By Harsha de Silva, SJB MP
Earlier this week, a senior IMF official visited Sri Lanka to brief the government on the IMF’s assessment of the crisis-hit economy. The IMF Asia and Pacific Department Director Changyong Rhee held meetings with the Finance Minister, Basil Rajapaksha and President Gotabaya. However, Mr. Rhee has not met with the Governor of the Central Bank, Ajith Nivaard Cabraal. In normal circumstances, an agreement with the IMF is signed between the IMF and two local parties, one being the Minister of Finance and the second being the Governor of the Central Bank. Thus, the absence of a meeting between the IMF official and the Governor of the Central Bank indicates that his stance on not engaging with the IMF is firm. How can one expect easing of the current crisis, while the decision makers responsible for our economy have ideological differences.
The IMF official listed out six main points in his brief to the President; beginning with the first and biggest policy blunder of unnecessary tax cuts in 2019, which witnessed a significant reduction in government revenue. According to Dr. Roshan Perera, a former Director of the Central Bank, government revenue fell by at least Rs. 500 billion in the year 2020 as well as 2021, signaling a loss of over Rs. 1 trillion in total revenue in the last two years. Secondly, Mr. Rhee highlighted the fact that international markets are completely closed to us right now due to the loss of confidence in the government’s planning of the economy. Third point criticized the government’s complete mismanagement of the exchange rate and utilization of foreign reserves, which consequently led to a lack of funds for debt repayments and substantial devaluation in the rupee.
The fourth point critiqued the massive budget deficits over the past two years. On numerous occasions, we have pointed out in parliament that the government was fudging the numbers. In fact, the budget deficit for the year 2020 was 14% and not 11% as reported in official stats. The fifth point highlighted the international communitys’ major loss of confidence in Sri Lanka, as well as the people’s loss of confidence in the current government. A recent poll by Verite Research displayed that the people’s confidence in the government was as low as 10%! Moreover, international market confidence is a decisive factor in successful economies, however, Sri Lanka’s international sovereign bonds are down 50% in the Singapore bond market.
Lastly, the IMF official pointed out the inability of the government to control rising inflation. For example, Sri Lanka reported a 25% rate of food inflation last month although it may be as high as 40%. Most importantly core inflation, which is an inflation measure that excludes transitory or temporary price volatility such as seen in food and energy, was as high as 11%. Core inflation is a reflection of the government’s macroeconomic policy making and should normally be below normal inflation rates of an average 4-6%. When will the government understand basic principles of economics such as rising inflation due to money printing? Since last Friday, the government has printed over Rs. 100 billion!
The government continues passing the ball, now between the Minister of Finance and the Governor of the Central Bank. This is the first time in history that we are witnessing a Governor of the Central Bank blaming the Minister of Finance openly about the mishaps in the economy. The devaluation of the rupee has not ceased, as interest rates have not increased in parallel to the devaluation. Nonetheless, all citizens are left with no assurance of an end to their plight. Minister Eran, Kabir and I are currently drafting a economic blueprint in bringing Sri Lanka out of this crisis, with drastic reforms never-attempted before in consultations with leading international and local academics and professionals. Moreover, we hope to launch a programme to ease the burden on the bottom 20% of society that is going through unbearable hardships, as the bottom 20% represents only 5% of total income while the top 20% enjoys over 50% of total income. We hope to present a social market economy, in which we will guarantee social justice while increasing competition in the market. Nevertheless, in line with our progressive thinking, we hope to consult all economic experts, business leaders, unions and all chambers, regardless of political affiliations, in gaining their vital ideas and suggestions for Sri Lanka’s economic recovery in the coming weeks ahead.