Dollar Crunch & Expanding Horizons

By Rusiripala Tennakoon –

Finance Ministers Change – some accept the offered portfolio unwillingly and protesting. Central Bank Governor resigns. New Governor appointed. Cabinet reshuffles take place one after the other within short intervals reminding us of recurring weekly tele-shows.

Each time the curtain goes up a new face appears on stage making us forget that the same wine is coming in new bottles. But the desperate and helpless people become somewhat hopeful believing that the players have been carefully chosen to play the role to fulfil the expectations of the masses. But the reality is the longed and sought desires vanish before long like the disappearing mirage leaving all high and dry.

This poses the question as to whether these choices are made after careful and serious consideration of the need to accomplish speedy results to the burning issues OR steps merely taken desperately spurred due to the pressure of the reacting people against unbearable sufferings they are undergoing. The latter seems to be the most realistic and sensible presumption when we look at the continuity and the worsening of the state of affairs.

As the World Bank the IMF has recently pronounced the country has been drifting over a long period of time before falling into this mess. This has happened under the influence of conflicting traits with changes in the trajectories from time to time during different regimes. They are aware that Sri Lanka does not have a credible Macro-Economic Policy frame work in place. It is a pity to learn that our dilemma is going to continue beyond expectations. The hopes people had about the international bodies to come to our rescue as predicted by some Economic pantomimists have been shattered.

The WB and the IMF have now declared in no uncertain terms that until such time we produce an adequate Macro-Economic Policy they will not be considering any significant assistance to us. Nevertheless, the World Bank confirmed its commitment towards urgent humanitarian needs which they have already elaborated in a statement worded as follows; quote-:

“we are currently repurposing resources from previously approved projects to help the government with some essential medicines, temporary cash transfers for poor and vulnerable households, school meals for children of vulnerable families, and support for farmers and small businesses.” unquote

These concerns clearly indicate their awareness of the plight of the people and the immediate attention required to address those. They are also well aware that the hardships caused due to acute shortages of some other essentials now felt by the large majority of the people are due to the inadequate economic policies of the government. In other- words the incompetence of our policy makers now and before. Hence this response.

This poses a question as to whether we are seriously addressing this need and by whom. The haphazard choice of failed politicians to attend to this urgent and important task, at this most critical moment, has driven us to a state of perplexity making us feel that the whole exercise will end in further despair. This forces us to examine their past performance to assess their suitability to navigate a course so critical as now.

Economy before 2015

Sri Lanka economy exhibited a robust annual growth at 6.4 % during the course of 2003 to 2012. It was a rate well above the regional peers and was ahead of other countries in the South Asian region. It was noted as a period of transformation into an upper middle income country status after a long spell of Civil conflicts that prevailed over three decades. Sri Lanka successfully achieved the Millennium Development Goal target of halving the extreme poverty conditions.

Economy during the Period between 2015 and 2020

The economy was managed under the policies directed by Prime Minister Ranil Wickremesinghe. SL planned to create a knowledge based social market economy with emphasis for an export-oriented economic approach. A plan was put forward for a Western Region Megapolis to promote rapid economic growth. There were plans for the establishment of several business and development promotion areas and island wide Tourism Zones. One other main focus was the regaining of GSP+ trade concessions and joining the Trans-Pacific Partnership. A very ambitious goal of achieving an overall growth rate of more than 8% was also in the cards.

There was also a focus on constitutional reforms aimed at strengthening the organs of the government for more accountability and to fight against corruption. It was accepted in principle that the government would follow an open foreign and economic policy with all countries.

Did we achieve any of these? In 2015 the total value of our economy was about USD 80.5 Billion. From 2015 the difference between the National Income and Expenditure began to decline. Towards the end of 2015 when the income was USD 10.75 the expenditure rose to USD billion 16.95. The budget deficit became -7.5% of the GDP. The total public Debt which was 70% in 2014 increased to 76% at the end of 2015(without the borrowings of the SOEs). The export income recorded a decline from the 2014 position of USD bn. 11.3 to USD billion 10.5. In 2016 March the countries’ economy fell into a position and Ranil/Sirisena administration applied for the EFF facility from IMF stating the following reasons;

• To avoid the balance of payment crisis
• To arrest the expansion of the Fiscal Deficit
• To tide over tougher external conditions such as the servicing of loans
• Depleting Foreign Exchange and volatile bond markets experienced in March 2016

In 2016 June, IMF agreed to lend USD 1.5 Billion to SL. But we received only USD 1.3 Billion due to failure of our compliance with the IMF conditionalities attached to this facility.

In fact, we did not see the then government implementing any steps effectively to act in compliance of the conditions we agreed with the IMF. Let us take as example the status of the 3 largest SOEs which were running at a loss for several years.

CPC (Ceylon petroleum corporation)

2015                           2018                             2019

Total labilities ,Rs Millions           427,057,053             611,499,043             611,938,905

Annual Loss   Rs Mn                     2,895,869               106,162,414               11,856,600

Sr Lankan AirLines

Total Liabilities Rs Mn                      9,865,934             25,035,943               49,760,210

Annual Loss     Rs Mn.                     1,632,990               4,170,033                 4,413,940

Ceylon Electricity Board

Total Liabilities   Rs Mn.                    66,311,835           160,613,726           238,080,904

Annual Loss       Rs Mn.                     20,308,248             28,257,954             81,850,168

No further clarification is needed regarding the concerns expressed by the IMF today.

These SOEs were allowed to borrow freely from the State Banks without any restrictions until lately the former Governor imposed certain conditions for this borrowing. Banks made huge hypothetical Interest incomes out of these facilities. Today Ranil W himself has signaled that the State Banks are in peril.

Period between 2020 and 2022

Gotabaya govt. proper started from Aug 2020, after the General elections which ousted the previous regime marginalizing the opposition. Even the election was held under severe Pandemic conditions. Most parts of the World were inundated with Covid-19. The ripple effect had caused serious repercussions to our economy.

A quick glance at the economic programs envisaged by the Gotabaya regime would serve us to understand the direction and the actual movements of the economic factors from 2020.

Foreign Exchange reserves remained around USD 7.5 Bn including the Bullion value and IMF deposit quota. Our monthly import needs were in the region of USD 1.5 Bn. Economic program of the new government included, a plan to implement several components covering the external sector. Projections covered the securing of multi-lateral and bi-lateral loans, obtaining funds through SWAPs from other central banks, raising capital (exchange) through under- utilized assets, development of Industrial Zones in Hambantota and Port City project with the promotion of FDIs, and to increase inward remittances and exports.

There was no policy decision to obtain IMF facilities under this program, although there was constant pressure and urging to seek facilities from IMF. It was only in march 2022 the President announced the intention of the government to go to IMF.

By then the country had secured the following loans and assistance from different sources to meet the growing depletion of Foreign Reserves.

• A forex cash loan to the value of USD 1300 mn. From China Dev. Bank;
• A SWAP of USD 1550 Mn from Peoples Bank of China;
• Bridging Finance to the value of USD 1500 mn from India;
• USD 400 Mn from the reserve Bank of India;
• Delaying of settlements to Asian Clearing Union
• A SWAP amounting to USD 200 Mn. From Bangladesh Bank;
• Finalised 2 Trade Credit facilities from India to the value of USD 2000 for Oil and other essential Imports from India;

According to published information these funds were utilized to settle three (3) I.S.B.s totaling USD 2500 Mn. ( in 2020,2021 and 2022) while also supporting the State Banks to meet urgent Forex requirements to the extent of about USD 2000 Mn.

About USD 1500 Mn. were utilized to supply the Exchange needed for the import of essentials such as medicines, fuel, gas, coal and food items.

In or around Jan 2022, China had expressed their willingness to arrange USD 1000 Mn.as liquid Funds and USD 1500 Mn. to support Import financing requirements. This was confirmed by the Chinese Ambassador in Sri Lanka in April 2022.

Most of these steps were taken in a climate where ISB borrowings would have been heavily costly due to high interest rates prevailing in the International bond market.

During the period from early 2022 there was increasing pressure by Lobby groups and economic sector to resort to three things, viz., Seek an urgent IMF facility, apply a debt restructure program and delay the payment due on borrowings and to float the USD freeing it from the freeze. Rating agencies down graded the sovereign rating making things impossible to resort to market borrowings.

The situation in the country became precarious due to heavy shortages of essentials such as Gas and Fuel with the Food Costs also increasing unbearably. Forex reserve position started drying up due to the decline of the tourism sector and the reduction of worker remittances to a very low level.

We have to be mindful of the decision-making process and the practices and principles involved. The decision whether to go to IMF has to be taken by no others than the cabinet itself. The officials could move in the direction of securing the facility only after the cabinet takes such a policy decision.

We have to carefully look at certain highly relevant factors that contributed to the disastrous situation we are facing today.

It is important to note that we had damaged our credibility with IMF due to the failure of Sirisena/ Ranil regime to implement the agreed reforms.

During the period 2015 to 2020, while enjoying the benefits of the IMF facility, the government had resorted to borrow a sum of USD 10,000 Mn by issuing I.S.B.s.

This caused a highly unsatisfactory situation of increasing the external debt position by about 65% while the GDP remained almost stagnant around USD 80 Bn!

Considering the above realities, we have to accept the fact that the country is fast dwindling towards a worst economic crisis as we have never experienced before. The last regime has not only failed to put the economy on a firm footing but has aggravated the plight by resorting to costly borrowings and seriously damaging our credibility with the International Organizations such as IMF and the World Bank. Today both these bodies have publicly declared that Sri Lanka does not have an acceptable Adequate Macro Economic Policy in place.

We cannot forget the highly ambitious pronouncements made under the Sirisena/Ranil regime regarding their economic reforms which have all evaporated into thin air. The HCID (Howard University Committee for International Development) engaged by Ranil Wickremesinghe in 2015/16, to prepare a comprehensive economic policy program which he presented to his parliament has failed to satisfy the IMF and the WB. But alas! he has been chosen by Gotabaya regime to resurrect the ailing economy ruined by them. The message we get is both sides are idiosyncratic!

Let us as free thinking citizens, look for ways and means to save our country without relying on these day dreaming charlatans dominating the social and economic structure deceiving the gullible.

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