard position where it cannot pay for its essential imports, fuel, food and medicine due to an acute forex crisis. The government declared bankruptcy in mid-April by refusing to honour its international debt. President Gotabaya Rajapaksa was forced out of power last week due to his poor handling of the economy.

Georgieva said that developing nations had also been experiencing sustained capital outflows for four months in a row, putting their dreams of catching up with advanced economies at risk

In this piece we shall try to analyse the latest external debt figures, as reported by the World Bank, for Sri Lanka, Bangladesh and India to understand the debt status of other two countries compared to Sri Lanka.

Sri Lanka

Figures in Table 1 clearly indicate that the Sri Lankan crisis was brewing for a long time. A cursory look at the debt data should have given enough signals to the policymakers about the imminent crisis. While the total debt stock increased by 157 per cent during 2012-20, long-term interest payment increased by 280 per cent. Private creditors like bond holders and commercial banks played a significant role in providing credit. The World Bank was also a major multilateral creditor.

The external debt situation in Sri Lanka becomes clearer if one analyses different debt ratios (table 2). In 2020, the external debt stock to exports in Sri Lanka increased to an astronomical figure at 424.2 per cent compared to 260.5 per cent in 2012. External debt stock to GNI moved to 71.8 per cent from 53.2 per cent. Debt service to exports reached 39.3 per cent from 15.5 per cent and multilateral loan to external debt stock declined to 16.2 per cent! And in 2020, reserves to external debt stocks plummeted to 9.3 per cent! The corresponding debt ratios for 2012 were also very alarming.

Sri Lanka became a member of the IMF in 1950 and since then 16 loan arrangements have been made. Presently Sri Lanka is negotiating for the 17th loan from the IMF. As of March 2022, figures in table 3 indicate an outstanding loan of SDR 892.28 million for Sri Lanka.

It may be recalled that in 2021, Sri Lanka received USD 787 million from the International Monetary Fund's (IMF's) special drawing rights (SDR) allocation and USD 150 million from Bangladesh Central Bank as a currency swap arrangement, boosting the island nation's depleting foreign exchange reserves as it struggled to recover from the coronavirus pandemic. The IMF distributed a total SDR allocation equivalent to USD 650 billion among its member countries on August 23, in proportion to their existing quotas in the IMF.

An International Monetary Fund (IMF) mission team led by Peter Breuer and Masahiro Nozaki visited Colombo from June 20 to 30, 2022 to discuss IMF support for Sri Lanka and the authorities' comprehensive economic reform programme. Anne-Marie Gulde-Wolf, Deputy Director of the IMF's Asia and Pacific Department, participated in policy discussions. At the end of the mission, Breuer and Nozaki issued the following statement:

"Sri Lanka is going through a severe economic crisis. The economy is expected to contract significantly in 2022, while inflation is high and rising. The critically low level of foreign reserves has hampered the import of essential goods. During the in-person visit, the team witnessed some of the hardships currently faced by the Sri Lankan people, especially the poor and vulnerable who are affected disproportionately by the crisis. We reaffirm our commitment to support Sri Lanka at this difficult time in line with the IMF's policies.

The authorities' monetary, fiscal policy and other actions since early April were important first steps to address the crisis. The team had constructive and productive discussions with the Sri Lankan authorities on economic policies and reforms to be supported by an IMF Extended Fund Facility (EFF) arrangement. The staff team and the authorities made significant progress on defining a macroeconomic and structural policy package. The discussions will continue virtually with a view to reaching a staff-level agreement on the EFF arrangement in the near term. Because public debt is assessed as unsustainable, Executive Board approval would require adequate financing assurances from Sri Lanka's creditors that debt sustainability will be restored.

In this context, discussions focused on designing a comprehensive economic program to correct the macroeconomic imbalances, restore public debt sustainability, and realize Sri Lanka's growth potential. Discussions advanced substantially during the mission, including on the need to reduce the elevated fiscal deficit while ensuring adequate protection for the poor and vulnerable. Given the low level of revenues, far-reaching tax reforms are urgently needed to achieve these objectives. Other challenges that need addressing include containing rising levels of inflation, addressing the severe balance of payments pressures, reducing corruption vulnerabilities and embarking on growth-enhancing reforms. The authorities have made considerable progress in formulating their economic reform programme and we are looking forward to continuing the dialogue with them".

The IMF imposes various conditions to debtors before finalising any loan. The above statement is a case in point. But it should be remembered that prior to this, the IMF had entered into 16 loan arrangements with Sri Lanka. It looks obvious that despite immense expertise and power, the IMF failed to make Sri Lanka's powerful political establishments follow its prescriptions and adhere to a proper debt management programme. Instead, the IMF had repeatedly provided new loans to the mis-governed Sri Lankan state.

Bangladesh

Table 1 reveals that total external debt stock, in Bangladesh, increased by nearly 239 per cent during 2012-20. In those nine years, short-term external debt had increased by more than five times while long-term debt more than doubled. In that period (2012-20) short-term to external debt stocks increased to 16.2 per cent from 6.9 per cent

Table 1 also indicates that Bangladesh has received most of its loans from official creditors like multilateral institutions. However, the World Bank's credit to Bangladesh — a least developed country — remained elusive. In 2020, commercial banks emerged as significant creditors to Bangladesh. On repayment obligation, figures in table 1 suggest that in 2020, the amount payable to private sector commercial banks increased to USD 1,564.7 million from a nominal amount of USD 161 million in 2012. Bangladesh had made interest payment of USD 680.4 million in 2020 compared to USD 252.4 million in 2012 — an increase of 270 per cent. Compared to the rate of increase (239 per cent) in total debt stock, the rate of increased interest payment was higher during the period under study.

Table 2 indicates that during 2012-20 the ratio of external debt stock to export increased to 173.7 per cent from 101.9 per cent. But external debt to Gross National Income (GNI) remained the same — around 20 per cent. In 2020, multilateral to external debt stock was 45.3 per cent, down from 68.9 per cent in 2012. But debt service to export ratio reached 9.9 per cent from 5.8 per cent. Though most of the debt-related data indicate that during nine years of this study, Bangladesh became increasingly dependent on external debts, its reserves to external debt stock has improved from 42.5 per cent to 62.5 per cent.

Bangladesh became a member of the International Monetary Fund in 1972. Since then, the IMF has made 12 loan arrangements for Bangladesh. As of March 2022, the country has SDR 816.71 million outstanding loans to the IMF (refer to table 3). It is reported that Bangladesh announced that it was not planning on using any of the remaining SDR allocation. Bangladesh has also not made much direct use of its previous SDR allocations. Instead, the country's central bank has chosen to keep the allocation as part of its forex reserves. The rationale for this policy is that this provides a buffer against possible future shocks.

Recently, Bangladesh has initiated a talk with the IMF for securing their 13th loan from the multilateral institution to shore up its foreign currency reserves that are under pressure due to high commodity prices and economic slowdown in its mainstay export markets of EU and the US. Dhaka is also looking for a USD 1-billion loan from the World Bank for the same purpose. Some of the changes Bangladesh will have to make are: reducing NPAs, developing capital markets and improving monetary and fiscal governance.

India

By the end of 2020, India's external debt stock was USD 5,64,179 million compared to USD 3,92,576 in 2012 — an increase of 143 per cent. Interest payment, during this period, also increased by 143 per cent! In case of long-term external debt stock, as the table 1 indicates, the private non-guaranteed loan of USD 2,62,130.8 million in 2020 was higher than the publicly guaranteed loan of USD 1,92,785.4 million. This was also true for 2012. Among the multilateral creditors, the World Bank plays a significant role, and commercial banks and bond holders are the major private creditors. Repayment obligations to private creditors are also higher.

Table 2 reveals that during 2012-20, external debt to GNI ratio remained at around 21.5 per cent and share of short-term loan to external debt declined to 18.4 per cent. However, the most assuring figures in table 2 are reserves to external debt stocks. In 2020 it was 97.3 per cent compared to 68.9 per cent in 2012.

India became a member of the IMF in 1945 and since then seven loan arrangements have been made. As of March 2022, there was no outstanding loan with the IMF. In 2021, IMF had made an allocation of special drawing rights (SDR) 12.57 billion (equivalent to around USD 17.86 billion at the latest exchange rate) to India.

Table 3 shows, the total SDR holdings of India now stand at SDR 13.66 billion (equivalent to around USD 19.41 billion at the latest exchange rate). This increase in SDR holdings will be reflected in the foreign exchange reserves (FER) data, the RBI said

Conclusion

The Sri Lankan crisis is not merely an economic or debt-management crisis. It is a case of misgovernance by a group of political oligarchs of that country. Unfortunately, the IMF which has provided repeated loans to the island state has failed to bring in any discipline in the economic management of the country.

The situation of Bangladesh and India are different. Till date the debt-related economic parameters have not gone out of control.

Views expressed are personal