A Practical Way Out of Economic Crisis
Posted on December 18th, 2021
Kumar Moses
Latest CBSL data shows Sri Lanka’s GDP contracted by negative 1.9% in the last quarter (quarter 3) of 2021. However, the worst is yet to come when $1.5 billion has to be repaid in a month on top of existing problems. Another further $5.7 billion has to be settled next year in loan repayments and interest on them. This means 2022 will be a worse year than 2021 which is already the worst in history.
Sadly, economic problems are a precursor to military, terrorism, extremism related problems.
The sudden collapse of the northern economy post-1977 contributed heavily to radicalization of Tamil youth in the north.
Extremism thrived in Sri Lanka firstly among poorer sections in eastern Sri Lanka before spreading to richer sections leading to 4/21.
This is why national economic problems must be overcome as soon as possible.
So what is the way out?
IMF?
UNP/SJB love the IMF. Ever since the crisis broke out UNP/SJB has been clamoring to got to the IMF for a bail out. IMF can only postpone the problem, not resolve it. IMF is another lender, the lender of last resort! If Perkin’s Confessions of an Economic Hitman is anything to go by, the IMF solution is hardly a solution. Sri Lanka must avoid the IMF trap.
Many have forgotten the gas related problems have their roots in IMF dictated in the late 1990s. Sri Lanka sought IMF assistance in post Operation Riviresa (1995) reconstruction of the north. IMF was happy to help but imposed conditions. One of these was to recognize the private sector as the engine of economic growth which the CBK regime did. In order to make it meaningful, Lanka Gas had to be privatized. The rest is known.
Further, going to the IMF accepts bankruptcy and thereafter Sri Lanka will not be able to borrow from commercial lenders like the bond markets of Europe and USA. Since IMF conditions are not acceptable to them, bilateral lenders (like China, India, etc.) will be reluctant to lend too. That will perpetually tie Sri Lanka to the IMF!
India, China, etc.?
Another suggested approach is to borrow from India, China or any other and resettle existing loans. This too is not a solution. It only postpones the problem to the future. Both options come with geopolitical costs and the cost of interfering in domestic affairs.
This option too requires accepting bankruptcy which denies further loans from other lenders.
Default SLDBs and SLSBs?
Sri Lanka development and sovereign bonds are the bulk of Sri Lanka’s foreign loans accounting for 50%. They are commercial loans and carry very high market interest rates. Defaulting on these bonds is a clear winner. Of course, Sri Lanka will not be able to borrow from them thereafter. However, bilateral lenders will still lend to Sri Lanka. Unavailability of bond loans is a blessing in disguise as these easily obtained loans led to Sri Lankan politicians borrowing at will landing the country in a debt trap.
It will also bring sustainable economic discipline to Sri Lanka knowing they have to plan their finances. It can save Sri Lanka over $5.2 billion next year and over $30 billion in the next 5 years in repayments and interest. This massive saving is sufficient to propel Sri Lanka’s economy to a very strong recovery and build foreign reserves quickly.
Sadly, it will also affect foreign investors who relay on rating agencies. However, all rating agencies have already ranked Sri Lanka at the very bottom. Therefore, there is no additional impact of defaulting bond repayments.
Large Investments in Agriculture, Local Manufacturing, Food Security and Foreign Employment
The first thing Sri Lanka must do after overcoming from the crisis is to invest heavily in local food production and manufacturing. A dollar saved is a dollar earned. The default will save $5.2 billion in 2022 alone! That can be invested in these priority sectors. Foreign languages that create employment opportunities like Japanese, Korean, English and German must be taught to school children.
This will ensure Sri Lanka will never again fall into a foreign currency crisis again.
The new year will bring new hope. But it requires bold decisions from the government. Bold decisions are all about saving people and the nation from Shylock lenders. Remember, Sri Lanka is not the only country in debt ridden economic crisis. A number of developing countries face this dilemma.
December 21st, 2021 at 8:00 pm
Thank you for your letter, Mr. Moses. What you say is true. Unfortunately, during the time from 2015-2019 during the Yahapalanaya Govt, even though we had fairly ideal conditions they were not utilized by the then Govt. We had low prices for crude oil in the world market, and the economy was in good shape thanks to President Mahinda Rajapaksa. When President Mahinda Rajapaksa handed over the Govt to the Yahapalanaya the debt was only 75% in spite of the war, the SL Rs was trading at 130 to a $, etc. We could have utilized this blip of the good economy to pay off more debt, invest in development, and promote a job-oriented education and technology for our young people. Instead, the Yahapalanaya set about the wrong way by starting with two Central Bank Bond scams, and then they allowed all the ministers to import luxury cars with no tax and sell them at exorbitant profits within the country. Money was spent lavishly by the Ministers during this time. A group of 40 went to Davos in Switzerland for a meeting with the billionaires, etc. Davos is one of the most expensive cities in the world. The hotels charge about $2000 per room per night. Did the leader of the team think that the billionaires would fall his charm and fork our $ to Sri Lanka? The Port City project that had been initiated by President Mahinda Rajapaksa was scrapped by Yahap and after two years reinitiated at unfavorable terms, the Hambantota Harbor which was built during President Mahinda Rajapaksa’s Presidency was given on a 99-year lease to a Chinese company by Yahapalanaya. What happened to the money we receive from the Chinese firm? It has not been properly accounted for. They also imported around 200 containers full of garbage from the West and some of the containers were full of hospital waste. Luckily as soon as the present Govt came in they took steps to return all the containers back to where they came from.As a result of Neo-Liberal policies Sri Lanka went down in the economy and by 2019 the SL Rupee was trading at 199/$. The present Govt came into power in 2020 and started off well but was hit by the surge in Covid-19. President Gota handled the Covid19 very well compared to the USA, U.K, and Europe, by clamping down immediately and taking action to isolate and prevent people from getting infected. Then when the vaccines became available he made sure we got enough to vaccinate everyone.
I applaud President Gota’s emphasis on organic fertilizer. Though many do not realize organic fertilizer enriches the soil and promotes earthworms and bacteria which are essential for healthy soil. Excessive use of chemical fertilizers while giving good returns in the short term makes the soil hard and clayey and then you need more and more chemical fertilizer to make anything grow. As the soil becomes hard it does not absorb rain and there is flooding with soil erosion. Same with weedicides. They give good crop yields but in the long term will harm the soil and the people who eat the produce. President Gota is doing all the things you have recommended. However, he is hampered due to the foreign exchange shortage caused by the fall in tourism, and earnings from people going abroad. It is picking up slowly and I hope they will be able to continue their good work which they will start soon. What are our scientists in the RRI, TRI, and CRI doing to advise the Govt on the correct way to use organic fertilizer with the required nitrogen, phosphorus, and potassium instead of excess as it is done in the last few years? I believe the private importers of these items were lobbying the Govt and also preventing the truth about organic fertilizers from coming out.