Samagi Jana Balawegaya warns against counting foreign loans as part of forex reserves

Harsha De Silva

The Samagi Jana Balawegaya (SJB) has cautioned the Wickremesinghe-Rajapaksa government against counting loans received from the International Monetary Fund (IMF), World Bank and Asian Development Bank (ADB) as external buffers as they have to be paid back.

SJB MP Dr. Harsha de Silva said loans secured from whatever sources weren’t earned reserves.

The former UNP State Minister and economist said so when we sought his opinion on the government declaration that with the IMF second tranche amounting to USD 337 million and World Bank’s USD 250 million loan official reserves were expected to pass USD 4 billion by end of next week.

The President’s Media Division (PMD) said that this figure was much higher than expected.

The PMD issued the statement hours after SLPP leader Mahinda Rajapaksa, in a statement issued to the media declared that USD 10,000 million in new ISBs borrowed between 2015 and 2019 broke the back of our economy.

The former President found fault with the Sirisena-Wickremesinghe administration.

The SJB MP said: “Generally, the net international reserves refers to gross usable reserves less short term drains. Now this is where the lies of the Rajapaksa regime led to a false sense of security on usable reserves.

Why did Foreign Minister Ali Sabry, PC, announce on April 12, 2023 that the government was unable to meet two external debt payments amounting to approximately USD 200 million even though former CBSL Governor Ajith Nivard Cabraal had claimed we had some USD 1.6 billion in reserves?

Truth is the government apparently had only USD 20 million of usable reserves and not USD 1.6 billion The USD 1.5 billion Chinese currency swap was not usable due to restrictions on imports cover.

So if usable reserves have now increased due to import cover restrictions being met and the Chinese money is available for then one can say we are in a better place in terms of buffers.”

Commenting on funds received from various sources, the MP questioned the continuing practice of counting loans, whether from World Bank and ADB as external buffers.

That is not the ideal. Because these need to be paid back and not earned reserves. Fact is most countries count such long term loans as reserves.

But there again the Rajapaksa was misled that when they lost the election in Jan 2015, USD 2.2 billion were short-term swaps and another USD 3.5 billion consisted of ‘hot money’ meaning foreigners investing in Treasury paper having converted USD in to LKR which could be reversed immediately depending on interest rate movements.

So of the then USD 8.2 billion forex reserves almost USD 6 billion was not stable. That is why counting short-term swaps and hot money is misleading.

In fact, converting these large unstable reserves into long term reserves amounting to close to USD 6 billion is a major reason beyond rolling over some USD 5 billion during the Yahapalana government that saw large-scale borrowings through ISBs.

At the time Gotabaya Rajapaksa came in, reserves consisted of less than USD 1 billion in such unstable reserves, down from almost USD 6 billion.

Also given 2020 was an election year the CBSL had borrowed an additional USD 2.9 billion in ISB preparing for any potential market risk.

In fact, if not for this move of building external buffers Sri Lanka would have gone bankrupt much earlier after that the government made serious policy blunders.

As we all now know, the government kept using the reserves to pay back foreign loans after the country was downgraded by the rating agencies and doors to the international capital market were closed.

On the other side of the equation is the amount in short term drains, meaning the total amount of USD debt that needs to be paid by the government in usually one year.

So, if the government is comfortable on both counts then it’s ok to be a little confident.

I don’t have the numbers to make that call. Having said that I must reiterate that ultimately it’s earned dollars not borrowed dollars that really matter.”

(Source: The Island)