 So hello and welcome to this online Lowy Institute panel discussion. My name is Roland Radar and I'm the lead economist at the Lowy Institute and the director of its newly established Indo-Pacific Development Center. Before we begin, as we are based in Sydney, Australia, let me take a moment to acknowledge the traditional owners of the land on which some of us are joining from here today and pay my respects to their elders past, present and emerging. Today we are discussing the ongoing debt crisis in Sri Lanka and what might be the way out for the country. Numerous developing countries around the world are grappling with severe debt problems, but Sri Lanka's crisis has been amongst the most acute and visceral, triggering significant social unrest and political upheaval. The crisis is ongoing and yet to be resolved, so I'm glad to say that we have assembled an excellent panel of experts to step through all the issues involved. First is Dr Indrajit Kumaraswamy. Dr Indrajit Kumaraswamy is one of Sri Lanka's most respected and experienced economists and former policymakers, most recently serving as the governor of the Central Bank of Sri Lanka from 2016 to 2019. Next we have Brad Setzer of the Council on Foreign Relations based in New York. Brad is one of the world's most prolific but also insightful commentators on international economic issues and a guru on sovereign debt issues in particular, so it's great to have him with us as well. And finally, we have my colleague, Marisa Kurei. Marisa is a research fellow in the Low Institute's Indo-Pacific Development Center and, among other things, has previously worked as a macroeconomist with the World Bank, covering Sri Lanka and the Maldives. So, Marisa, Brad and Dr Kumaraswamy, welcome and thank you for being here. Marisa, if we could start with you to kick us off, just what's the basic story of the crisis playing out in Sri Lanka, and this your version of what's going on and what's the current state of play? Thanks, Roland. Well, Sri Lanka's growth trajectory and overall debt trajectory is a very interesting and complicated story. So, I'll just summarize what's happened in the last two decades also very quickly, but Sri Lanka graduated as a lower middle income country in 1997 and then became an upper middle income country in 2019. Between those two, sort of that, between that window, basically, Sri Lanka's concessional financing, you know, obviously went away largely and Sri Lanka had to borrow in the private capital markets and also at high interest rates with bilateral creditors. So, you know, in the background, obviously, we have the war, the conflict that began in the 80s and, you know, sort of ended in 2009 with, in May 2009. So, you know, a lot of us actually lived through that conflict. One of the things that Sri Lanka started doing after the war is to aggressively expand on its infrastructure by borrowing and, you know, there are those that say that, you know, some of these white elephant projects are sort of what led to Sri Lanka's debt crisis. But, you know, in the reality is that even though Sri Lanka became upper middle income country in 2019, in July 2019, you know, they haven't really seen much of the gains and, you know, some say that, you know, they are sort of stuck in a middle income fact, so to speak. Following, you know, there was a east, there was a, we would call it the Easter Bomb, but there was a bomb in April 2019. And, you know, a lot of sort of people sort of speculate that that led to the election of the Rajapaksas sort of coming in. Gotabaya Rajapaksa was elected in November 2019. And, you know, with and then 2020, of course, was a very difficult year with the pandemic. And Sri Lanka really, you know, struggled like a lot of other countries. Sri Lanka's debt crisis really, you know, Sri Lanka should have gone to the IMF by 2019 because there were visible signs of debt distress from 2019. You know, they had issues making repayments on ISPs. And I think the central bank had to sort of play a supporting role in that. 2021, Sri Lanka was trying very, very hard to continue to service debt at all, despite all odds and at the expense of essential social and human development spending. And then we have 2022, which was arguably the most fraught and difficult year for a lot of Sri Lankans. For all of Sri Lanka, politically, economically, people had to face, you know, very long power cuts, full shortages, people were unable to go to work, which obviously full shortages led to no public transportation in some months or very little public transportation. And so in April 2022, Sri Lanka basically began its debt moratorium. And that's when the news media internationally sort of picked up and then Sri Lanka sort of became one of the first countries in South Asia to actually default on its debt. And so that was sort of, sort of in recent history. And so that was sort of, I would say, that made the headlines. And despite all, so I think people were sort of protesting from March 2022, but those protests gained momentum, because there was a sense of dissatisfaction with the regime. And people were hungry, food prices had gone up, inflation were at record highs. And so basically, I think we have the June and July protests were very, very difficult. The Prime Minister resigned, that was the President's brother, he resigned. And then you have sort of the protests taking over to such an extent that it sort of became a revolution in a strong sense of the word. And in August 2022, Mr. Gotabeya Rajapaksa sort of fled the country. And then shortly after that, we have kind of a veteran politician and veteran Prime Minister elected as the President, Mr. Ranil Vikram Singh. And ever since then, you know, there obviously was then an overt push to get in the IMF, even though it was a delayed reaction, it was still very much the only option that Sri Lanka had. And then, you know, in the IMF, I think they started their discussions sort of in the third quarter of last year. And then we got board approval for the EFF in, I think, March of this year. And so far, Sri Lanka has been tracking very well. And of course, I think later in the discussion, we can talk about some of the preconditions and some of the structural benchmarks that Sri Lanka will be working towards. But so far, Sri Lanka is doing very well in terms of meeting the IMF conditionality. Yeah, I think that's fair to say that there are still quite a lot of risks. I think that the key risk is really the local elections. They keep getting postponed. And I think there's a lot of concern from NGOs and also from Sri Lankans that the rule of law and democracy need to be upheld, even in an extreme crisis such as this. So I think there's definitely concern that the elections are postponed. I think the reason is that, you know, there's obviously, it's expensive to have an election. It's expensive to print ballot papers, etc. So so I think that's probably why it's been postponed indefinitely. But as I said before, Sri Lanka is tracking very well. Thank you, Marisa, just for bringing us up to date in terms of what's happening and flagging that, you know, it's a debt crisis, but it's also humanitarian, social and deeply a political crisis as well. Dr. Kumar Aswami, if I can turn to you, just to sort of give your version of how Sri Lanka has come to this point. I mean, obviously, you've been involved in policymaking in Sri Lanka for a very long time as a, you know, observer, commentator, contributor. How is it that Sri Lanka has come to the position that it's in? What do you see as the underlying drivers? Thank you, Roland, for having me. Let me say that if one is to talk about the genesis of the multiple crises that Sri Lanka is currently confronted with, it's instructive to separate the causes between those which are historical and those that are approximate in terms of coming into being in the last couple of years. Historical causes really are the reasons why Sri Lanka has been a twin deficit country for decades. You know, at the time of independence, Sri Lanka was second to Japan in Asia on many indicators, but we've regressed a great deal, and a major cause for that regression has been consistent macroeconomic stress, repeating cycles of macroeconomic stress. And that is reflected in the fact that the Sri Lanka has had 16 IMF programs before the current one. And we've never really been able to get the structural reforms done to pull the country onto a different growth trajectory. We've had stop-go policies around a series of IMF programs for many years. And the main cause of the macroeconomic stress has been the government's fiscal operations. And the unsustainable fiscal operations have been amplified by fiscal forbearance in monetary policy. And then you have the exchange rate being used to contain inflation. They're the very high import component in Sri Lanka's import basket. And so these essential imports tend to go up in prices as soon as you depreciate the currency. So in order to combat that, governments tend to run overvalued exchange rates. So that's another kind of mismanagement of the macroeconomic policy framework. So we had mismanage fiscal policies, mismanage monetary policies, and often mismanage exchange rate policies. So the macroeconomic management or macroeconomic mismanagement has been a primary cause of the stress that the economy has been going through in repeating cycles. So finally, how did Sri Lanka last for such a long time, 75 years since independence? In fact, Professor Joan Robinson from Cambridge, who was certainly no neoliberal, as you know, she was an expert on China way back in the 50s and 60s, she came to Sri Lanka in 1959 and said famously, you still need it was still on then, you still need have eaten the fruit before you planted the tree. And that's basically, I think that's a very good depiction of what happened in Sri Lanka. But we were able to get away with it. How did Sri Lanka go on for so long with this kind of macroeconomic misalignment that existed for a long time? And that was because of those countries that went down the religious routes, the inward looking route, Sri Lanka was the second country after Chile to liberalize the economy in 1977. Chile at that time was under General Pinochet. So the traditional donors were very keen to have a country, which had a liberal economy and a liberal quality, and to show good, demonstrate good development outcomes in that country. So they were extremely generous to us in terms of concessional assistance. We were a low income country then. The World Bank's IIDA, the Asian Development Bank's Asian Development Fund gave us a lot of concessional money. The bilateral donors gave us generous amounts of concessional money. So we were able to live beyond our means and really not take the tough measures necessary to put our house in order. But that, this all went on, as Marisa said, went on okay until we graduated from low income country status around 2010 is when it really began to make a change. And then once we became exposed to rating agencies and international capital markets, we could no longer basically behave in the way we did in the past. But that did not percolate through to the policy makers, to the politicians in particular. And we continued to behave in the same old way until we got hit very badly. Of course, the problem was building up all the time and where it kind of spilled over with the proximate causes, which were the pandemic, which was beyond our control, as is the impact of the of the Ukraine-Russia war on commodity prices, etc. But there were also some major policy mistakes, including a very large-scale cutting of taxes at the end of 2019, as well as a banning of chemical fertilizer, which had a major impact on Sri Lanka as agriculture. The cultivation of rice, which is basically the basic food item in the country, as well as our major exports like tea. So if a combination of policy mistakes and exogenous shocks coming through from the pandemic and the war has meant that there was a kind of a perfect storm, which hits Sri Lanka. And then we had the kind of multiple crisis that you spoke about, basically, essentially, debt, foreign exchange, social, all at once. But as again, Marisa ended by saying Sri Lanka has got an IMF program. And that program, there was an IMF team in Colombo last week, and they were pretty satisfied with the way the program is progressing at the moment. And their debt restructuring is being negotiated with the bilateral and commercial credit. And that is also making progress. Hopefully, we should get a deal done in the next month or two. Thank you. But there's still a lot of hard work to do, particularly to put the country on a recovery and growth path. Thank you. Thank you for that, Dr. Kumar Swamy. It's very interesting, I think, to separate those historical and approximate causes of persistent twin deficits and then a set of policy missteps that made those twin deficits far worse, exactly when a bunch of very large shocks were coming through on the external side. I mean, it's also noteworthy what you say about the role of the international community in financing Sri Lanka historically in terms of, I guess, the incentives were reformed that that ultimately seems to have set up in the story that you tell. And now, as you know, the new source of external financing has been China. Theoretically, they say that comes with no strings attached in terms of at least economic policy settings. But obviously, it's attracted a lot of attention and debate. Just wonder if I can draw you on that. What's China's role being in the genesis question of this crisis? Well, in my view, the narrative that Sri Lanka got caught up in a Chinese debt trap does not stand up to much scrutiny in the sense that total Chinese debt counts for about 10% of our total external debt, which is just a little less than Japan. We owe Japan and certainly less than what we owe the World Bank and the Asian Development Bank. The terms are somewhat more tighter as far as borrowing from China are concerned, but much of it is still on concessional terms, not as concessional as the multilateral money and some of the bilateral money, but it's still on fairly concessional terms. So it's unfair to say that there is some kind of Chinese debt trap which Sri Lanka fell into, but it is fair to say that the quality of the projects that the Chinese loans financed did not earn or save enough foreign exchange to service that debt. So to some extent, the fault has to be on us and the Sri Lankan side, because we did not screen the projects well enough to make sure that they would provide us sufficiently high return to be able to sustain that debt and also be allowed political considerations to drive the loan giving, both on our side and China, I guess, also played along with it. And that is where the real problem is that the poor quality projects and probably also quite a lot of corruption around those projects where both sides benefited from the corruption. All that was a pretty toxic mix, but you can't put the debt crisis down to that really, because as I said, the debt crisis has a long genesis and then we've had a number of exogenous factors plus policy missteps that all came together to cause the debt crisis. But the Chinese debt, as I said, real problem is the quality of the lending. We and the Chinese, I think need to learn lessons in terms of making sure that projects that are financed by these loans can generate sufficient returns for the country to be able to service for them. Thank you for that. Brad, can I bring you in here any comments on what Dr. Puma Swami and Marisa have already said, but also you're one of the few people that's really into the weeds of the whole debt restructuring process. So your view is also on how that seems to be going. Sure. Well, I agree with much of what has been said so far. I certainly would also point to the large tax cuts in 2019 as an important immediate cause of the crisis. Sri Lanka was looking pretty bad on a range of debt indicators when the pandemic struck. And I also would highlight that the quality of China's project lending wasn't what it should be for various reasons. But you look at the numbers and that's 5 billion of Sri Lanka's debt, international bonds are 13, and Sri Lanka also benefited in the short run from being able to access bonds when the bond market, when rates were low for long in the advanced economies, when investors were looking for yield, but what didn't put itself in a strong position to handle the risk that came with that surge in lending. And you really just can't rely on the international bond market, cut taxes, and go through several years when you're collecting 10% of GDP and revenues, less than 10% of GDP and revenues, when your fiscal deficits were over 10% of GDP. I mean those kind of numbers just scream unsustainability. What I would add though a little bit is that in 2020 and again in 2021, the China Development Bank came in with a sizable not enormous fiscal support loan that prolonged Sri Lanka's effort to keep paying and dug Sri Lanka in my view into a bigger hole. And so I do fault both Sri Lanka and China for not biting the bullet back in 2020 or certainly in early 2021 when it was clear, clear that Sri Lanka was not in a position to repay all of its international bonds and fallen on time. It took out loans from China to basically pay back the bonds to pay back some of the loans to China and really depleted almost entirely Sri Lanka's foreign exchange reserves in the process. And that left Sri Lankan in a horrible position when it ran out of money in 2022. It really had to rely on squeezing the Sri Lankan people and help from India at that time. Happy if Dr. Karmaswamy wants to jump in. No, no. But he wants to finish right. So now in Sri Lanka did strike relatively quickly a deal with the IMF. It took a long time to go from the deal with the IMF to actual IMF lending because of some difficulties I think securing financing assurances from China. That's been a fairly typical problem actually for countries that fall into default on both their bonds and on the Chinese project and more fiscal lending. Zambia also had to wait a long period of time. But China did finally give its consent, allowed the IMF program to go forward. And I think my main concern right now is a little bit less on whether Sri Lanka is delivering on its commitments, it seems to be. But a little bit more on what I think the IMF didn't do sufficiently, which is to set out parameters for the debt restructuring that actually require real concessions from the predators. The actual constraints on Sri Lanka are not that tight, not that binding in comparison to the constraints on say Zambia or some of the other cases. The debt to GDP criteria is 95% debt to GDP, which is quite high for a lower middle income country, a country with this level, with this history of fiscal deficits and lack of revenue. And the constraint on foreign currency debt service, which wasn't a constraint on the actual interest you can pay was a much looser constraint because the way it was defined is 4.5% of GDP. If that's all structured as an interest payment and doesn't include a pay down of principle, that's also a pretty hefty burden. So I worry a little bit that Sri Lanka is not being set up to succeed because it may emerge with more debt than it can sustain, even if it meets the IMF criteria. We can discuss why, but I do think that is an important unresolved question. Why did the IMF provide relatively undemanding to the creditor's criteria? But I think it was also a puzzle because the criteria don't seem all that demanding, and yet it still took six months to get China's financing assurances. So I think there's, to a degree, a generalized difficulty of getting agreement from a more diverse set of creditors, even when there's a debate about whether creditors are being asked to do all that much. Yeah, it certainly seems that the parameters that have been proposed by the IMF package don't leave much in terms of a safety buffer, in near term or indeed maybe in the long term, given the targets that have been set. Dr. Kumar Swami, though, you wanted to come in on something? Yes, not really to basically reinforce what Brad said about the delay in going to the IMF, because back in 2021, I think it was about April or May, Sri Lanka applied for assistance on the IMF's rapid finance initiative. I think over 90 countries were assisted through that facility that was initiated to support countries at the time of the pandemic. But that support did not come, and there was no real explanation given by the country or the IMF. But the reason was, I suspect, is because the IMF decided at that time itself that Sri Lanka's debt was unsustainable. And therefore, once the country's debt is deemed unsustainable, they're not able to transact with the country. So it was clear that there was a problem. So we would have known from that time there was an issue on the debt side. So to wait for two years, pretty much two years after that, clearly compounded the problem. So that's one thing I think that Brad was very right. We could have gone much earlier. That could have meant that the problem would have been a far lesser problem to resolve. But because of the pre-existing vulnerabilities and the COVID and the other factors, we probably would have had to restructure on that anyway. But it would not have been quite as onerous as it is now. As to whether Sri Lanka's the parameters the IMF has set are too light or not, I know it's interesting that something like 59 or 60% of the countries that go in for a debt restructuring end up having to go again. So I certainly hope Sri Lanka is not in that category. But one thing that perhaps could work in the after I say, Sri Lanka's favor is the growth assumptions in the IMF projections. They basically project contraction of 3% this year, then there is no growth next year, and then 3% growth over the subsequent five, six years of the 10 year time span. The Sri Lankan economy has the capacity to grow faster than them. If we do the stabilization right and do some of the structural reforms and also given what's happening in India in the neighborhood and the kind of opportunity that are likely to come up for us to be piggyback on to some of that, we can grow at 4-5%. So as you know, once the growth number comes out better than anticipated in the IMF program, that makes a very big difference for the sustainability of all the all the matrices kind of change in a positive direction. That's a very good point to make. Marisa, I might bring you in on this now looking forward in terms of, you know, the way out of the current situation and the adequacy of what we're seeing. I mean, Dr. Kumar Swamy says, you know, you need the debt restructuring, you need the stabilization, you need better fiscal macro settings, but then also you need to generate economic growth. So there's actually, there are a number of components who the set of policies and requirements to get out of this crisis. What's your view on the package and the sort of strategy that's currently on the table? Do you think it provides that kind of basis? Thanks, Roland. Look, it certainly provides a basis, but I think the government still needs to have a cohesive strategy in terms of how it takes the IMF conditionality and how it takes, how it views its growth in the medium term and what it plans to do in terms of growth-centric reform. And I think the package certainly is a stabilization package, right? It's not going to mean that Sri Lanka doesn't go to the IMF again. And, you know, like Brad rightly said, the performance criteria is relatively undemanding, right? So I think that's definitely there. But the only comment I would have to add there is that the level of political instability. And I think also when IMF was initially sort of doing its appraisal, there was also a lot of social instability and that's still ongoing, but not at the level that it was last year, right? So in terms of the package itself, the, you know, preconditions as well as the quantitative criteria and structural benchmarks are all, I think, pretty fair. I think there are risks though that the government may not be you know, consistently committing to all of the reforms. My concern is really on the central bank act, you know, that needs to be debated in parliament and approved in parliament and it needs to get go from the parliament. And that's not happened as yet. I think the discussion on that was delayed. So I think that's one of the conditions that have not been met as yet. The other thing is that from the point of Sri Lankans, there's still, there's a lot more information than there was, you know, say, on what Sri Lanka is doing actively to meet the IMF conditionalities, but there's still relatively some unknowns, you know, and I think, particularly on the monetary side and also on the fiscal side, there's still a lot of room for improvement. And I think Sri Lanka is going to start, you know, there are commitments to obviously improve the level of transparency in terms of information sharing on how Sri Lanka is meeting its conditionalities on the EFF. So it's a work in progress. But I think on the EFF itself, it's quite fair. And I think the only thing I would add is that there are so many unknowns in terms of the political and social space of the country that there and also, there's really no margin of error because there's no, there are really no buffers, right, as such. So if there's a natural disaster or something, you know, I guess the IFIs would have to sort of swoop in to support Sri Lanka because Sri Lanka really doesn't have the ability to be able to defend itself in an emergency, so to speak. Very, very good. Dr. Krimraswamy, I wanted to sort of ask you to specifically on the reform side of the equation rather than the debt restructuring side of the equation. I mean, I think many of these reforms have been things that either have been talked about or recognized for some time. So what's the, you know, what will this time be different, so to speak? You know, what's the chance of success on the reform front in your view? What will it take? And the other element is that the deeper structural reforms, governance and in terms of generating economic growth. From my reading, that seems to be something that has sort of been said largely, we'll specify that later, we'll work that out later, that's still to come. But any views on what that needs to do as well? What needs to be in the mix there? So yeah, as Marisa has said, the stabilization program has, you know, gone pretty well. You would be seeing inflation coming down, interest rates are coming down, the exchange rate has been appreciating. But it's important to point out, though the stabilization has been very positive, that it has been done at a lower level of equilibrium. It was done when the economy shrank by 8% last year. And it's projected to shrink 3% this year. So it's not difficult. I mean, it's not easy, but it's easier to stabilize if you're, you know, stabilizing at a much lower equilibrium. So what we need to do is to have stabilization when the economy is going 3, 4, 5%. So that's where we need to get. And that cannot be done through, you know, tightening monetary policy, tightening fiscal policy, adjusting the exchange rate, and then it's helpful. But you really need to have these structural reforms that are going to strengthen the growth framework in the economy. And we've talked about those for many years, but have not really, you know, been able to implement them. Because, for instance, the investment climate, the investment promotion needs to be more focused. The trade policy, trade agreements need to be worked on. In fact, now the president is saying that we are resetting ourselves to kind of benchmarks. One is ASAP. And the other is the success of the TPP that he wants to make sure that the reforms are embedded by us working to join those two trade agreements. If that is possible, if we achieve that, that would be transformative. But there's a long way to go to get there. So trade policy is another area, education, training, and skills development. So the whole, really the whole spectrum of the development challenge needs to be worked on to make sure that the country gets up to a higher level of growth on a sustained basis. Now, what is concerning is that in the previous assignment program, while we'd managed to do the stabilization quite well for a period of time, then, you know, the electoral cycle would come to an end. And as elections approach, even the stabilization, you know, fell apart. But that structural stuff never really got done. Because the payoff usually takes more than one electoral cycle. And, you know, politicians don't see it in their interest, do tough things to improve the, you know, the structure of the economy. This time around, if we don't do it, we're going to be stuck in this low-level equilibrium. And if we keep, if the economy keeps contracting, the social problems are likely to exacerbate and exacerbate very seriously. So that has to be done. And my fear, the risk to all this is because elections are approaching next year. Historically, when elections approach, we have real, real falling away of discipline. So that is what we have to avoid this time. That risk is there. The politicians need to be focused on doing it all very differently this time. I hope that message has got through. Brad, did you want to come in on any of that in terms of the structural reform side of the equation? Maybe less the structural reforms and more just to reinforce that, you know, the IMF program, like all IMF programs assumes that Sri Lanka will meet its primary surplus requirements. And you can view that assumption as very optimistic in reality. There are some possibilities of slippage there. And that is a real challenge, as Dr. Kumaswari says, highlighted. Sri Lanka doesn't have a history of sustaining primary surpluses over time. I think that, you know, I personally prefer to have an IMF program not be built around a growth miracle. A lot of times debt restructurings fail, programs fail, because there's an excess of embedded optimism. So having a more realistic growth baseline that implicitly assumes some kind of future shock. So you're not always growing at your full potential. I think that's prudent. But there is this underlying risk that with this higher level of debt, Sri Lanka has no choice but to maintain a primary surplus over time. And that's not something that is, the one would say is consistently demonstrated in Sri Lanka's past history. That's a very good point. And I think not only growth and the surplus settings, but the IMF program is premised on quite significant revenue raising, not just reversing tax cuts, but revenue administration, which is obviously much more complex and uncertain. And maybe not wise to strictly bent on for the success of debt restructuring, as you say, Brad. Maybe, Brad, we can stick with you. I mean, just turning back to the debt restructuring side of things, I think all three of you have said that things seem to be going reasonably well. But obviously, that is the central element of this crisis and the way out. Do you see that there could be potential roadblocks? What are the things that people need to watch? What are the issues that are going to need to be overcome? Some that come to mind to me is that there's this significant amount of domestic debt rather than external debt. And so how that gets treated in the debt restructuring is complex. A lot of domestic holders of that debt that would take a hit. On the private sector, there's been some positive signs from the private sector bond holders, but there are many that didn't assign the letter that said that they were willing to play ball on debt relief. And so there might be some holdouts. I wonder if there is what your views are on the risks of that. And then I still think, as I understand it, China's role is still not clear that the China Ex-Im Bank, Export-Import Bank, has provided its assurances to participate in debt relief. And that still will be part of an ongoing negotiation. But the China Development Bank that also has important exposures is considered at this point one of the private sector creditors. And so that's obviously a complicated issue. Brad, what do you see anyway as the sort of potential roadblocks from here in terms of the debt restructuring? Well, I think the IMF program parameters provide the backdrop for all these different debt restructurings. On one level, because the overall debt constraint is set at a pretty high level, less is being asked of all creditors, which should facilitate agreement. But because Sri Lanka is not a low-income country, the way the parameters have been written leaves more room for flexibility and interpretation, which in some sense creates more opportunities to pit different groups of creditors against each other. I personally would have rather had an independent constraint on external debt service, the net present value of external debt, rather than have that embedded in an overall debt constraint. So in theory, more debt relief from the domestic side would allow more scope to pay a bigger yield, more future payments to private creditors. I actually don't think there's that much more that Sri Lanka can get out of its domestic creditors. There have been suggestions around debt optimization processes. The ones that make sense are designed to reduce your gross financing need, which is the technical parameter in the program, probably by using floating rate bonds, which don't have a big haircut and can be accommodated on the local bank's balance sheet, but really hitting bonds held on the local banking system never generates sustained, in my view, gains to debt sustainability. You lose on the banking side anything you think you gain. So I hope that there's a recognition that this shouldn't be an obstacle to moving forward. On the official creditor's side, again, because Sri Lanka is not a low-income country, it doesn't technically fall within the common framework. So there's actually two official creditor's committees, one which is the Paris Club in India, another which is China, which in this case is mostly China XM. I don't think either the Paris Club, which is mostly Japan or China, will actually have to take a really significant haircut. Even the concessional coupon that is implied by the IMF program, it's a little concessional, but it's not that concessional. So I would hope that there isn't a roadblock there, but we don't yet have an example of the terms that XM will accept, and they are in the first tier of the restructuring process. With respect to the bonds, the bonds are priced to be restructured. They traded into the 20s for a while, they're made, what, in the 30s, they haven't really rallied. There's an embedded expectation that there will be a bit of debt relief. And I hope that creditors recognize that. I hope Sri Lanka recognizes that, and I hope everyone can get to agreement. There's a whole that risk, but there's also a broader risk, which is that the bondholders get too greedy, frankly, when they look at the IMF program parameters, and they try to optimize their cash flows consistent with the IMF program parameters, and that leaves too big a gap between the Sri Lankan government and the creditors to get to a deal. So I worry that either Sri Lanka will give in and go up to that, or the bondholders were asked for too much, and that either way it may take longer than people hope to get a deal with the bondholders. But assuming that there is a deal that is done that is consistent with current market pricing, there is a coordination challenge with holdouts. There are multiple bond issues. Some of them have older bond restructuring language. But I also think that if Sri Lanka is well advised legally, there are ways to make reduce the risk of holdouts. Use the contractional provisions that you have. There's some technical things that make it harder after you do a restructuring for the holdouts to successfully suit a block payment on the new bonds. Do those things. And I actually think that if you can get a deal with the critical mass of the bondholders, there's no reason why you couldn't get very high levels of participation and minimize the holdout risk. So of the various risk out there, that's probably the one I worry about the least. Dr. Kumar Aswami, anything you want to add on the potential roadblocks or what Brad has said? Yeah, I very much agree with what Brad has said. And I think on the holdout, so far there's only been one. There's the Hamilton Reserve Bank, which has a 25% holding on one of the international sovereign bonds. And there's a court case going on in New York, which is still ongoing. But the government's legal advisors have reasonably confident that they can hold that off. And I think Brad is absolutely right. There is a deal to be had in the sense that within the parameters set out by the IMF, I think the bilateral deal, I think the contours of it have been shared with the Paris Club and India and China. So hopefully negotiations can start fairly soon. And on the commercial creditor side, also so far, there is a creditor group, which has been making very constructive noises so far, and all the major players are in that group. So hopefully progress can be made on that front too. The slight complication is that China is not part of the common platform of the Paris Club plus India. So there may have to be two separate negotiations with the Paris Club plus India on the one hand and China on the other hand. And then one would need to make sure that the outcomes are comparable and transparent. So one needs to work to the same outcomes on both sets of negotiations. So it's not an insoluble problem, but it makes it a little bit more complicated. I mean, and just to add to that on the private side, there's also two restructurings because you have to do the restructuring with the bonds. And then because China developed in the banks, fiscal financing is considered private. So you're going to have four separate negotiations. Not an insurmountable problem, but it's a layer of complexity. Yeah, complication. Yes, absolutely. And I think so far, it's been progressing quite well. I think the next, you know, where there is some sensitivity at the moment is on the domestic debt. It seems that it's not possible to do the deal without some treatment of domestic debt. The government is very determined not to touch the banking system if it can possibly avoid it, because as pointed out, it's absolutely a financial crisis on top of everything else that we have. Brad's absolutely right. That would be disastrous right now. But there are some low-hanging fruit. The central bank holds two-thirds of the treasury bills. So that can be, I think, treated without too much difficulty, converting those into long-term bonds. And if there may be some scope, the superannuation funds are being talked about, but that's politically very sensitive, of course, to have any kind of treatment of the holdings by those funds. So there is a bit of an issue to be handled there, because it seems that some domestic debt treatment is necessary. And my understanding is that the central bank has made some recommendations to the government, and hopefully it will now move forward, because the other elements are actually far more doable. The domestic debt is a bit sensitive. Well, I mean, it sounds like there's a little bit of hope, if you will, on the restructuring side of things. Although, going back to the earlier point in our conversation, as Brad put it, the requirements are a bit soft, so to speak. I'm not sure you've said soft, but nonetheless, the requirements are a bit soft. And so that makes the task somewhat easier. I'm conscious of time, though, in terms of this conversation. So what I might do is just give the three of you an opportunity to provide some last words, your final overall take in terms of what you think needs to happen, and what do you think the lessons coming out of this crisis so far are, both for Sri Lanka, but also in terms of there is a global debt crisis affecting many other emerging and developing economies. What are the lessons potentially as well for the international community from all of this? Brad, maybe if we start with you, that's okay. Sure. So I would probably highlight three lessons. The first lesson is, which I think generally applicable, Sri Lanka will be the example that people point to for the cost of delay. It was very clear, well before Sri Lanka defaulted, that it needed to seek a restructuring, that it shouldn't be paying its debts, and that needed to conserve its reserves. And by essentially waiting until there was nothing left other than the Chinese swap, which wasn't usable, Sri Lanka guaranteed this deep contraction, this 10% loss of GDP. So it guaranteed a bad outcome. So lesson number one is the cost of delay. I think lesson number two is important and it's sort of almost obvious, but you can't support high levels of debt with low levels of revenue. When tax revenue fell to 10% of GDP, a crisis was almost certain. Emerging in low income countries could only support that, or only have high levels of debt and low levels of revenue if all their debt is concessional. If it's market debt or even Chinese project lending, which has a meaningful amortization profile, you just can't sustain high levels of debt with low levels of revenue. And I guess that's not an architecture observation, that's an eternal observation. The third issue, I think it's a real issue for the international community, is how do you set debt restructuring targets that both help you get to deals when you have a complex set of creditors that includes China, that includes market commercial bondholders, and that also provides a path to sustainability with a high probability. Getting a deal that doesn't give you a sustainable debt structure isn't a great outcome. Not getting a deal is not a great outcome. And I do worry that there are such a large divergence, just in technical terms, but also in terms of what is being asked to various creditors between what is being asked in some of the low income country cases, and what is being asked under the market access debt sustainability framework. So to me, one of the lessons is thinking about what criteria move the negotiations forward in a constructive way, but also in a way that generates sustainability and that doesn't generate wild inconsistencies across relatively similar countries that differ only slightly in their income levels. It's very difficult, but many will be watching Sri Lanka's situation and the arbitrary distinction, as you say, between being outside of the standard common framework and the low income approach to debt sustainability, but still having so many vulnerabilities at the end of the day and very low revenue. Marisa, maybe we can bring you in at this point with your final sort of words on this situation and the way forward. Yeah, I think Brad covered off the lessons really, really well. And I think really, I guess I worry about the downside risks in terms of other exogenous shocks, I mean, a natural disaster or something else, given that there are basically no buffers as such. I think my key message really is on fiscal discipline and also investment project appraisal, improving those processes. On fiscal discipline, sort of, I think in the early 2000s, there was an FRA act and there were some operational fiscal rules that were not really adhered to. I think this time around, this is an opportunity for the government to introduce realistic fiscal targets, fiscal rules, have them sort of, you know, package them within the legislation and have sort of leaner escape clauses. That's the one message. The second is for the government to continue to work. I mean, Dr. Kumaraswamy has pointed out that some of these growth centric reforms, reforms in relation to the BOI and improving FDI flows, et cetera, these reforms have been in the works for years, right? Having a one-stop shop for investors, et cetera. But really, Sri Lanka also needs to think in the background, apart from meeting these policy conditionalities, apart from pushing towards a constructive dialogue and, you know, sort of refraining from holdouts and getting a deal, I mean, cutting the deal, that's, as Brad said. And then third is to, in the background, to really think about sort of sustainable growth, a sustainable growth path, going from non-tradable growth to tradable growth and what that would entail, right? Given that the crisis, you know, you have a debt crisis and these kind of multiple crises, what happens is that non-tradable growth obviously then gets squeezed out. And one more point to add is really on strengthening and having a targeted strategy on reducing income inequality. And I think Sri Lanka is making headway with improving SSN transfers by introducing the ASSIMO program, et cetera. But more needs to be done. I think the IMF package does have a great conditionalities on imposing wealth and inheritance taxes. But more needs to be done to ensure that sort of the richest, the one person, so to speak, are paying their cash out dues in terms of revenue. Thank you for that, Marisa. Dr. Kumar Aswami, give the last words to you. Okay. I think one point I must make and I should have made earlier is that, you know, income poverty has doubled in the last year or two. So we need to strengthen our social safety net. Our cash transfer programs need to be beefed up. The government has plans to do so. So that has to be implemented and has to be implemented in a transparent way. And hopefully by using technologies, a lot of the leakages that have been there in the past can be addressed and it can be targeted better. So one is a much stronger, a better targeted and more effective social safety net. The second thing is I think I would really want to endorse what Brad said about a timely approach to the IMF. If you're running into difficulty, you should get in there early. The problem becomes a far less complex and far less burdensome to handle. And that is one lesson that needs to be really absorbed. The other point I'd like to make is that, you know, you must have buffers in your economy. One of the things that the East Asians learned after the East Asian crisis is that you need to build buffers. You need to build a fiscal buffer. And the East Asians built insurance in terms of the external reserves. So those kinds of buffers need to be built in the macroeconomic framework. And the third related macroeconomic point is that as I kept saying and at the beginning, macroeconomic stress has been a big problem, right? Repeating cycles of macroeconomic stress. So we need to have very clear frameworks for macroeconomic policymaking. So inflation targeting is what the new central bank bill has. And you need to have these frameworks and embed them in the law. So you have flexible inflation targeting. And you also stop the central bank by law from being able to participate in the primary auctions or treasury bills so that you can't have this unlimited deficit financing that the central bank has been undertaking recently. You also have to make sure that you have certain fiscal rules. We have a fiscal management responsibility act, but the rules are very weak. We need to strengthen the rules. And I believe that's been done in the new kinds of fiscal laws that are coming in. So have clear framework and the exchange rate in a flexible inflation targeting framework, the exchange rate has to be your first line of defense. So you have to manage it flexibly. So you have to have these clear frameworks and wherever possible embed them in law. Then the final point I'd like to make is that SOE reform. So the SOEs have been a massive burden on the exchequer and their losses are sitting on the state bank balance sheets undermining their viability. So really we need to have a significant major SOE reform program, divestment where possible and necessary and operational autonomy and efficiency where that is the better chosen objective. So all in all I think one thing we have not been able to do as I've said is to do fiscal stabilization and structural reform at the same time. This time around we have to do that. You've got to do that concurrently. It's not a sequential exercise. If you want to get growth going quickly enough to head off any social instability and which automatically will translate into political instability, we need to get this done quickly and effectively. Thank you. Thank you Dr. Kumar Swamy. Those are some excellent points for us to end on. I think my takeaway is that the debt restructuring that is being put forward, it's going reasonably well in part because the requirements of the creditors, the bar has not been set too high in turn that that does leave Sri Lanka vulnerable. And it also means that a lot of the emphasis I'm taking away from your comments in particular and Dr. Kumar Swamy and Marisa, a lot of the emphasis is going to be on what Sri Lanka itself is going to need to do from here to maximize its chances to exit from this in a decent way, both on the stabilization but also those deeper reforms that, as you say, have been difficult to achieve historically. But now is the time when it's going to be most needed. And so the emphasis is very much on those actions by Sri Lanka itself. But let us leave it there. Let me thank you all on the panel for participating and contributing. You're very insightful comments. And to those watching online, thank you for joining us. And we hope to see you again for a future discussion.