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A PATHFINDER PERSPECTIVE ON THE ECONOMY

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SRI LANKA HAS TO SET AN URGENT GLIDE PATH TO THE IMF:

The Sri Lankan authorities have been able to achieve stable macro-economic indicators despite the severe economic dislocation caused by the pandemic. Inflation has remained well within the 4-6% target range; and the improvement of the trade deficit has had a positive impact on the current account of the Balance of Payments. In addition, interest rates are at historically low levels and there has been some stability in the exchange rate. As in most other countries, growth has been negative, due to both demand and supply shocks in the domestic economy and the decline of external demand due to the slowdown of the global economy. Sri Lanka’s performance has been better than a number of other countries in the region.

However, the model that has underpinned the significant degree of stability in macro-economic indicators to date, is now coming under considerable pressure. The extremely low interest rates have been maintained through administrative action (financial repression). The under-subscription in bill and bond auctions are signs that this policy is coming under stress in a context where credit to government remains high while private sector credit is picking up. At the same time, the currency has also come under pressure. The SLR has been propped up by restrictions on imports and capital outflows. Recently, a ban has also been imposed on forward transactions in the forex market. Despite (or because of) this, there continues to be stress in the forex market as imports rise with the bounce-back of the economy from its contraction in 2020. In addition, the prices of oil and other key commodity imports have been rising in global markets increasing the demand for dollars in the local forex market at a time when supply remains constrained, due to a shortage of foreign earnings/inflows, borrowed or non-borrowed.

The import and capital restrictions currently in place have a negative impact on growth, employment and incomes at a time when priority needs to be attached to bouncing back from the economic scarring inflicted by the pandemic.

The most imminent threat to macro-economic stability, which can affect the whole economy, comes from the Balance of Payments, the external payments in particular. Sri Lanka’s external debt dynamics are extremely challenging over the next six months and urgent action is needed to address them and mitigate collateral damage which can have wide-ranging social and political ramifications. Gross foreign external reserves amounted to USD 5.7 billion (including USD 400 million in gold) as at December 31, 2020. Total debt-related payments during the next six months (February – July 2021) comprise: an International Sovereign Bond (ISB) maturity of USD 1 billion; SLDB maturities of USD 980 million; and interest payments of USD 482 million. In addition, the Reserve Bank of India (RBI) SARC SWAP of USD 400 million would need to be repaid this month (February 2021). This is intended to be a short term facility and cannot be extended further without staff-level agreement on an IMF Arrangement.

In normal circumstances, the expectation is that SLBDs would be rolled over. However, only 25 percent of the maturities of USD 200 million was rolled over at the last auction. This reflects the severe scarcity of Forex in the market. There is uncertainty, therefore, regarding how much of the maturing SLDBs of USD 980mn can be rolled over during the next six months. Any shortfall will deplete the external reserves. The shortage of foreign exchange is also likely to adversely affect the rollover of short term SWAPs with FCBUs which will be maturing over the next six months.

The upshot of all this is that there is a strong possibility that reserves will fall to extremely dangerous levels within the next six months (by July 2021). Unless there are significant inflows in the meantime, there will have to be severe compression of domestic absorption (consumption and investment), i.e., very painful austerity. Instead of a recovery, the economy could well experience further contraction. It becomes important, therefore, to examine the likelihood of inflows which would serve to offset the heavy debt-servicing burden over the next six months. Sri Lanka’s development partners (multi-lateral and bilateral) are expected to disburse USD 1.7 billion during the course of the whole of 2021. Some of this would be flowing in over the next six months. However, because this is project and programme lending, it would not be possible to utilize this funding to boost the external reserve position. Furthermore, the rating downgrades have meant that Sri Lanka is no longer able to access international capital markets at affordable rates (currently 15 percent) thereby curtailing a potential source of financing.

Specific sources, which have been announced by the authorities to fill the external financing gap, include the following:

* Term loan from the China Development Bank : USD 700 million

– SWAP facility from the People’s Bank of China: Yuan 10 billion; equivalent to USD1.5 billion (this facility could have conditions that will constrain its capacity to bolster usable reserves)

* SWAP facility from the RBI: USD 1 billion (this facility is tied to Port development and removal of some import restrictions complicating the completion of negotiations).

The delay in the completion of these transactions seems to indicate that there are challenges in each of these negotiations. Even if all three of these facilities materialize, it is extremely unlikely that it would be possible to get sustained bilateral support of this nature in the magnitudes required to meet the country’s debt obligations of USD 23 billion over 2021-2025. Hence one needs an approach that unlocks a wider base for sourcing external financing.

The second option is to seek the support of the IMF. This will also serve to leverage a number of other sources of external financing. Over 70 countries have been assisted by the IMF through the Emergency Facilities established by the Fund to provide countries with fast-disbursing financing to address the impact of the pandemic. Sri Lanka would be eligible for USD 800 million from the Rapid Financing Initiative. An arrangement with the IMF can also trigger direct budgetary support from the ADB (USD 500 million) and the World Bank (about USD 300 million). It can also pave the way for a rating upgrade and eventually regaining access to international capital markets.

Anchoring policies to an IMF arrangement would also provide foreign investors with greater confidence to invest in the country. However, in the present global and domestic climate, it is unrealistic to expect that FDI will play a major role in filling the external financing gap, particularly in the short term. It is also noteworthy that it is difficult to utilize FDI to give a direct boost to gross official external reserves as much of it would flow out of the country in the form of imports and other payments incurred by the foreign investor. However, in the medium term, FDI can increase the capacity to service debt by contributing to an increase in the production of tradables which would earn or save foreign exchange.

For IMF support to be secured, there has to be a clear medium term plan to achieve debt sustainability. The Fund’s Articles do not permit it to lend to countries where it cannot certify that the debt is sustainable. At present, the IMF finds itself unable to certify that this is so. All options would need to be considered including fiscal adjustment, as well as a market- friendly re-profiling of Sri Lanka’s external debt through an extension of maturities and some relief on coupon payments. This would serve to create some space both in the Government Budget and the Balance of Payments for growth-oriented stabilization.

It is noteworthy that the IMF is currently advocating and supporting a growth-oriented approach to stabilization with a back loading of adjustment. It must be pointed out, however, that Sri Lanka does not have a painless glide path to stabilize the economy. Kicking the can down the road would only serve to increase the severity of the austerity when it is inevitably imposed.

It is crucial that there is early and decisive action as a very disruptive hard default, involving hair-cuts for creditors, could well be looming on the horizon. There are signs that Sri Lanka is facing solvency rather than liquidity challenges. As experienced in other countries, such a default usually means soaring interest rates, a collapse of the currency and severe belt-tightening, which tends to impact the poor and vulnerable disproportionately with unpredictable social and political ramifications.

The longer-term solution for achieving sustainable debt dynamics involves running a primary surplus in the budget and promoting an accelerated growth trajectory.This involves not only stabilization of macro fundamentals but also structural reforms to increase productivity/competitiveness of the economy. Increasing investment, including FDI, and boosting the production of tradables, particularly exports, need to be an integral part of this narrative. The Pathfinder Foundation set out a roadmap to achieve this in its Report, “Pathfinder Beyond the Box: A New Economic Vision for Post – COVID – 19 Sri Lanka” in May 2020.



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Civilizational dialogue proving a remote possibility as realpolitik rages

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Political leaders at the Shanghai Cooperation Organization Summit 2026. (Photo by PROKOFYEV / POOL / AFP)

Looking back over the years since the 9/11 catastrophe, it could be said that barring former Iranian President Mohammad Khatami no world political leader of note has made an earnest effort to change the nature of global political discourse for the better. Khatami won world acclaim for his pronouncement that the time is right to launch and sustain a ‘Dialogue among Civilizations’.

This was in marked contrast to US political scientist Samuel P. Huntingdon’s epochal theses, formulated in the wake of 9/11 and other global political tumults that the Post Cold War era is essentially one of conflicts among civilizations. That is, people’s identity markers, such as culture and religion, are the prime shaping forces of international conflicts.

From a Political Realism standpoint, Huntingdon’s theory may seem to have gained in credibility over the years but it is Khatami’s pronouncement that has evoked an empathetic response in the hearts and minds of publics world wide. So much so, 2001 was proclaimed by the UN General Assembly as the ‘Year of Dialogue among Civilizations’.

It could be said that the latter proclamation was an endeavour to give back to humans their essential identity of peace-makers. It was an eschewing of the position that war and conflict are central to the human condition and amounted to upholding constructive dialogue among peoples and civilizations as a path to peace.

That things have not worked out in the world in keeping with the expectations of peace makers does not in any way invalidate the thesis that peace is the essential propensity of humans.

If peace-making is seemingly ineffective it is primarily because the path to peace is narrow, tortuous and time-consuming. On the other hand, violence usually misleadingly recommends itself to the human as the more expedient, cost-effective way out of a conflictual situation. However, the ultimate cost of the latter approach is prohibitive because it brutalizes the human beyond recognition.

Some of the evidence is before our eyes. The Trump administration, for example, has, minus much forethought, unleashed what may be described as a ‘quick-fix’ war against Iran but is now finding that it is in a veritable military quagmire in West Asia. The priority for the administration now seems to be a face-saving escape strategy. Such are the costs of the war option.

However, there is no denying that much remains to be done by the world community to bring peoples and cultures together with a view to enabling them to work as one for the cause of a less dangerous world.

Meanwhile, the broad divisions in international politics continue and past political polarities are lingering to the detriment of enhanced international understanding. The East and the West and the South and the North, for instance, are continuing to work in separate collectives, more or less, and no notable efforts are being made by the international community to bring these sides together for the purpose of united constructive action that could usher greater international well being.

The recent Shanghai Cooperation Organization Summit, 2026, held in Kyrgyztan was a replication of the above broad trends but there were some statements at the forum by Indian Prime Minister Narendra Modi that deserve special scrutiny and comment.

Modi was quoted saying among other things: ‘The land of Gandhi and the land of Buddha share a single message: the path to peace!..We must move away from endless war towards an end to the war. This is essentially for the well being of humanity. A peaceful resolution to all issues at the earliest is the call of humanity, and this is India’s message.’

The above is the language of international peace and unity. It is such language that will help in building bridges among civilizations and advance the cause of world peace. Besides, it will help bring a measure of understanding between North and South.

In this regard, the Trump administration could take a leaf or more from the Modi government. Unless it makes a ‘U turn’, as it were, in the direction of peace and reconciliation it is very unlikely that the US and the world would experience any stability worth speaking of.

Right now the US is savaging the sovereignty of Venezuela. It is a question of the ‘Empire striking back’ but Venezuela is a far cry from Iran. Iran has outsmarted the US on the battle field and is in a position to influence broad trends in the world economy since it still has control over the Hormuz Straits. That is, Iran could exercise a determining influence over world oil, gas and energy prices. In short, the US consumer’s future peace of mind is very much in the hands of Iran.

Given the above backdrop it should have dawned on the US political leadership that working towards cordial relations with Iran is the most advisable option. The US, simply, has too much to lose otherwise.

Likewise, Russia too needs to take a leaf from India. It is plain to see that its invasion of Ukraine is proving totally ineffective. It has not brought any measure of peace for the Russian people. Russia is right now experiencing a rerun of its military misadventure in Afghanistan. On the other hand, sections of the peoples concerned have been victimized and even brutalized.

Accordingly, there needs to be a coming together of democratic opinion worldwide for a fresh consideration of the options facing humanity. There is a dire need for value-based politics to take the place of Realpolitik. Besides, the language of peace and humanity needs to replace current divisive discourse with its stress on polarities and antagonisms.

International organizations of the stature of the UN need to take the lead in spearheading the above initiatives. Right now the UN gives the impression of being a spent force. This columnist hopes that he would be proved wrong on this score because the UN remains the only hope of the poor and victimized. It will be in the interests of all peoples for the UN to rejuvenate itself and dedicate itself increasingly enthusiastically to the cause of international peace.

Whether it be the South or North, dynamic, visionary political leadership and direction emerges as essential. The need is for voices that would espouse peace and accord across boundaries and divisions. For South Asia, India and Pakistan have the potential to fill this lacuna.

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Sri Lanka’s constitutional test: Judicial independence beyond immediate political moment

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Superior Court Complex, Colombo

by Shelton Dharmaratne

Sri Lanka has reached an important constitutional moment.

The proposed 22nd Amendment has moved beyond political debate and into the constitutional process through which its validity will be examined. That development should change the character of the national discussion.

That is understandable in a politically contested environment. But Sri Lanka should now resist reducing a question of constitutional design to a contest over political positions.

The deeper issue concerns the relationship between constitutional reform, judicial independence and public confidence in the institutions of the State.

The Supreme Court will determine the constitutional questions before it. Public commentators should therefore exercise restraint in predicting, interpreting or seeking to influence that determination. But restraint does not require silence. It requires a more rigorous discussion of the institutional principles at stake.

A narrower constitutional question than the political debate suggests

The proposed amendment principally concerns the retirement ages of judges of the Supreme Court and Court of Appeal, together with an increase in the maximum number of judges permitted on the Court of Appeal.

Under the proposal, the retirement age of Supreme Court judges would rise from 65 to 67 and that of Court of Appeal judges from 63 to 65. The maximum number of Court of Appeal judges would also increase from 19 to 24.

Other proposed changes concerning the retirement ages of judges in the lower courts arise under separate legislation. This distinction matters because the public debate has sometimes treated the wider package of judicial reform as though it formed a single constitutional proposal.

Nor should the central issue be reduced to whether retaining experienced judges is inherently good or inherently dangerous. Both propositions are too simplistic.

Sri Lanka faces a substantial burden of pending litigation, and delays in the administration of justice impose significant costs on citizens, businesses and the State. Experienced judges represent an institutional resource. Continuity, accumulated knowledge and familiarity with complex areas of law cannot always be replaced immediately.

Those are legitimate policy considerations.

But the opposing concern is equally important: judicial tenure is not merely an employment condition. It is a structural component of judicial independence.

The real question is institutional

The critical question is not whether an individual judge is capable of acting impartially. It is whether the constitutional structure provides adequate protection against circumstances in which judicial tenure could become connected, directly or indirectly, with political authority.

That is an institutional question, not an accusation against individual judges.

A judge may be entirely conscientious and independent while the institutional arrangements surrounding the judiciary nevertheless create public doubts about independence. Constitutional democracies therefore cannot depend solely on the personal integrity of office-holders. They must construct institutions capable of preserving independence even when governments, individuals and political circumstances change.

This is particularly relevant when constitutional reform concerns the tenure of serving members of the superior judiciary.

The institutional sensitivity of such a proposal should neither be exaggerated into an allegation of improper motive nor dismissed as irrelevant. The appropriate response is transparency, procedural fairness and confidence in constitutional safeguards.

Legitimate objectives do not settle constitutional questions

The government has stated that its objectives include strengthening the administration of justice, addressing delays, retaining judicial experience and increasing institutional capacity.

Those objectives deserve serious consideration. Sri Lanka needs judicial reform. Citizens waiting years for their cases to be concluded experience the justice system very differently from those discussing it in Parliament, courtrooms or universities.

A government is therefore entitled to propose reforms designed to improve judicial efficiency.

But legitimate objectives do not automatically resolve constitutional objections. The relevant question is whether the means chosen are compatible with the constitutional structure and whether sufficient safeguards exist against unintended institutional consequences.

That is precisely why constitutional scrutiny matters.

The concerns of the Bar Association of Sri Lanka (BASL) should likewise be examined without political labelling. Opposition to the proposed changes should not automatically be characterised as opposition to judicial reform or an attempt to obstruct the government. At the same time, invoking judicial independence does not place any argument beyond scrutiny.

The appropriate questions are straightforward:

Does extending judicial tenure strengthen the administration of justice?

What risks, if any, could it create for judicial independence?

Are adequate institutional safeguards in place?

Does the proposal operate prospectively, or does it affect judges already serving?

Could the same objectives be achieved by filling vacancies, increasing judicial capacity, improving court administration and strengthening case management?

These questions can be examined rationally without attributing improper motives to either side.

Judicial vacancies and institutional confidence

Recent concerns raised by the BASL regarding judicial vacancies add another dimension to the debate. The BASL has argued that vacancies in the Supreme Court contributed to the retirement of a senior Court of Appeal judge without promotion to the Supreme Court, despite vacancies having existed. It has also raised concerns regarding forthcoming judicial retirements and the need for timely consideration of appointments.

Such matters should not be treated as evidence of the motives behind the proposed amendment. They do, however, illustrate a broader principle.

Judicial independence is shaped not only by the retirement age written into the Constitution. It is also influenced by how vacancies are filled, how promotions are determined, how seniority and merit are assessed, and whether judicial officers and the public believe that institutional decisions are made according to transparent and defensible criteria.

The government has an opportunity to address these concerns constructively.

Prompt appointments based on publicly defensible principles would strengthen confidence in the judiciary irrespective of the eventual outcome of the constitutional debate.

Seniority, merit and transparent criteria

The controversy also exposes a longstanding question concerning judicial appointments.

Seniority has traditionally carried considerable weight in judicial advancement. Yet seniority alone need not be the sole measure of merit. Conversely, replacing established practices with undefined assessments of “merit” could create another institutional problem.

If governments or appointing authorities can determine which judges are sufficiently meritorious without clear and objective criteria, uncertainty itself may become a source of institutional anxiety.

Sri Lanka would therefore benefit from clearer, objective and defensible standards governing judicial appointments and promotions.

Such standards would protect judges as well as appointing authorities. They would reduce opportunities for favouritism, strengthen institutional confidence and make it harder for political actors to portray every appointment as politically motivated.

Institutional rules are stronger safeguards than assurances of good intentions.

The State is larger than any government

One principle deserves particular emphasis: a government is not the State.

Governments are temporary. The constitutional State is continuing. Political parties change, parliamentary majorities change and political priorities change. The judiciary, however, must continue to function independently of whoever occupies the government benches.

The judiciary is neither a government institution in the political sense nor an Opposition institution. It is an institution of the State whose legitimacy depends upon its independence from both.

For that reason, governments should exercise particular caution when proposing constitutional changes affecting the judiciary, even where the policy objectives are legitimate.

The stronger a government is politically, the greater its responsibility to demonstrate institutional restraint.

That is not political weakness. It is constitutional maturity.

Public confidence is a constitutional asset

The most consequential issue may ultimately be neither retirement age nor judicial capacity, but public confidence.

Courts do not possess political power in the conventional sense. Their authority rests substantially on the acceptance of their decisions as legitimate.

Citizens will sometimes disagree with judicial decisions. But where the judiciary is perceived as independent, even unpopular decisions can command respect. If judicial institutions are perceived as being shaped by political convenience, even legally sound decisions may become vulnerable to suspicion.

Constitutional reform affecting judicial tenure must therefore be evaluated not only by its immediate administrative benefits but also by its effect on institutional credibility.

A reform that produces short-term efficiency while weakening confidence in judicial independence could impose a greater long-term cost. Conversely, reform that improves efficiency while preserving independence can strengthen both justice and public trust.

The challenge is not to choose between judicial efficiency and judicial independence. It is to achieve both.

If a referendum arises …

If the constitutional process ultimately requires approval by the people at a referendum, the debate should rise above the conventional government versus Opposition contest.

The electorate should be given a clear constitutional question and sufficient information to assess it.

Citizens should understand what problem the amendment seeks to address, why the proposed mechanism is considered necessary, what institutional risks have been identified, what safeguards exist and whether alternative measures could achieve the same objectives.

A constitutional referendum deserves a higher standard of public discussion than an ordinary election campaign.

The people would not merely be choosing a political side. They would be deciding the institutional framework within which political power and judicial authority operate.

Beyond who wins

The most important question arising from the proposed Twenty-Second Amendment is therefore not simply whether the government succeeds or whether the Opposition and BASL prevail.

Nor is it ultimately whether judicial retirement ages become 67 and 65 or remain unchanged.

Those are immediate constitutional questions. The deeper issue is what Sri Lanka learns from the controversy.

If the government seeks to modernise and strengthen the justice system, that objective deserves serious consideration. If the BASL and others warn that particular reforms may affect judicial independence, those concerns deserve equally serious examination.

Neither side strengthens the country by assuming that the other is acting in bad faith.

The constitutional system is strongest when legitimate disagreements are resolved through institutions rather than political pressure.

Whatever the eventual constitutional outcome, Sri Lanka will still face the underlying challenges of judicial vacancies, case delays, institutional capacity, judicial appointments and public confidence. Those problems will not disappear with a judicial determination, nor should the national conversation end there.

Sri Lanka should instead seek a broader consensus around a fundamental proposition:

Judicial reform and judicial independence are not competing objectives.

The real challenge is to pursue reform in a manner that strengthens the judiciary without placing its independence under suspicion.

That requires sound legislation, transparent appointments, adequate resources, efficient court administration, responsible political conduct and safeguards capable of surviving changes of government.

The present controversy will eventually pass. Political arguments surrounding it will fade.

But constitutional arrangements can endure for decades.

That is why Sri Lanka must look beyond the immediate political contest.

The ultimate test is not who wins today’s constitutional argument. It is whether, when the political moment has passed, Sri Lanka has a judiciary that is more efficient, more accessible and more trusted—while remaining sufficiently independent to hold every government, including future governments, within the boundaries of the Constitution.

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Farewell to a Fashion Icon

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Chula was very fond of The Island newspaper and kept in touch with us on a regular basis (L) / Chula: Sent us this photo for Glam Scene, just a couple of weeks ago (R)

Sri Lanka’s fashion world lost one of its brightest stars Monday morning – veteran model, actress, and elite pageant trainer Chulpadmendra “Chula” Kumarapathirana.

Her sudden demise has certainly come as a shock to many.

Chula had just completed a major event on Sunday (30th August), and was no more in the land of the living the following day (31st August).

Born in Colombo, she was an old girl of Buddhist Ladies’ College and later studied at the National Institute of Business Management, and has many awesome achievements to her credit.

In 2006, she won the “Miss Tourism Model of the World Press Award” in Tanzania.

She entered the entertainment industry, as an actress, and gained popularity through the teledrama “Wahinna Muthu Wessak.”

Chulpadmendra has been on TV, and many Sri Lankan hip-hop music videos, including “Hanthane” and “Heena Hirimal”, and has had several other minor acting jobs since then.

She hosted the Derana Miss Sri Lanka for Miss World 2008 and even participated in the reality TV show Sirasa Dancing Star.

For over 25 years Chula was active in local and international fashion and founded the Chulpadmendra Catwalk Studio to train young newcomers

She trained hundreds of models for runway, photoshoots, auditions, and international pageants.

She was known as a fierce mentor who believed in “not just learning to walk, but learning to command the runway”.

Many young models called graduating from her studio their “happiest moment.”

Chulpadmendra “Chula” Kumarapathirana: Many young models called graduating
from her studio their “happiest moment.” (L)/ Won the “Miss Tourism Model of the World Press Award” in Tanzania (R)

Chula was very fond of The Island newspaper and kept in touch with us on a regular basis.

Her last message to The Island was a ‘thank you’ note for the article ‘New benchmark in pageant industry’:

“Thank you, Ivan, for writing such a beautiful article about me. Your unwavering support, encouragement, and belief in me throughout my career mean more than words can express. I am truly grateful for your kindness and generosity.

“My heartfelt thanks also go to The Island newspaper for featuring the article. It is a great honour, and I sincerely appreciate the recognition and support.

“Thank you once again.”

In fact, just a couple weeks ago, she sent a photo of herself for our Glam Scene and that picture I publish today, as part of this story.

May she rest in peace. Our deepest condolences to her family, students, and all who loved her.

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