Economic crisis and possible way out

By Dr. Wijeyadasa Rajapakshe,

President’s Counsel, Member of Parliament

Sri Lanka has been positioned in the third place of the weekly global inflation dashboard by John Hopkins University (US), above Turkey, Sudan and Venezuela as at 21st April 2022. As measured by the US university, inflation is as high as 119% a year. It surged to 30% in April. As for food items and medicine, the inflation is over 50%. Our total public debt has increased up to 100 % of the GDP whereas it remained as 25% in the year 1960. Our per capita income was USD 200 in 1960, but now it has reached closer to middle income country. Devaluation has caused an abysmal gap between the rupee and dollar.

Sri Lankan debt was 86.8% of the GDP in 2019, but now it has reached approximately 109% (2021). External debt has increased to US $ 51 billion. External debt as of export earning has risen to 350% in 2019. During the last two years, the value of imports has been 100% more than that of exports. Now, we are facing a massive debt and fiscal crisis and experiencing diminished liquidity and insolvency. In March, the rupee depreciated by over 40%. Foreign exchange reserves virtually remain at zero. Projected debt service stands at USD 8 billion per annum from 2022 -2026. The economy cannot take this kind of pressure.

The Sri Lankan economic crisis is not limited to the economic front; it began as a result of a political crisis, which had been simmering for the last one and a half decade. The outlook shows that the monetary authorities are struggling to stabilise the economy without much support from the citizenry due the mounting anger against corrupt rulers and officials of the Central Bank and the Treasury. A family oligarchy has made the public resentful. It is important to identify the reasons which led to the current economic crisis:

1.    Sri Lanka’s foreign debt has risen up to USD 51 billion including USD 3.38 billion from China and it amounts to 10% of total debt liabilities. The amount spent by Chinese lenders on BRI (Belt and Road Initiative) projects is USD 11 billion. Borrowing at commercial lending rate from China for projects is not sustainable as most of the projects are white elephants, e. g. the Hambantota Port, the Mattala Airport, and the Lotus Tower.

2. Shady deals of the government in obtaining foreign loans for projects such as expressways and awarding contracts.

3.Imprudent and immature monetary policy adopted by the Governors of the Central Bank during the last 15 years and most of the transactions are ostensibly corrupt and disadvantageous to the country, e. g. sovereign bond issues, hedging deal, the purchase of Greek bonds, etc. Maladministration and dishonest conduct of the Central Bank have led to devaluation of the rupee. The appointment of unqualified henchmen as Governors was the reason.

4. Tax concessions to high-income earners in 2020 amounting to Rs. 600-650 billion per annum at a loss of revenue equivalent to USD 7 billion during the last two years at the then exchange rates.

5. The ill-conceived, irresponsible decision to ban agrochemicals has caused an approximately 40-50% drop in the national agricultural output, especially paddy harvest.

6. Appointment of mediocre MPs as minister to handle vital sectors such as Finance, Power and Energy, Education, Health, Highway, etc.

Similarly, appointments of unqualified and dishonest henchmen to the institutions vital to the economic development had aggravated the present crisis.

7. Failure of monetary authorities to seek IMF assistance immediately after realising that the economy was heading for crisis in early 2021.

8.Excessive money printing

9.Disorganised and unproductive public service, which has become a burden on the economy

The economy has to be revived to meet the basic needs of the populace. The government has sought assistance from friendly countries, mainly India and China, but geo-political conflicts have become obstacles to a certain extent although substantial assistance has been given. Now, the government has finally sought the assistance of the IMF, which has already supported Sri Lanka 16 times earlier.

Although we have secured IMF assistance and many other monetary agencies, our agricultural and industrial sectors have been gradually dwarfed by the ever-expanding service sector. The contribution of different sectors to the GDP is as follows:

Agriculture 8.3%

Industries 26.2%

Services 59.6%

Due to its heavy dependence on the service sector, the economy is susceptible to adverse global situations.

Corruption prevalent among politicians and bureaucrats has plunged the country into chaos. Reforms and strategies that we are in need of urgently are short-term and long-term.

Short-term measures

1.Political stability is the key factor to resolve both the prevailing social uprising and the economic crisis. Fiscal discipline. Unless the government can convince the general public that it is free of corruption and engages in transactions in a transparent manner, it may not be able to achieve political stability.

2. Increase of interest rates. (Already done)

3.  The immediate steps to have a moratorium on debt, and a debt restructuring programme with the assistance of the IMF shall be the prioritised task of the authorities. International Sovereign Bonds is the major share of debt which amounts to 36% of the total and ADB multilateral debt is the second highest, amounting to 14%.

Management of debt liabilities both foreign and domestic shall include the following:

a) Moratorium on debt service (Already done).

b) Renegotiate and restructure loan and interest components.

c) Renewal and extension of SWAP arrangements,

d) Setting off part of the loans obtained at commercial interest rates for projects that do not make a significant contribution to the economy.

4. Complete ban on import of non-essential items for a limited period. Although authorities have announced such a policy, it is apparent that the importers having close links with the powerful politicians do display such items for sale.

5. Reducing the deficit of the balance of trade is extremely urgent. Laws alone will not help tackle this problem; generous support from businesses and expatriates is called for.

6. The eradication of money transfer schemes such as hawala and undial which have been adopted by the importers as well as the exporters to bypass the established banking system, the result being that the Banks do not receive dollars and the rupee depreciates.

7.                Sri Lankan migrants also resorted to such informal methods of money transactions instead of sending their remittances through banks. Some of such intermediaries are directly linked to drug dealers engaged in money laundering.

8.                Monetary authorities also should draw their attention to the fact that some migrants do not send their remittances to the country in protest against the current rulers, who are corrupt. Although the country was receiving around USD 600 million monthly from expatriates earlier, it now receives only about USD 250 million a month. This needs to be addressed as an extremely urgent matter to resolve the deficit of the balance of trade.

9.                Immediate tax reform measures to be taken to impose direct taxes on high income earners as was the case before 2019.

10.            Delay the capital expenditure on projects, more prudently by presenting a new budget to tackle the economic crisis.

Long-term measures

1.                Encourage export-oriented products by extending tax concessions and providing infrastructure facilities.

2.                Value addition to exports

3.                                        Adoption of a national policy to take measures to increase the agriculture sector contribution to GDP from 8.3% up to 14% and industrial sector contribution from 26.2% to 34% (approximately) in five years.

4.                Restructuring of major loss-making State institutions.

a)               Ceylon Electricity Board has recorded a loss of Rs. 308 billion up to 2020.

b)               Sri Lankan Airline has recorded a loss of Rs. 374 billion up to Feb. 2021.

c)                Sri Lanka Railway Dept has recorded a loss of Rs. 331 billion up to 2020.

5.                Restructuring of the public sector to ensure its sustainability and contribution to the national economy.

6.                The establishment of development banks for sustainable development of agriculture and industrial sectors. At the commencement of the state-owned Bank of Ceylon and People’s Bank, the state was aiming to achieve the goals of industrial and agricultural sectors and it attained its goals, but after the introduction of liberal economy, those two banks also started making profits, forgetting the purpose for which they were established.

7.                The curtailment of the budget deficit. Budget deficit increased up to 11.1% in 2020, whereas it was 5.5% in 2017, which is indicative of weak financing management.

8.                The adoption of stringent procedure as regards appointments to all state-run institutions and to ensure that appointees have met the minimum qualifications stipulated.

9.                Either amending the Assets and Liabilities Declaration Act or enacting a new law to ensure that transactions of politicians, official and government contractors are monitored to ensure their transparency.

10.            Making anti-bribery laws applicable to the private sector as well.

1. 11.            Restructuring of the Sri Lanka Customs.  It is apparent that a substantial amount due to the treasury from the Custom is not credited due to variety of reasons.