Hedge Funds, Private Investors Precluding Sri Lanka’s Economic Recovery, Say Experts

A group of 182 economists and experts said extensive debt cancellation is needed for Sri Lanka's economic recovery, and lenders who benefitted from charging a premium to lend to the nation must be willing to share the burden of restructuring.

New Delhi: A group of 182 economists and developmental experts have said that some of the world’s powerful hedge funds and private investors are precluding economic recovery in Sri Lanka with their hard-line stances.

According to the Guardian, this group of economists and experts include Indian economist Jayati Ghosh; Thomas Piketty, author of Capital in the Twenty-First Century; and Yannis Varoufakis, former finance minister of Greece.

They said extensive debt cancellation is needed for Sri Lanka’s economic recovery, and lenders who benefitted from charging a premium to lend to the nation must be willing to share the burden of restructuring.

In a statement, they said, “Debt negotiations in Sri Lanka are now at a crucial stage… All lenders – bilateral, multilateral, and private – must share the burden of restructuring, with assurance of additional financing in the near term.”

Sri Lanka owed $6 billion in external debt service (interest) payments in 2022, but it had only $1.9 billion in foreign currency reserves, the Washington Post reported in September last year.

External debt is the portion of a country’s debt that is borrowed from foreign lenders. These loans, including interest, must usually be paid in the currency in which the loan was made.

Amid a deep economic and political crisis, the country defaulted on its debt for the first time in history in May 2022. Simply put, it temporarily suspended foreign debt payments. Such a situation can make it harder for a country to borrow the money it needs on international markets. This can further harm confidence in its currency and economy.

Also read: Knee-Deep in Debt, Food Shortages, Depleting Foreign Reserves: How Did Sri Lanka Get Here?

The Guardian report said that 40% of Sri Lanka’s external debt stock is owned by private investors, mostly as international sovereign bonds. These bonds have high interest rates. So it means that private creditors will receive more than 50% of external debt payments.

“Such lenders charged a premium to lend to Sri Lanka to cover their risks, which accrued them massive profits and contributed to Sri Lanka’s first ever default in April 2022. Lenders who benefitted from higher returns because of the ‘risk premium’ must be willing to take the consequences of that risk,” the statement said.

Negotiations to restructure Sri Lanks’s debt have been ongoing since its $51 billion default in 2022. A major element of that has been negotiating with the International Monetary Fund (IMF). However, the IMF has only agreed to provide Sri Lanka a loan if they are confident that the country’s debts are sustainable.

The group of economists and experts fear that hard-line stances of private creditors could lead to a poor deal for the country.

Debt Justice, a campaign group, said that Sri Lanka is one of the many nations that have defaulted on or are seeking debt restructuring as a result of the COVID-19 pandemic. Other countries that suspended external debt payment include Lebanon, Suriname, Ukraine, and Zambia, with the newest addition being Ghana.

“With global interest rates increasing and widespread recessions expected in 2023, many more countries could follow”, Debt Justice said, also noting that two-thirds of the lower-income countries were vulnerable to a debt default.

The statement of the economists and experts also said, “The Sri Lankan case will provide an important indicator of whether the world – and the international financial system in particular – is equipped to deal with the increasingly urgent questions of sovereign debt relief and sustainability; and to ensure a modicum of justice in international debt negotiations.”

“It is, therefore, crucial not only for the people of Sri Lanka, but to restore any faith in a multilateral system that is already under fire for its lack of legitimacy and basic viability.

Also read: India’s Dilemma on Sri Lanka Is Playing Out Again

Andy Mukherjee, a Bloomberg Opinion columnist, in December, had written that Sri Lanka’s suffering may not end soon as debt restructuring has become an exhausting exercise for troubled nations as some investors mount legal challenges. The delay in resolution of sovereign crises is increasingly a norm, he noted, giving an example of Argentina’s economic situation.

Reuters had reported in June last year that more than 30 asset managers – including Amundi Asset Management, BlackRock and Morgan Stanley Investment Management – which hold Sri Lanka’s international bonds, formed a creditor group to start debt restructuring talks with the island nation.

The country’s bilateral creditors include China and India. Sri Lanka owed Chinese lenders $7.4 billion by the end of 2021, Reuters reported, citing a research report. This is 52% of the bilateral debt, and a fifth of Sri Lanka’s public external debt.

However, the Bloomberg Opinion columnist noted that neither Beijing nor New Delhi wants the other to extract more financial or geopolitical mileage out of the crisis.