Posted on December 31st, 2020


A major reason for the economic downturn of Sri Lanka could be considered as the variation of foreign exchange reserves, and no government since 1948 has been explained the issue to the public, despite the policymakers widely talking about foreign exchange earnings and shortages. The public in Sri Lanka has no understanding of why the country needs a stable volume of foreign reserves, and what are issues associated with the up and down variation of foreign reserves of the country. The public needs to educate and motivate to encourage to make a voice to increase foreign reserves. No government or opposition politicians in the country have talked about this issue during the election campaign and motivated the public to monitor the level of foreign reserves and pressure politicians to stress on maintaining the required level of reserves, and implement related policy actions.

People have no idea what is the volume of foreign reserves in the country and what level of reserves need to maintain, and the nature and causes of variation of the volume compared to many countries. Sri Lanka needs to maintain a minimum of US dollar 25 billion of stable reserves, and after the independence in 1948, no government’s economic policy has been able to achieve required the level. It is regret to note that since 1948, during the 73 years, Sri Lanka could not build $25 billion foreign reserves, and why such a regrettable economic policy has been allowed to work.  Since the early 1990s, many countries like India. China, Australia have massively built a high volume of foreign reserves, and the economic policy of those countries focused on building and maintaining the level of foreign reserves in the dynamic economic environment. What were the contributing factors for the up and down variation of foreign reserves in Sri Lanka? The bottom line was the government did not get firm economic advice on this matter, and many economic advisors attempted to gain advantages for self-benefits than providing clear advice to improve the volume of foreign reserves. The behavior and the nature of economic advisors were to praise politicians and not to advise what really should do to achieve the target of foreign reserves.  

The direct impact of changing foreign reserve level has been the decline of the value of Sri Lanka rupee (foreign and domestic value) that has been the major effectuate of problems. When established the Central Bank of Sri Lanka, two majors were set to stabilize domestic and foreign values of the monetary unit, and the aims have been educating university students, and practically governments did not specifically direct policy to achieve the aim. Many textbook authors attempted to show that achieving the objective has been a compact task, like going to heaven. The government had no plan to strictly monitor the usage of foreign exchange with concrete economic activities with a plan to maintain reserve level and it seemed that the government irrationally allowed to use foreign exchange for economically disadvantaged activities rather than promoting the saving of foreign exchange.

The borrowings must have focused to achieve and maintain the reserve base and explain to the lenders the government objectives as the debt service activities concussion with all economic activities. The nature of borrowing has been based on the ability to repayment and although it has been a good focus, the borrowing should have not been affected by the foreign reserves level in the debt service process.  Since the 1950s, economic policymakers have not been concerned on this point, and if they have considered while protecting the level of reserves and borrowing managed to protect and increase the level of reserves Sri Lanka could have faced economic down downturns with a higher value of the monetary unit. 

China has US $3 trillion foreign reserves that are the highest in the world, despite becoming an enemy country with China, Taiwan has more foreign reserves than the USA, UK, Canada, Germany, and other developed countries. The size and the population of Taiwan are congruous to Sri Lanka.  Why did Sri Lanka cannot achieve a minimum required level of US $25 Billion reserves during the past seventy years? Politicians in the country have no understanding of the problem, and they don’t motivate people to work achieving the basic target of US$25 billion.  Under the financial administration of the Currency Board System in Sri Lanka had been accomplished a stable foreign reserve level. If the government ruled the requirement, people would have a concern on the matter of variance, and politicians in the country would have educated people without party politics in any government would have monitored the requirement, and politicians scared to educate people with a fear that the public will judge the government’s performance using the benchmark of foreign reserves.

The lower foreign reserve has been a root cause for economic problems such as lower foreign value for Sri Lanka rupee, high cost of imports, an increase in debt service, slower growth of foreign investment, and many other issues. The balance of foreign reserves depends on the demand and supply of foreign exchange. When there is a trend of a strong inward volume of foreign exchange and a lessor trend of an outgoing going foreign exchange volume, it will be a positive trend for an increase in foreign reserves, and in such a situation the government can allow liberal import policy. When it critically tests the trend of foreign reserve variation, economic policymakers have not maintained an essential reserve level as a benchmark, and the quantum of foreign exchange reserves would be helpful to counter the adverse impact of many economic problems.

Many economists regard that the liberal economic policy introduced in 1978   has been a contributory factor for the adverse variation of foreign reserve level. During this period, the import of war-related weapons and other materials and import policy of the country attempted to liberally allow incoming goods and services without discipline. Although Sri Lanka’s trade policy should be managed to consist of WTO agreement Sri Lanka would have considered that the country shouldn’t be allowed to unnecessary imports betraying the import substitution and building a production economy. 

International Monetary Fund was established by Briton Wood Agreement purposed to support member countries to maintain the required level of foreign reserves and the fund has implemented a range of credit schemes such as Standby Credits, Special Drawing Rights and providing supports for economic downturns such as the COVID-19 crisis. If it deeply analyses the IMF credit policy encouraged developing countries to import from developed countries rather than helping to build foreign exchange reserves in developing countries.  The operational pattern of IMF regarding Sri Lanka best speaks that IMF either played politics or disregarded the extending supports to Sri Lanka to increase and maintain a good foreign reserve level. There was evidence that the IMF helped for foreign reserves, despite many supports the IMF indirectly encouraged imports from developed countries.

After the presidential election in 2015, the government of Sri Lanka desired massive supports to build the foreign reserves of the country, however, practically IMF did not consider the required level of supports, and this reason was the root cause of the unpopularity of the Yahapalana regime. However, the IMF policy towards China and India was contrasting, and Sri Lanka was not supported as the way expected, and some conditions imposed when granting supports to Sri Lanka were a consolation to decline the level of foreign reserves and did the responsible policymakers explain the truth to the IMF authority is unknown and the government did not make any statement.

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