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Sabry tells Parliament some home truths

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Finance Minister Ali Sabry yesterday told Parliament that continuous budget deficits had led to accumulation of public debt, which was now unsustainable.

“In this process, I do not rule out the element of corruption, and therefore we need to emphasise the institutional factors, such as an independent judiciary, a credible Central Bank, and a strong public service. At present, the Sri Lankan economy is in an extremely challenging situation, and this has triggered social turbulence and political instability. This may lead to catastrophic consequences if the fundamental issues are not addressed immediately,” the Minister said, making a ministerial statement to the House on the present status of the Sri Lankan economy and way forward.

Full text of Minister Sabry’s speech: “At this critical juncture of Sri Lanka’s post-independence history, I am addressing this august house today to deliver my first special statement as the Minister of Finance. The country is battling with unprecedented socio-economic and political challenges. The root causes of these challenges go back to several decades of economic history although more recent developments have aggravated the situation into an acute crisis. There are critical developments that need urgent attention. Inflation has risen to extremely high levels making the cost of living unbearable, foreign exchange reserves have depleted significantly, and the exchange rate has rapidly depreciated, all of which have contributed to the crisis. A foreign debt repayment standstill has been announced as an interim measure. There is a shortage of essential items, including fuel, LP gas, pharmaceuticals, and raw materials while power outages continue, and people are demonstrating on the streets against their economic hardships.

Fundamental macroeconomic weaknesses in the economy have been decades in the making. This includes fiscal instability, accumulated debt overhang, low productivity, and persistent current account deficits. Recent shocks such as the COVID-19 pandemic and the Ukraine conflict have exposed these underlying weaknesses. However, we should also be humble enough to admit that this situation has occurred due to some of the misaligned and imprudent policies implemented in the recent past as well. This is indeed a serious situation. I believe the time has come to follow a professional approach in resolving these issues rather than being swayed by ideological inclinations.

I accept the fact that the aggravation of the issues was due to the delay in restoring fiscal and debt sustainability and failing to pre-emptively address the decline in foreign reserves. Sri Lanka should have focused on regaining capital market access by establishing a credible path of macroeconomic stabilization, supported by institutions such as the IMF. But now, rather than trying to find fault, it is important to identify the reasons for this situation and concentrate on the way forward.

The public protests send the message that we need to be serious in providing professional and sustainable solutions. An important part of this is being transparent and forthright regarding the challenges ahead of us and the fact that there are no painless solutions to choose from.

Often in Sri Lanka’s history, successive political actors have painted rosy pictures and made promises that lack realism and credibility. Every time there has been an attempt to establish long term solutions, these are reversed in the next election cycle with a promise of short-term benefits and relief. Today we see the adverse outcome of these stop-go policies – and the public has rejected this as reflected in the protests we see today.

It is time for Sri Lanka to establish a broad political consensus on the economic path forward for the country. An economic path underpinned by fiscal and monetary discipline, a focus on enhancement of productivity, and ensuring equitable outcomes by protecting the most vulnerable sections of our society.

We must understand the root cause of the issue, i.e., the unsustainable fiscal policies adopted by many successive governments. We should be humble enough to accept the fact that we as a country have lived beyond our means. Without proper checks and balances, all governments have spent much more than what they earned, of course with the approval of this august assembly, as the responsibility for public finances comes under the Parliament according to our Constitution. In my view, what is happening right now is that “we reap what we sow”.

The time has come to focus on sustainable solutions. The fundamentals of the remedies are quite straightforward. Manage expenditure within the framework of a reasonable revenue stream with a sustainable debt position, rather than placing the burden of a huge debt pile on generations to come.

But, to do that, we must make changes. Changes to the way we manage the fiscal operations and the entire economy. We should undertake reforms, to remove bottlenecks that hinder our economic progress. We must be futuristic and wise to make decisions in the name of the progress of the economy, progress of the country.

The Parliament must give priority to implement tax reforms to increase government revenue and rationalize expenditure whilst ensuring public investment in critical areas such as education, healthcare, and social protection. Macroeconomic policy must be tailored towards boosting national savings, channelling public and private investment towards productive sectors, whilst driving productivity and competitiveness in all aspects of the economy.

We need to take tough decisions in reforming state owned business enterprises, encouraging competitive market mechanisms where possible to achieve best outcomes at lowest cost to society. We must learn to harness the immense productive potential of market forces, whilst being fully aware of market failures and providing appropriate intervention to ensure just outcomes for society. We need to build up credible systems to improve public sector efficiency and productivity.

The decision to seek the assistance of IMF is important in this context. An IMF programme will be a catalyst to undertake these much-needed reforms and will provide a signal to the rest of the world that we are serious in addressing our economic difficulties. But we must realise that the economic reform programme we embark upon must be a programme with Sri Lankan ownership. We must put forward a professional and analytically robust economic plan, where the IMF will also provide technical assistance and then endorse. Without that Sri Lankan ownership, and without broad consensus of the legislature, we would not succeed in providing permanent solutions for our longstanding economic issues.

Whilst we are facing deep economic challenges at present and our priority is macroeconomic stabilization, let us not lose sight of the immense potential Sri Lanka has as an Indian ocean economy at the doorstep of the most dynamic economic growth centres in the world. We must continue to position ourselves to take advantage of these opportunities through appropriate engagement in regional and global economic value chains. Towards this end, we must invest in education, healthcare, clean energy, public transportation, social protection, and sustainable infrastructure.

In this process, the private sector needs to play a greater role in driving employment and growth. Sri Lanka needs to have a more globally competitive, export-oriented economy that is conducive to Foreign Direct Investments (FDI) with appropriate policies.

In doing so, we should take decisions underpinned by evidence-based research. I am in the process of establishing a Research and Analysis Division in my office at the Ministry of Finance. Very soon we will have a set of Advisors also in the Ministry of Finance. This will help us to promote new ideas and deliver a professional approach to economic policy making.

How did the situation escalate to the present crisis?

The budgetary operations of Sri Lanka, over the past several decades continued to suffer several weaknesses, as reflected by most of the key fiscal variables. This includes a sharp decline in government revenue mobilisation, high and rigid recurrent expenditure, high concentration of capital expenditure towards certain sectors and persistent fiscal deficits that resulted in huge debt accumulation.

The spill over effects of the above fiscal imbalances complicated the conduct of monetary and exchange rate policies as well.

Thus, the Sri Lankan economy displayed twin deficits, having both an external current account deficit and a government budget deficit, simultaneously.

Continuous budget deficits have led to accumulated public debt, which is now unsustainable.

In this process, I do not rule out the element of corruption, and therefore we need to emphasize the institutional factors such as an independent judiciary, a credible Central Bank and a strong public service.

At present, the Sri Lankan economy is in an extremely challenging situation, and this has triggered social turbulence and political instability. This may lead to catastrophic consequences if the fundamental issues are not addressed immediately

What triggered the recent crisis in Sri Lanka?

As I indicated above, the fiscal sector was suffering from persistent weaknesses over many years.

However, in late 2019, the government introduced substantial tax cuts, aimed at stimulating economic activity without addressing the fundamental weaknesses I mentioned above.

However, the intended results of this measure were not realized with the outbreak of the COVID-19 pandemic in Sri Lanka, which aggravated the situation in the country.

Further, the revenue foregone due to the tax cuts introduced in late 2019, which was estimated to be more than Rs. 500 billion, has resulted in sovereign rating agencies to downgrade Sri Lanka to near default levels.

In my view, these tax cuts should have been gradually reversed in the new environment created by the COVID-19 pandemic. What transpired instead was that the revenue loss led the Central Bank to print money and help the government to finance the deficit.

The rating action amidst volatility in global liquidity conditions, constrained Sri Lanka from accessing international capital markets.

This prevented the government from raising fresh capital to refinance the maturing debt.

As such, the country gradually utilised its foreign currency reserves to maintain its unblemished debt service record.

Meanwhile, the major hit to the tourism industry together with the slowdown in the workers’ remittance inflows, further aggravated the tight foreign currency liquidity position in the market, exerting further pressure on reserves.

The price controls, in the form of a fixed exchange rate, regulated interest rates, unrealistic petrol, diesel and LP gas prices, and other administered prices, made the situation more complex. The release of these pressure points is now reflected in high inflation.

The developments in the global economy after the COVID-19 pandemic and the more recent Ukraine crisis added further pressures on the Sri Lankan economy.

By end 2019, the Central Bank reserves amounted to USD 7.6 billion. By end 2020, the reserves declined to USD 5.7 billion because of gross inflows of USD 5.8 billion and outflows of USD 7.8 billion, including foreign currency debt service payments of USD 6.0 billion.

The reserves declined further to USD 3.1 billion by end 2021 consequent to the gross inflows of USD 7.9 billion and outflows of USD 10.4 billion, including foreign currency debt service payments of USD 6.8 billion and provision of foreign exchange of USD 1.2 billion to finance essential imports.

Given the shortage of foreign currency flows to the commercial banks, the official reserves at the Central Bank were utilized to meet foreign exchange needs related to the import of essential items, including fuel, coal and LP gas, pharmaceuticals, and other essential items, starting from August 2021.

Consequently, official reserves declined to USD 1.9 billion by end March 2022. However, the bulk of these reserves, including the USD 1.5 billion equivalent SWAP facility from People’s Bank of China (PBOC), are not usable to settle USD denominated payments.

Hence, as of now, the usable liquid reserves are at negligible levels, severely impacting importation of essentials, including fuel, LP gas and pharmaceuticals.

I would not hesitate to inform this august assembly that the government is struggling to find enough foreign exchange to finance these essential imports. Therefore, we need urgent solutions as a country to restore supply chains on six essential items, to address the grievances of the people and to move forward on a reform programme and to work on bridging financing and to implement medium to long-term growth-related policies.

However, political stability and support from all parties including the private sector are vital factors for us to implement this much needed reform agenda.

The above analysis summarises the major issues faced by the country right now, particularly in the fiscal sector.

We have a critical and deeper issue at hand that needs careful consideration and well-thought-out solutions.

These are accumulated issues in the past over many decades under successive governments. Fortunately, or unfortunately, the current Parliament has been compelled to find solutions.

So, it is our responsibility to work as a team to better understand the situation and produce solutions with much needed reforms with the support of all the members.

There is no doubt that many of these reforms will be painful. Hence, we must take care of the vulnerable segments in the society through appropriate robust social safety nets.

I take this opportunity to appeal to the citizens of Sri Lanka on this matter at this critical juncture. I wish to say that we hear your voice very well. What we need to do is make corrections to the previous mistakes and put the fiscal operations and for that matter, the country’s future path, in the right direction.

It will be very challenging, but we must do it for the betterment of the present generation as well as the generations to come.

As the proverb we all are familiar with says, “A Journey of a Thousand Miles Begins with a Single Step”. What this means is that the great things commence with simple beginnings.

So, we must begin our journey to reach the goal of creating a sustainable fiscal position and a better and stronger country in the future for our citizens, by taking these first steps, with determination.

This is more important now than ever.”



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Lanka on the brink of economic collapse: Prez seeks international help to overcome crisis

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President Gotabaya Rajapaksa, addressing the 27th International conference on ‘Future of Asia’, yesterday, called upon the international community to help Sri Lanka overcome its economic crisis.

Addressing the virtual summit, the President said that it was no secret that the last several months had been extremely difficult for Sri Lanka.

“We are currently undergoing a severe economic crisis, which has profoundly impacted the lives of all Sri Lankans, resulting in social unrest. The virtual shutting down of the tourism industry and the sharp decline in inward remittances from expatriate workers due to COVID19 in the past two years and increasing inflation due to other events combined with Sri Lanka’s high outstanding debt obligations to cause a severe financial crisis,” he said.

President Rajapaksa said that in April, Sri Lanka announced a ‘Debt Standstill’ with the intention of restructuring this external public debt through negotiations with our creditors, whilst simultaneously approaching the International Monetary Fund for a suitable programme.

“In parallel to these efforts, we have appointed a new Prime Minister and a Cabinet of Ministers with representation from multiple political parties, and we are fostering ongoing discussions in Parliament towards forming a national consensus on the way forward,” he said.

Given below are excerpts of his speech: “Sri Lanka is Asia’s oldest democracy. It is crucial that the solutions to our present national crisis are supported through our nation’s democratic framework.

“As we work through such solutions, however, we urgently require the assistance of our friends in the international community to ensure that our immediate needs in terms of the importation of essential medicines, food supplies, and fuel are met.

We are also in urgent need of bridging financing to restore confidence in our external sector and stabilise our economy until the debt restructuring process is completed and an IMF programme commences.

“Sri Lanka is grateful for the support provided by India, our close friend and neighbour, which responded with generosity in our time of need. The support extended by our other neighbours and development partners, as well as regional and global institutions, is also deeply appreciated.

“Japan remains one of Sri Lanka’s key development partners, and we hope that the negotiations now underway regarding bridging funds from Japan will conclude soon, and support Sri Lanka as we try to stabilise our economy and our nation.

“I appeal to the other friends of Sri Lanka present here today, to also explore the possibility of extending support and solidarity to my country at this very difficult time.

“A positive aspect of recent events in Sri Lanka has been the increased engagement of our youth in the nation’s politics.

“We have seen similar activism in other countries too, where the loss of confidence in prevailing systems has led to strong displays of opposition against governments.

“It is important to ensure that these systems undergo the reforms that are essential to their improvement so that future generations will benefit from better opportunities in education and employment, leading to an increase in their productivity.

“The grave difficulties facing Sri Lanka are an early indication of the long tail effects of the COVID19 pandemic, made worse by the ongoing conflict in Europe that may affect other vulnerable nations too.

“Supporting such vulnerable nations through these difficulties is essential for regional as well as global stability.

“It is therefore earnestly hoped that nations able to do so, lend a helping hand to these countries as they seek to overcome the very serious threats they face. An even more widespread problem that the world will face in future concerns food security.

“The shortages of food items and sharp increases in food prices likely to occur in the months ahead will place considerable strain on many countries.

“It is therefore essential that we pay attention to this crucial problem and prioritise agricultural production locally and improve our resilience in the face of this coming issue.

“Increased cooperation amongst nations will also be necessary to ensure that we overcome this issue.

“As we look to the future, it is no secret that even more widespread challenges caused by human induced climate changes lie ahead for the Asian region as well as the world.

“The adverse impacts of such climate change, including loss of biodiversity, water scarcity and pollution, degradation of air quality and ecosystems, will all contribute to significant challenges for many nations including in food security.

“Maritime security in Asia is another thorny issue that require serious policy attention. In addition to traditional security concerns involving the projection of naval power, many non-traditional issues including piracy, human trafficking, drug-smuggling, and illegal, unreported and unregulated fishing continue to pose challenges in this region.

“Sri Lanka has a great interest in the security of the Indian Ocean region, and the protection of the sea-lanes has established a strong relationship between Sri Lanka and dominant regional players including Japan.

“Sri Lanka has responsibility over protecting sea routes, maritime resources and combating maritime crime over a significant region of the Indian Ocean, and we look forward to partnering with the Asian community as we seek to expand our capacities in these areas in future.

“Another enduring regional concern has been civil unrest, conflicts, and communal violence. Sri Lanka too has been marred by sectarian tensions throughout its history. I am of the view that policymakers must come together to devise collaborative regional mechanisms on such issues.

“Exchanging expertise and experience to build capacity in the fields of peacebuilding and reconciliation is essential. So too is the empowerment of the underprivileged, because this is one of the root causes of unrest.

“In this context, I respectfully submit to this forum that the core objectives and functioning of some existing regional bodies are presently affected by conflicts of member countries on matters relating to economic, political, or strategic interests.

“It is my hope that member countries will be able to overcome such impasses and work together in the true spirit of Asia to fulfil the region’s priorities.

“In concluding, I once again thank Nikkei for having organised this conference, and the Government of Japan for hosting this event.

As Sri Lanka overcomes its present difficulties and starts rebuilding for tomorrow, we look forward to constructively participating in future such events too, for the betterment of Asia.”

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BASL, Opposition reject 21-A draft

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The Bar Association has rejected the 21st Amendment to the Constitution that has been presented by Justice Minister Dr. Wijeyadasa Rajapakse, PC, to the Cabinet recently.

The main Opposition Samagi Jana Balavegaya (SJB), too, has rejected the 21 A in its present form.

Addressing the media at the Opposition Leader’s Office in Colombo, SJB spokesperson Eran Wickremaratne explained why the SJB wouldn’t support the proposed law as it would further enhance the executive.

A spokesperson for the BASL told The Island that they pointed out serious shortcomings in the draft and the need to rectify them. According to him, the BASL, in letters dated May 23 explained their position to President Gotabaya Rajapaksa, Prime Minister Ranil Wickemesinghe and Justice Minister Dr. Rajapakse.

The JVP and TNA too have rejected the 21 Amendment in its present form.

The following is the text of the BASL letter addressed to the President, PM and the Justice Minister: “On the 23rd of April 2022, the Bar Council approved the “PROPOSALS OF THE BAR ASSOCIATION OF SRI LANKA (BASL) TO RESTORE POLITICAL AND ECONOMIC STABLITY IN THE COUNTRY”. In the 13-point proposal the BASL proposed the introduction of the 21st Amendment to the Constitution by repealing the provisions of the 20th Amendment and restoring the 19th Amendment, and the re-establishment of the Constitutional Council and the Independent Commissions which existed under the 19th Amendment whilst enhancing their financial independence, transparency, and accountability.

The BASL is concerned that whilst the 21st Amendment will restore the provisions of the previous 19th Amendment to the Constitution as regards the Constitutional Council and the Independent Commissions, there are several vital provisions which were found in the 19th Amendment which are not incorporated into the draft 21st Amendment.

The provisions of the 19th Amendment precluded the President from assigning to himself any subjects or functions. However, the 21st Amendment does not incorporate such a provision and as such the President will be able to continue to retain Ministries and assign to himself any subjects and functions and take over subjects and functions of any Minister. The BASL is of the view that the 21st Amendment must include a provision amending Article 44(2) of the Constitution removing the power of the President to retain Ministries and assigning to himself any subjects or functions. Such provision must be made operative as soon as the 21st Amendment is passed.

In addition, the BASL observes that the President’s powers to prorogue and dissolve Parliament are left intact, in contrast to the 19th Amendment to the Constitution where the President could dissolve Parliament only after four and a half years following a Parliamentary election. The BASL is of the view that the provisions in the 19th Amendment relating to dissolution of Parliament should be restored. In addition, the BASL recommends that the following matters which were contained in the BASL proposals be included in the 21st Amendment:

1. A provision for the members of the Monetary Board to be appointed with the approval of the Constitutional Council (in addition to the Governor of the Central Bank);

2. A provision for the appointments of the Secretaries to the Ministries, Governors of the Provinces, Ambassadors and Heads of Missions be done on the advice of the Prime Minister in consultation with the Cabinet of Ministers;

3. A provision to require Presidential Pardons to be done according to the recommendation by a body established by law, appointed by the President on the recommendation of the Constitutional Council;

4. A provision to enhance the financial independence, transparency, and accountability of the Independent Commissions.

The BASL further recommends that the number of members of the Constitutional Council who are not Members of Parliament be increased from 3 to 5 and conversely the number of Members of Parliament on the Constitutional Council be reduced from 7 to 5 as was found in the 17th Amendment to the Constitution. This is consistent with the position taken by the BASL in 2015 when the 19th Amendment was enacted.

The BASL calls on the Government to ensure the early enactment of the 21st Amendment to the Constitution, as it is a necessary step towards achieving stability in Sri Lanka.”

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Plea for debt moratorium to rescue drowning SMEs and saving millions of jobs

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Around 4.5 million Sri Lankans employed in the small and medium enterprises (SMEs) might lose their jobs in the coming months unless the government stepped in and assisted businesses, Chairman of Sri Lanka United National Businesses Alliance (SLUNBA), Tania Abeysundara told the media in Colombo on Wednesday.

She warned that a lot of SMEs might collapse in the next month unless the government arranged a debt moratorium.

“4.5 million people work in SMEs. When we asked the Central Bank Governor, he said that he can’t assure a debt moratorium. He was worried about the banking sector. I would like to ask the governor, wouldn’t the banking sector collapse if the SME’s can’t pay their loans,” Abeysundara said.

She said that Prime Minister Ranil Wickremesinghe had approved money printing to pay the salaries of government employees.

“When the government has no money to pay their employees, they can always print the money. What about us? Are we also to print money? Unless we receive a debt moratorium we will have to close our businesses,” she said.

Meanwhile, Treasurer of the SLUNBA, Lakmal Perera said that “once people lose their jobs, it is likely that they would come on to the roads and that will lead to a chaotic situation.

“We asked the government about this and they have no answer. There is no way that we can pay our loans with this contraction of the economy. We need an answer soon, when these people are on the roads the 225 MPs won’t be able to stop them,” he warned.

Vice chairman of the Association and President of the Vehicle Importers Association, Indika Sampath Merenchige also insisted that the government should talk to the business owners and give them a moratorium. If that did not happen, SMEs would be compelled to stop repaying loans.

“We give the government two weeks. We have employees that have been working with us for 10-15 years. They are a big part of how we have succeeded and survived. So, we can’t send them home. We have to somehow pay them. So, we have to stop paying loans,” Merenchige said.

Deputy Chairman of the SLUNBA, Susantha Liyanarachchi, who is also the Chairman of the National Construction Association of Sri Lanka (NCASL) said that there was a danger of a large number of garment factories leaving the country and as they couldn’t expect the cabinet that had been appointed to navigate the country out of the economic crisis.

“If garment factories leave, what will happen to foreign currency earnings?” he asked.

Governor of the Central Bank, Dr. Nandalal Weerasinghe said that the minimum economic activity would be experienced in the country in the next six to eight months.

“That means the economy will contract. We estimate that the economic contraction this year will be greater than any other time in post-independence Sri Lankan history. No one can bring down inflation below 30-40 percent in the next six months. People who are poor and vulnerable will be severely affected. Unless the government provides some support, the poor will find it hard to live,” he said.

Dr. Weerasinghe said that poverty levels would increase and when an economy contracted there would be a lot of unemployment, especially in the SME sector. (RK)

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