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Real question is not whether SL should go to IMF or not: Verité Research

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‘ Sri Lanka makes the mistake of letting IMF write a plan for the country’

by Sanath Nanayakkare

The real question is not whether Sri Lanka should go to the IMF or not. What is important is going to the IMF with confidence after having analysed the fiscal situation, with a convincing plan, Executive Director of Verité Research Dr. Nishan de Mel said in Colombo recently.

He made this remark at a CEOs Forum hosted by CA Sri Lanka to provide clarity on the current debt situation, whilst also helping the business community gain a better understanding on the government’s strategy and way forward to navigate through the ongoing situation.

State Minister of Money and Capital Market and State Enterprise Reforms Ajith Nivard Cabraal, was the guest speaker and the panel session brought together eminent speakers comprising of Governor of the Central Bank of Sri Lanka Professor W. D. Lakshman, Chairman of the Ceylon Chamber of Commerce Vish Govindasamy, [Executive Director of Verité Research (Pvt) Ltd Dr. Nishan de Mel], and Managing Director of Fitch Rating Agency Maninda Wickramasinghe.

Dr. Nishan de Mel further said: “For instance, when you go to a bank with a business idea to take out a loan, the bank says, ‘give me your plan’. But if you get the credit officer to write the plan for you it won’t be appropriate. The mistake Sri Lanka makes is letting the IMF write that plan for the country because the country doesn’t have one. The crux of the matter is; the credit officer shouldn’t write the plan. The country should present the plan and convince the credit officer that the plan has the potential to work out – a plan backed by an analysis that can win the confidence of the lender. That’s the structured way to obtain an IMF facility for Sri Lanka. I do hope that we can take that path.”

“The Central Bank may have a different approach to analyzsng the situation – I think publishing that analysis would be very valid because that is a test of some scrutiny and others would be able to look at it – that is a way to give confidence. I completely accept that there is no one way to analyse the situation and determine the approaches we can take, but it is important to make the chosen approach public.”

“The government and the Central Bank of Sri Lanka (CBSL) are on the right path with regard to reducing the ratio of foreign debt to domestic debt, but the greater reliance placed on domestic financing too quickly would be like running a marathon too fast as it could burn out the accelerated shift.”

“On the other hand, we might not have the option of being too slow on this aspect as rating agencies are downgrading and the markets are observing. Amid this we have to build confidence. These are very concerning which is why I say it is not too late for Sri Lanka to realign its strategy to get out of the problem and to keep its debt sustainable while making sure we won’t run into a liquidity crisis.”

“Verité’s own analysis shows that there are four steps that can make debt repayment more sustainable and a fifth step to avoid a reserve crisis which people are worried about.”

“Number 1; the interest rates on local debt can be no higher than inflation which I think we have probably achieved. The Central Bank has had a larger tolerance for inflation and it will end up in 6.5% range, and interest rates on local debt have been brought down which is an important part of the function. I t will take some time for all the government debt to reflect that lower rate, but that in reality is the right path. However, it’s a cost to society because inflation is costly in terms of real returns from your bank balances or investments.”

“Secondly, interest rates on foreign denominated loans can’t be higher than GDP growth There also Sri Lanka is well placed because even though we talk about having a large amount of commercial debt, the history of concessional debt is so high that our weighted average interest rate on foreign denominated debt is still only 3.9%, and going forward with a growth of about 4%, we can maintain that. Being able to maintain the interest on that percentage rate for foreign denominated loans is favourable for Sri Lanka.”

“Then there are two other conditions that Sri Lanka needs to do more about. One is the primary deficit- that is the deficit after paying interest- which should be less than 60% of GDP growth – that means if the GDP growth is 5%, primary deficit can’t be more than 3%. If we are expecting a lower GDP growth this time; say a growth of 3.3%, then the primary deficit can’t be more than 3%. So we really have to control that and bring it down. And it is very important to report those numbers correctly to give the markets that confidence. This still allows for a budget deficit in the high single digits because our total interest on debt is over 6% of GDP. This is not drastic, but it says that deficit has to be in the mid single digits. If we want to maintain the deficit, we need to be able to manage the upper single digits with a doable plan.”

The fourth is that depreciation of the currency can be no higher than inflation, and that brings us to the fifth step because currency depreciation today is not based on the fundamental mismatch in global crisis vs Sri Lankan crisis. From 2015 to 2019, one of the major important adjustments made was, to bring it to what you call the real exchange rate. Sri Lanka’s exchange rate until 2015 was significantly over valued. Even though depreciation hurt, the adjustment brought stability. That was an important alignment. That alignment is still sort of in place but today because of the uncertainty about the reserves, you see a speculative exchange rate- and that simply puts pressure on depreciation.”, he said.

 

 



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‘Dollar reserves in SL plummet drastically, putting the economy in jeopardy‘

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Key personnel at CNCI forum

By Steve A. Morrell

Sri Lanka’s dollar reserves have declined from $ 7.15 billion in 2019 to $ 2.8 billion currently. The President conceded economic failures although reasons for such failure were not explained, chairman, National Chamber of Industries (CNCI) Canisius Fernando said.

Fernando added recently at a forum: “Forex reserves are insufficient to expedite payment of import bills. More so that cost incurred on container traffic for imports and or exports was on a rising spiral. In comparison to cost of container shipping recorded at $ 2,800 earlier, it is now $ 12,000, indicating a rise in multiples of 250.

“Additionally, the Generalized System of Preferences (GSP +) affecting our trade with EU countries, placed Sri Lanka’s reputation at a risk, meaning that countries could veer away from Sri Lanka prompted by a possible inability to honor our trade commitments. The clear example being trade with the US. Rather than await goods and services transactions with Sri Lanka, that could invariably take three months, US economists and their trade sector opted to transact trade with countries in close proximity to US shores.

“Dearth of container traffic and rising cost for on- loading and off- loading of cargo seriously affect trade imbalances. Consequently, the credit worthiness of the Sri Lankan economy is affected, which in turn seriously affects the GDP.

“Worker wages which were static because of trade shut- downs caused demands for increased wages. Wage demands of Rs 1,500 from employees became a major phenomenon in most sectors. The question at issue was the hypothetical position of business establishments of about 4000 employees demanding increased wages. This would cause closure of those companies resulting in unemployment.

“The proverbial domino effect of such repercussions would cause further chaos in the economy.

“There was no proper policy in most sectors. Suspension of the import of fertilizer and consequent confusion would, in the short run, result in famine and food shortages. Already this was evident in the public panic caused by having to stand in line to purchase essentials. That the crisis is upon us and the question of a quick solution is not feasible in the current context of the economy.

“Foreign investors are lured by the possibility of cheap labour in Sri Lanka to establish their businesses here, but in this instance too, this is only a hypothetical situation but not the reality.”

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Supuni Products gives back by way of welfare initiative, helps to uplift the needy patients with chronic illnesses

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Supuni Products first started in 2016 when the business proprietor, Supuni Lakmalie along with her husband only had Rs. 150 as investment. With that small amount, they purchased kollu (lentils) and kurakkan and ground them using a grindstone. This was the beginning for them and today, Supuni Products is a booming enterprise that specializes in ground spices and cereal, operating from the town of Nildandahinna, Walapane. Their products are of very high quality and 100% natural and consists of 15 different spice and cereal products including chilli, coriander, turmeric, pepper, curry powder, kurakkan, lentil (kollu) etc.

In 2018, Supuni Products received the opportunity to supply kurakkan flour and cereal to be included into the Poshana Malla, which is a nutrition package prepared for pregnant women, instigated by the government. The success of their business was such that they were able to gain an equity of over Rs. Four million during the past three years.

As part of a welfare initiative, they have also pledged to allocate one rupee for every kilogram of product sold, towards supporting patients with financial difficulties and require emergency surgery and for those with chronic diseases. While having had to run a business in the confines of their own home, the grant offering they received from the enterprise project allowed them to complete construction work of their new factory. She now hopes to expand the business, improve their supply chain, and create new employment opportunities.

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Dialog Enterprise offers Dell Technologies Cloud IaaS in Sri Lanka

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Dialog Enterprise, the corporate solutions arm of Dialog Axiata PLC, is working with Dell Technologies Cloud Solution Provider (CSP) in Sri Lanka to offer Dell Technologies Cloud Infrastructure-as-a-Service (IaaS) solutions to customers to innovate and scale rapidly, reduce costs and increase performance of business-critical infrastructure.

“Together, with our combined forces, we bring the only hybrid multi-cloud partnership in the country, giving access to private clouds as well as to our existing public cloud, and for on-premises infrastructure, robustly powered by Dell Technologies and VMWare. Envisioning a one-stop multiservice solution for all enterprise requirements, we strive continuously to keep to the changing landscape strengthening the cloud play in the arena,” said Navin Pieris, the Vice President – Enterprise Business and Large Enterprise Sales, Dialog Axiata PLC.

Rather than making capital investments in hardware, storage and servers to maintain them, enterprises can harness and scale IaaS resources when needed, paying only for infrastructure services they consume. Mitigating and allowing for any threat of data loss, the cloud partnership also offers cyber recovery as a service with a guaranteed uptime of 99.95%, end-to-end management of data centers and 24×7 support with zero operational burden on the customer. Ensuring the same standardization, self-service, automation and analytics capabilities that exist in the public cloud, the partnership facilitates secure private clouds for customers along with servers, storage and customized enterprise, private and/or public cloud solutions as required by enterprises.

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