Collapse is imminent if we continue to go this way, it is almost similar to a broken car rumbling before it completely comes to a halt.
by Harsha de Silva
The country is in complete disarray today. Fuel is rationed at pumps, daily power cuts across the island, shortage of dollars to import essentials including medicine, food is to be rationed next. Collapse is imminent if we continue to go this way, it is almost similar to a broken car rumbling before it completely comes to a halt.
The government has no idea what they are doing, on one side Finance Minister Basil Rajapaksa states that he is ready to engage with the debtors but on the other hand, the Governor of the Central Bank reiterates to international media that there is no need to engage with the IMF. Independent economists and the opposition have repeatedly stated that home-grown solutions will not fix this and we need to seek international support immediately. As far back as November 2020, in my response to the budget speech, I stated that we need to engage with the IMF, in order to restructure our debt due to artificially created problems. Beginning with the tax cuts that resulted in almost LKR 600 bn losses, followed by the ban of chemical fertilizer exacerbated our economic situation. In the 2019 December Article 4 report by the IMF, they highlighted that we had substantially recovered from the crash due to the 2018 Coup as well as the Easter Attacks in 2019, therefore our debt was still sustainable. However, they also stated that if drastic changes were made to our government policies, our debt would be unsustainable, as it is today.
At this juncture, even the IMF alone will not be able to solve this problem. There are 3 ways in which one can look at this type of crisis. First, one being if Sri Lanka’s debt was sustainable, we would not have to restructure our debt. We could have chosen to stabilize our macro-economy by bringing in crucial economic reforms while paying our debt. Secondly, in the case that our debt sustainability was uncertain, we could have opted for a light-restructuring or short-term reprofiling, at which we would put off our interest payments for a short time. In the third scenario, which I believe we are currently in, our debt would be deemed unsustainable, thus we will not be able to reprofile and would need to make drastic reforms as well as initiate a debt-restructuring program with our creditors. In this scenario, there are three types of debtors that we would need to engage with including; Senior creditors (World Bank, ADB, IMF), bilateral creditors (China, India, Japan, Paris Club) and private creditors (Insurance funds, hedge funds, mutual funds etc). We will not be able to initiate any debt-restructuring program with bilateral and private creditors without engaging with the IMF first and gaining their confidence.
The government's reluctance to engage with the IMF is an ideological difference. Statements being made that the IMF will impose rules and regulations are unfounded. They will only agree or deny the working plan submitted by the government. If we don’t agree with the terms they propose, we should be able to present a better plan. It is almost similar to an individual seeking a loan from a bank. The bank manager will not give you the plan to pay off your loan, instead, they will review your finances and deem its feasibility. Moreover, the government’s reluctance also stems from the fact that they know the IMF will not approve their political program for local council elections. Initially, they tried to print money to fund their political activities, however, due to high inflation rates they are constrained. Subsequently, they decided to tax the EPF and ETF, in order to pump LKR 100 Bn to their local councillors but we were able to block that initiative. If they have a little bit of decency and sympathy for the people of this country, they would abandon this electioneering program and most importantly abandon corruption to save the little bit of money we have left!
On the 25th of February, the IMF will present their analysis on the Sri Lankan economy in Washington, DC. According to publicly available stats and figures of the government, we believe that our debt is unsustainable, thus no home-grown solution nor the tourists queuing up to get into bars in the South will be able to solve this. The shortage of dollars has resulted in a shortage of oil, which has translated into a power shortage. We cannot go on much longer, as these problems have also led to instability within the local banking system. A certain government minister has stated that we should establish a ‘Thel Potha’ similar to the ‘Hal Potha’, where are we heading without any sustainable solutions? We urge the government to present the IMF Article 4 report to Parliament and table it, in order for us to have a constructive debate and come to a working plan, regardless of political affiliations. Moreover, GSP+ may be in jeopardy as well due to actions taken by this government. The vital export sector is the only thing that is holding us above water. We have to go beyond political biases and find a solution to this economic mismanagement immediately.
( The writer is an economist and former Cabinet Minister of the Government of Sri Lanka )
Post a Comment