{"id":117901,"date":"2021-09-07T22:33:24","date_gmt":"2021-09-08T04:33:24","guid":{"rendered":"http:\/\/www.lankaweb.com\/news\/items\/?p=117901"},"modified":"2021-09-07T15:15:01","modified_gmt":"2021-09-07T22:15:01","slug":"a-reset-of-economic-fundamentals-in-sri-lanka-is-imf-the-only-hope","status":"publish","type":"post","link":"https:\/\/www.lankaweb.com\/news\/items\/2021\/09\/07\/a-reset-of-economic-fundamentals-in-sri-lanka-is-imf-the-only-hope\/","title":{"rendered":"A reset of economic fundamentals in Sri Lanka; Is IMF the only hope?"},"content":{"rendered":"

By Raj Gonsalkorale<\/em><\/span><\/h2>\n\n\n

Sri Lanka is at the precipice of an economic disaster. The country\u2019s foreign debt is suffocating the country, it is its biggest immediate problem, and the problem for the foreseeable future unless urgent and drastic action is taken, now. The crisis arises due to several factors, the primary factor being the high component of market borrowings in the form of International Sovereign Bonds (ISBs) in the country\u2019s foreign debt portfolio. ISBs account for 47% of the debt. The following Central Bank chart shows this<\/p>\n\n\n\n

\"\"<\/figure>\n\n\n\n

ISBs are short term\nloans attracting high interest rates (around 6%) with no grace periods while\nloans from international institutions such as the World Bank, Asian Development\nBank, IMF, attract low interests and long term repayment terms including grace\nperiods. ISBs are usually not conditional while others like WB, ADB, IMF have\nconditions that a country has to fulfil to qualify for the loans. Besides the\nISBs, the Chinese debt component is stated as 10% of the total debt. These\nloans are reportedly similar to short term ones as IDBs, and attract a higher\ninterest like ISBs. If this is so, 57% of the loan portfolio is in high\ninterest, short term loans.  In the\nabsence of exports income that brings in a nett inflow to the country after accounting\nfor the import component of exports, a serious drop in tourist earnings, foreign\nremittances and much anticipated FDIs not materialising, Sri Lanka will not\nhave a choice but to take more loans in the form of ISBs and other high\ninterest, short term loans, to repay loans and interest components that will be\nfalling due. <\/p>\n\n\n\n

It is perhaps time\nthat the country came to terms with the fact that we are skating on thin ice\nand pretending there is no berg at the bottom of the ice berg and only its tip.\nWhat is visible in an ice berg, it\u2019s tip, is only a small part of the entirety\nof the ice berg, and Sri Lanka\u2019s debt problem is that big part of the ice berg\nwhich politicians do not wish to see preferring to see only the tip. The\nTitanic sank because of the underestimation of the unseen part of the ice berg\nit collided with. Sri Lanka could be the next Titanic.<\/p>\n\n\n\n

In the past, Sri\nLanka managed to settle large debt repayments with foreign exchange inflows\nfrom exports, tourism and foreign emittances, and also build a small reserve\nfor a rainy day. Today that reserve is down to USD 2.5 Billion, while our\naccumulated debt is around USD 35 Billion without counting the interest\ncomponent of this debt.<\/p>\n\n\n\n

The spin that is given to Sri Lanka\u2019s\neconomic woes reminds one of very commonly used Australian and New Zealand\nexpression She’ll be right, mate\u201d. This is a frequently used idiom<\/a> in Australian<\/a> and New\nZealand<\/a> culture\nthat expresses the belief that “whatever is wrong will right itself with\ntime”. In recent years, the term has taken on a less than flattering\nconnotation, with “a she’ll-be-right attitude” referring to a\nwillingness to accept a low-quality or makeshift situation rather than seek a\nmore desirable solution. This definitely rings a bell with regard to the\nsituation in Sri Lanka. Postponing the inevitable, and administering stop gap\nmeasures seem to be the modus operandi that seems to be a common thread that\nlinks all politicians.<\/p>\n\n\n\n

Sri Lankan\npoliticians of whatever hue, when they are in power, seems to be experts at\ndeception with their feigned assessment of the country\u2019s economic situation. It\nhas never been more evident than now. Internal mismanagement over the years,\nthe economic situation in the rest of the world on account of the pandemic, and\nnot having a clear direction for now, and the next 10 -20 years, have all\ncontributed to this artificial situation.<\/p>\n\n\n\n

The President and the\nrest of the country, must come to terms with the fact that she, meaning the Sri\nLankan economy is not all right. That is the first thing that must happen. The\nSri Lankan economy, its structural fundamentals, and its financial situation is\nin a perilous state and that is a kind word to use to describe an extremely dire\nsituation. The country has a short term policy of virtually robbing Peter to\npay Paul, and scraping money from any quarter in order to settle foreign debt,\nand fund essential imports in order to survive. <\/p>\n\n\n\n

The direness of the\neconomy is well explained by Umesh\nMoramudali, a lecturer at the University of Colombo in an article titled <\/em>Sri\nLanka\u2019s Foreign Debt Crisis Could Get Critical in 2021 published in the\nDiplomat (https:\/\/thediplomat.com\/2021\/02\/sri-lankas-foreign-debt-crisis-could-get-critical-in-2021\/<\/a>)<\/p>\n\n\n\n

The situation outlined\nby Moramudali did not start with the Pandemic, nor just the current\nadministration. Those currently in the Opposition should not clap and gloat\nthat they would have done a better job. They have had enough opportunities to\nfix the problem, but they did not do so. This article is therefore not about\nwho is to blame for what, but to throw open the question as to how one should\nreset the economic fundamentals and why. <\/p>\n\n\n\n

The writer is no\neconomist, but an ordinary pragmatist. It is hoped that readers will use their\ncommon sense and give thought to the issues mentioned here, use their common\nsense to question, debate and discuss, but importantly arrive at conclusions\nwhich are solution oriented and not ones that exacerbate the problems.<\/p>\n\n\n\n

Firstly, the economic\nfundamentals and the foreign policy of the country, which have a relationship\nto global political relationships, have to be questioned, assessed, and re set\nwhere necessary. In a sense, one should question which side of the bread slice\nis buttered, meaning, if the country\u2019s future is to be based primarily on\nexport earnings, then questions like, where do we export now, where does the\nbiggest future potential lie and whether our foreign policy is conducive to\nsustain and grow export markets needs to be questioned.<\/p>\n\n\n\n

It is understood that\nSri Lanka\u2019s primary export markets are to Western nations and the country has a\ntrade balance in Sri Lanka\u2019s favour when it comes to these countries. On the\nother hand, China, a country very supportive of Sri Lanka at all times when\nothers virtually abandoned it, reportedly has a substantial trade balance in their\n(China\u2019s) favour. While efforts need to be made to address this situation, it\nshould surely be important to examine whether Sri Lanka\u2019s foreign policy is\nconducive or not to support the overall future direction of export markets and\nearnings.<\/p>\n\n\n\n

The width and depth\nof Chinese economic associations with a multiple number of developing countries\nis substantial and is a reality that needs to be known and faced. Sri Lanka is\nwell aware of this, and the extent of their portfolio of direct and indirect\nloan facilities, and equity participation is probably not known in its entirety\nby the public.  <\/p>\n\n\n\n

Sri Lanka however\ncannot go down the path it has been traversing for a considerable period of\ntime, and it needs to diverse its own equity and loan facility portfolios with international\nbodies and countries who are their primary export markets. China too should\nbecome an investor in Sri Lanka and importer of products and services from Sri\nLanka and not just a lender.<\/p>\n\n\n\n

In relation to\nexports, it is not clear whether what is being reported as export earnings are\npresented as nett export earnings after accounting for the import component of\nthe exported item\/s. A gross export earning is like a mirage particularly where\nthere is a very high import component. The long term future benefits will\nnaturally accrue only if the import component decreases in order to give the\nexporter and the country a higher earning component. This is where a value\nadding export industry is needed and earnings increased either by using more\nand more local inputs, or where the exported value has a substantially higher\nmargin over the imported component. While Sri Lanka has been moving in this\ndirection, this needs to be the policy that underpins the export industry. Tax\nincentives perhaps should be enhanced for export industries that have a\nsubstantial local cost component and\/or where the value adding component is\nhigh.<\/p>\n\n\n\n

Much has been written\nabout the need somehow to recommence tourism as soon as possible, and also to\nrecommence overseas travel for workers employed overseas. Both income earners\nare critical for the country\u2019s survival and it is hoped both will commence\nsoon. However, both have an international dependency and therefore the status\nof the pandemic in other countries.<\/p>\n\n\n\n

While it is an\nunderstandable reaction when faced with a devastating pandemic that has caused\neconomic havoc throughout the world, to curtail imports and conserve foreign\nexchange, it is a very short term measure as many economists have pointed out.<\/p>\n\n\n\n

From all accounts of\nexpert economists, it appears that Sri Lanka needs a bail out with long term,\nlow interest loans, with a grace period to tide over the current economic\nsituation that is going to prevail at least for another 2 to 3 years if not\nmore. The IMF is the only obvious institution that comes to mind to obtain such\na bail out as that is more or less their core business.<\/p>\n\n\n\n

Of course any such a\nbail out will be conditional on Sri Lanka agreeing to major structural reforms.\nSome of these will be painful in the immediate to short term, but they will be\nless painful than the repercussions of an economic collapse or a marginal\nexistence with adhoc borrowings to sustain the country. A weak economy will\nimpact on the popularity and the credibility of a government and it will\nprovide ample opportunities for Opposition parties to destabilise the\ngovernment. Political stability, the one key criteria that foreign investors\nwill look for when they make decisions about investing in Sri Lanka, will be\ngravely impacted, and the much anticipated Foreign Direct Investments (FDIs)\nwill be hard to come by.<\/p>\n\n\n\n

All above economic\nworries will destabilise the Rupee even further from its present status. Today,\nthe market rate that commercial banks pay to purchase US Dollars outside of the\nCentral Bank rate is said to be between Rs 230 to Rs 240 for 1 US Dollar\nalthough the Central Bank rate is Rs 202. This dichotomy is real and it is not\na fantasy according to reports from Sri Lanka. Many suspect that the real value\nof the Sri Lanka value is far worse and if allowed to float, it will sink Sri\nLanka. The current defacto devaluation is bound to exacerbate unless the\ncountry\u2019s economy is stabilised, and its economic fundamentals are reset in\nsuch a manner that it can prepare the country for its next many generations and\nfor them not to live a lie perpetrated on them by the successive governments.<\/p>\n","protected":false},"excerpt":{"rendered":"

By Raj Gonsalkorale Sri Lanka is at the precipice of an economic disaster. The country\u2019s foreign debt is suffocating the country, it is its biggest immediate problem, and the problem for the foreseeable future unless urgent and drastic action is taken, now. The crisis arises due to several factors, the primary factor being the high […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"closed","sticky":true,"template":"","format":"standard","meta":{"footnotes":""},"categories":[172],"tags":[],"class_list":["post-117901","post","type-post","status-publish","format-standard","hentry","category-raj-gonsalkorale"],"_links":{"self":[{"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/posts\/117901","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/comments?post=117901"}],"version-history":[{"count":0,"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/posts\/117901\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/media?parent=117901"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/categories?post=117901"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/tags?post=117901"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}