Brace ourselves

Several weeks ago I posted how the 18Jan2022 International Sovereign Bond (ISB) of Sri Lanka had a whopping annualized Yield to Maturity (YTM) of over 450%[4] after Fitch Ratings (FR) downgraded Sri Lanka's Long-Term Foreign-Currency IDR from 'CCC' to 'CC' [*] . A rating of 'CC' means that according to FR Sri Lanka has very high levels of credit risk and default of some kind appears probable [*] .?

Two days ago the GoSL issued a statement saying that it has allocated $500 mln for the repayment of the bond [*] . Today on Bondsupermart the GoSL ISB YTM is down to 113%[*] . Sri Lanka's foreign reserves stood at USD 1.6 billion as at November 2021, but now has increased to USD 3.1 billion after the government entered into various swap facilities with other countres [*] .?Once it pays the January bond and other expenses the reserves will deplete again. However, current Central Bank Governor, Mr. Ajith Nivaad Cabral has never been worried about this[*] .

Parliamentary MP and member of the Opposition, Dr. Harsha de Silva , who has a Phd in Economics seems to think there is some foul play, and some people were able to make a killing in the bond market using the 18Jan2022 ISB at the expense of Sri Lankans. Dr. de Silva's twitter account is all about this at the moment [*] .?

Harvard and Oxford educated Dr. Nishan de Mel , CEO of Verité Research a leading think tank in Sri Lanka, which is also the company that maintains the websites www.Mantri.lk , www.factcheck.lk and EthicsEye (media ethics), has been giving several interviews[*] since last year where he asserts that the GoSL need not, infact should not, pay the 18Jan2022 ISB. Instead Dr. de Mel says Sri Lanka should have entered into a pre-arrange restructuring of the repayment, like Ecuador and Argentina did. That way the bond holders will not be out of the pocket but will have to wait a bit longer, and Sri Lanka can utilize its reserves to pay for much needed items instead of the bond. At the moment due to the lack of foreign reserves banks are unable to open LCs for companies, and companies are unable to import essential raw material and components to continue their businesses. Dr. de Mel also asserted that paying the 18Jan2022 ISB will infact worsen Sri Lanka's liquidity and solvency problems, and will not improve the country's credit rating, as more pressure will be put on the next ISB in line to mature on 25Jul2022.

The inability to open LCs has also lead to a food shortage[*] and a gas shortage[*] in Sri Lanka. The food crisis in Sri Lanka has been further compounded by the current GoSL's decision to use 100% organic fertilizer and ban the use of chemical fertilizer [*] .?The BBC recently showed a video on Sri Lanka's food crisis, where the people interviewed claimed that they had to reduce their meals to just two meals a day.

According to many economists a default is imminent. If a government allows a sovereign default to take place, and not take measures to mitigate it, e.g. by restructuring the debt in an orderly and timely manner, that will have severe long terms issues. A country in default means an already economically imporveished country. Borrowing will be more difficult. Also the costs and terms will be largely unfavourable [*] . The World Bank says that this year more than 500,000 Sri Lankans have fallen below the poverty line[*] , i.e. people living on less than USD 3.20 a day.

So how is the Government of Sri Lanka currently managing despite the lack of foregin reserves? It does so by restricting imports[*] , restricting foreign currency payments[*] , entering into currency swaps[*] , settling foreign debts by other means[*] , increasing its debt to China[*] , and printing money at record levels [*] to pay the state employees who demand higher wages citing cost of living (COL) increases.?The vicious cycle has set in.

To window dress the reality, banks are forced to covert LKR to USD at the Central Bank (CB) mandated rate of circa 1 USD to 200 LKR, even then only for a limited range of fx payments. Meanwhile in other fx exchange markets a USD is sold at LKR 245. The USDT in Binance is currently trading at LKR 240-245. Foreign wage earners who remit money to Sri Lanka hence are compelled to use means other than the SL banking system to convert their hard earned fx to LKR. As a result this has caused a further depletion of inward remittences of forex into the country. Who wouldn't circumvent the SL banking system when you can get 20% more for a USD than what the banks are compelled to pay? The Labour Ministry of Sri Lanka is currently mulling matching this rate[*] .

The official inflation rate in Sri Lanka reached double digits (12.1%[*] ) in December 2021. The average deposit rate is 5-7%. So, the real return for LKR savers is negative. Some economists say that the real inflation is close to 20% citing the increase in food and fuel prices[*] . So money as a store of value[*] , is no longer applicable for the LKR.

As a result, some Sri Lankans are parking their money in stocks, real estate, vehicles, precious metals/gems, and even crypto. The Colombo Stock Exchange (CSE) is at an all time high[*] at the moment with companies earning in USD (e.g. EXPO Lanka) seeing their value go up by 8-12x.?

Yet other Sri Lankans are migrating overseas[*] for employment in record numbers. The brain drain of young professionals has serious negative ramifications for Sri Lanka. Foreign employment consultants are currently advising young professional couples to migrate to Australia, UK, US or Canada by one spouse applying for a student visa to read for a 2 year masters degree which then allows the other spouse to obtain a work visa. The D7 residency visa offered by Portugal, an EU member, has appealed to several Sri Lankans with migration agencies promoting the visa amongst middle aged professionals[*] . In order to retain local talent several local IT companies have offered to peg their employees' salaries to a foreign currency[*] .

I personally think Sri Lanka is now too far down the rabbit hole to make any changes relating to its liquidity and solvency crisis. We now need to brace ourselves . Those of us who remain here will have to adopt quickly, and look for opportunities amidst the impending chaos. For the young professionals, I say use the plethora of learning opportunities that have been made possible through the internet and the generosity of leading universities and educational institutes (Coursera, Edx, Udacity, Udemy, Khan Academy, etc).

Speaking of education, education in Sri Lanka has been a big but scattered business. I foresee a major overhaul. The current state sponsored education system will be forced to evolve due to the lack of funds to maintain this extremely costly free education system. Costly because we can only effectively teach less than 10% of the young (6-23) population for free - the opportunity cost of the un/undereducated masses is staggering. Sadly the focus has always been on giving education "free", albeit to a very limited number of students, instead of teaching the most number of children (and adults). No one in the ministry of education seems to have studied about the theory of the efficient frontier .

Serial entreprenuer and Sri Lanka's top 1-2 richest people, Mr. Dhammika Perera is gearing up to revolutionize the Sri Lankan education sector with his currently free DP Education channels and compilation of education links. He will perhaps spin his DP Education as a Sri Lankan BYJUS . Schools in Sri Lanka are now reopening, but it seems that even after two years of forced locked down, there is no change, with schools trying to revert to pre-covid ways.

The other thing I recommend all young Sri Lankans to do is improve their English language skills. There are plenty of free and high quality resources available. Also learn about how to develop a Growth Mindset and a positive psychology . These are not just buzz words. There is hard science and research behind it. Sri Lankans are some of the smartest people in the world, Jeff Bezos said so[*] and so does the Stanford University[*] . An educated Sri Lankan who can communicate effectively with the world possessing a positive mindset is an unstopable force.

There have been some videos circulating in social media asking young Sri Lankan professionals not to leave the country. I won't sell that dream. Infact if you can go overseas to work or learn, go. Getting overseas experience helps broaden your vistas. However, don't leave with a sense of disgust towards Sri Lanka, but go with a sense of determination to return with more resources and capabilities.?Even consider starting a venture that links Sri Lanka and your new home country. That's what I did. Think global.

The services (e.g. hospitality, IT, health) and the export sectors will be forced to take the lead in reviving Sri Lanka's economy. Our harking to return to a self sufficient agrarian society may never come true. I personally don't think we should aspire for that in a global economy. People talk about how Sri Lanka once was self sufficient in agriculture during the reign of ancient kings. Those who love to tell this tail omit the fact that back then the population of Sri Lanka was several hundred thousand and not 22 million. Those who visit Sri Lanka's ancient cities see the ruins of palaces, temples, and the odd hospital, but the huts where the common folk lived during these self sufficient periods have long turned to dust. Context is important. Instead Sri Lanka would be better off planting more of the highly prized rare plants with value additions for the export market. Deshabandu Kumar Dharmasena's Argarwood Plantations[*] , and former Brandix CEO Udena Wickramsooriya's [*] Kelay Tea venture come to mind, and there are many others. Also home gardening should be encouraged. There is something therapeutic working with soil, plants and hands, and something satisfying eating a fruit or vegetable oneself has grown.

The impending turmoil will happen, and it will be tough. However, if it forces Sri Lankans to innovate, learn, and no longer be dependent on subsidies and hand outs, then the struggle we will have to go through will be worthwhile. If on the other hand it leads to social turmoil then we are in for a long downward spiral.

Finally, whatever lays ahead of us, let's ensure that we always treat each other with kindness, have an attitude of gratitude even for the smallest thing, be truthful to oneself and others and do our duty well.