Observer Courtesy The Island

August 17, 2016, 7:56 pm

Politicians from the top downwards, and fellow travelling columnists, keep on repeating that the current foreign exchange  difficulties faced by the country stem from servicing the foreign debts incurred by the Rajapaksa Government amounting to Rs. 9,000 billion and more.

The evidence, however, supports the view that a continuation of the Rajapaksa Government in 2015 would have resulted in a healthy surplus in the balance of payments both on current account and capital account in 2015, a rise in foreign exchange reserves of the Central Bank over and above the $ 8 billion at the end of 2014, and the ability to comfortably service in 2015 and 2016 the foreign debt of the Rajapakse Government up to end 2014.

The reasons can be put in a nutshell. Based on the implementation of the Rajapakse Budget for 2015, announced in November 2014, the value of imports in 2015 would have been some $2.5 billion less in 2015 than in 2014 primarily though not exclusively because of the precipitous fall in petroleum import prices.

The windfall for building foreign reserves consequent to a sharp fall in value of imports in 2015 was squandered in its entirety by the Yahapalana government. How? It deliberately promoted policies in 2015 that led to a huge uptick in the volume and value of imports, notably of motor vehicles. The increase of wages in the public sector (Rs 10,000 a month),  the  upward wage drift in the private sector, lower import duties, reduction of interest rates and easing private credit restrictions were all factors contributing to this result. The windfall vanished without trace.

On the capital account too, the Central Bank was deprived of a healthy inflow of dollars ($1.5 billion) to bolster its foreign exchange reserves when the Government halted the Port City Project a few months after it assumed office. Worse, the Central Bank was confronted with a massive depletion of foreign reserves of $2 billion when the Central Bank had to sell $2 billion from foreign exchange reserves to exiting foreign short term bond and Treasury bill holders. The foreign investors who had been happy to park billions of dollars in Sri Lanka`s short term government securities under the Rajapakse Government. They scuttled as fast as they could in 2015 primarily because of fears of devaluation and of uncertainty arising from questionable macro-economic policies of the Government.

The Government says the Rajapakse Government left a mountain of debt that has led to a debt trap. It is not the amount of debt that matters (the Rajapakse government debt as a percentage of GDP was not particularly high compared with many other countries and the ratio was falling over the years). What matters is whether the outstanding foreign debts can be serviced while reducing the ratio (foreign debt as a percentage of GDP) over time. This has proved difficult under the Yahapalanaya Goverment because its economic policies negated the good fortune of billions of dollars the country would have enjoyed in 2015 as a result of fortuitous circumstances. 

The attempt of  the Yahapalanaya Government to shift the guilt for our current economic difficulties on to the shoulders of the Rajapakse Government does not wash. Does it have the courage to accept that the responsibility for the current foreign exchange “crisis” is theirs and theirs alone? Improbable. It is politically expedient to spin the tale until 2020 while unpopular economic policies are implemented.

Observer