Sharing the pain
This week saw macroeconomics playing out with economics at the micro-level. On the one hand, the Government was confident enough to take another bold step to reset the country’s debt-ridden economy with a Domestic Debt Optimisation (DDO), also referred to as a DD Restructuring programme, at the macro-level, hand-in-hand with a somewhat revised but eventually botched attempt to identify the poorest of the poor – millions of them, who needed to be provided a ‘safety net’ to protect them from the travails of daily life.
The DDO comes in the wake of moves to restructure foreign debts. Those creditors abroad are, supposedly, calling for the locals to ‘share the pain’ in taking ‘haircuts’ (a reduction in what they expect in return for what they have lent to the Government in one way or another). The IMF is not officially calling for DDO, but doing the same thing by asking the Sri Lankan Government to meet its targets like evening out the debt-to-GDP ratio, allowing the Government to find the ways and means of meeting such revenue targets. How the Government gets to those targets is up to the Government. And clearly, the Government finds tax collections and similar revenue collection avenues domestically insufficient.
Basically, DDO means to reschedule the maturity dates of government securities like Treasury Bills and Treasury Bonds which banks and individuals have purchased, to make repayment thinner, and something technical called a ‘coupon rate’ which is to reduce the borrowings. The Opposition was taken off guard, especially as the Central Bank initially said there would be no DDO. Some compared this denial to Russia’s early insistence that it would not invade Ukraine!
It was only when the President contacted the main Opposition and the details spilled out through social media thereafter, Parliament was to be summoned this weekend to pass the DDO framework and the Government on the advice of its international financial advisor simultaneously gazetted last Friday to be a special bank holiday to avoid ‘market volatility’ (to prevent anticipated sharp price movements fearing a run on the banks like in Argentina), that there was excitement.
The fact that the Central Bank and the Finance Ministry kept their plans close to their chests and that the general public couldn’t understand the macroeconomic elements involved, averted matters spilling onto the streets.
What spilled onto the streets however, was the ‘micro-economic’ issue of the social welfare programme now called ‘Aswesuma’ (comfort or solace) – the poverty alleviation scheme aimed at providing a monthly ‘dole’ from Rs. 15,000 per household to the poorest of the poor to Rs. 2,500 for those slightly better off.
A quarter of Sri Lanka’s 22 million population are poor people, doubling from 13.1 percent in 2021 to 25 percent, according to the World Bank and therefore entitled to this scheme. The Government wants to streamline the recipients as political interference in the past resulted in thousands who were not entitled to welfare benefits receiving them. Untrained enumerators resulted in scores being left out of the initial list, while those not entitled seem to remain.
Provincial offices of the Government were stormed all over the country demanding redress. The Opposition asked for a scientific methodology like ascertaining incomes by going through electricity bills etc., while the former Army Commander turned MP asked a pertinent question; whether Governments like to keep people in eternal poverty for their political purposes through these schemes.
The people have come to accept this handout as an entitlement, a right they must be given while doing little to lift themselves up from poverty – an ingrained dependency culture. Others more sympathetic ask how could they lift themselves up out of poverty in this overall economic environment which has to lift itself up first.
“Sri Lanka has become a test case for how to juggle the challenge facing many low and middle-income countries,” says the UK-based Financial Times as the Government commits itself to a USD 46 billion DDR. Sri Lankan banks are, therefore, being asked to be treated equal to the ISB (International Sovereign Bond) creditors. The Central Bank Governor says the DDO they envisage keeps out the commercial banks and only the Central Bank will take the hit to its Balance Sheet.
The President has assured that the EPF and ETF funds of the private sector ‘pensioners’ will be untouched. These funds were initially invested in private banks and the share market by an adventurous Central Bank Governor who convinced the political leaders of the day to have their own appointees on the boards of these private banks. This decision has come home to roost today as these funds are vulnerable to the economic reforms at play.
It is a fact that the country at large has realised now; that no Government can continue borrowing, printing money and absorbing huge losses by state enterprises. The day the banks go down and collapse will be the end of the story. According to the Finance Ministry Public Debt Summary for 2020, the Government has borrowed Rs. 15 trillion from local banks. Out of Sri Lanka’s combined public debt of USD 83.6 billion, the Central Government has borrowed 76.9 which is 92 percent of it.
Banking analysts say that DDO is not a choice, it is inevitable. And that the current framework is not enough to make a significant difference. DDO may not impact the poorest directly, but it will do so indirectly if it is not successful and the country slips down further with not only its second tranche from the IMF in September in the balance, but so too the long-term health of the economy.
These economic reforms will need to extend for many years to come for favourable results to be seen. This may be only phase one of the DDO. The question every citizen asks, however, is; why are the twin ‘untouchables’ – the ten big debtors – the big boys, the local Robber Barons, who have borrowed multiple billions from local banks and not settled their loans but who continue to laugh all the way to the banks are not touched; and is it because of their political connections. And why those responsible for the country’s economic misery are issued with a ‘Get out of Jail’ card as well?