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Economic challenges for President Ranil

26 Jul 2022

By Dinesh Weerakkody Six-time Prime Minister Ranil Wickremesinghe, who took oath as the eighth President last week, faces the daunting task of leading the country out of its economic collapse and restoring order after three months of mass protests. He overwhelmingly defeated his main rival for the job, Dullas Alahapperuma, with 134 votes to 82 in a Parliamentary secret vote.  Two weeks ago, violent protestors burnt down Wickremesinghe’s private home and also stormed his Prime Ministerial office in Colombo in demonstrations against his leadership. But last week, after sweeping the vote, he called for unity and bipartisanship moving forward. He told Parliament the nation was facing “a very difficult situation” and there were “big challenges ahead”. Sri Lanka has been wracked with protests for months because the country is effectively bankrupt and facing acute shortages of food, fuel, and other basics.  In fact, Central Bank of Sri Lanka (CBSL) former Deputy Governor Dr. W.A. Wijewardena, in an interview with a newspaper, said recently: “In every respect, Sri Lanka is a bankrupt country,” adding that the challenge of the new Government was to make it solvent. “If Wickremesinghe fails, Sri Lanka will also fail, not in the next few years but for the rest of the period Sri Lanka will be a non-entity as a nation,” he warned. Crisis The economic crisis is largely man-made, starting with the huge cuts in tax revenues, suspending the International Monetary Fund (IMF) programme, and the squandering of forex, given the pandemic. As a result, money printing has been Rs. 4 trillion-plus. Overall, inflation is now at 30% and food inflation is over 70%.  Sri Lanka’s forex sector is the worst affected. Foreign reserves have fallen from $ 7.6 billion in December 2019 to a usable foreign reserve level of less than $ 200 million at the end of June. The net foreign assets of the Central Bank are negative, at $ 4.4 billion as at the end of March 2022. The rupee is under immense pressure, there is limited forex in the formal banking system, and a lucrative black market is thriving.  The CBSL has officially suspended foreign debt servicing, which amounts to a default, taking the crisis to another level. Sri Lanka is now an insolvent country. Making Sri Lanka a credit-worthy country will be an enormous task and cannot be done without the assistance of Sri Lanka’s long-standing friends like India, Japan, China, the UK, the US, and South Korea.  President Ranil Ranil Wickremesinghe being appointed as the eighth Executive President is nothing short of a miracle; no one in their wildest dreams would have thought it possible. But it has now happened. The appointment of Ranil Wickremesinghe is timely, given his vast experience. This is his opportunity to create a legacy, given all that has happened in the past. The new President knows that at present, the Sri Lankan economy is positioned in an extremely precarious position. A misstep or a miscalculation would send it spiralling to being a failed state and a pariah in the international financial ecosystem.  Although the Government’s budget projected revenue of Rs. 2.3 trillion, Rs. 1.6 trillion is the realistic projection of this year’s revenue. There is a $ 700 million credit line from India, and the Government will need to make available this credit line when importing essential goods.  Even taking a bold step similar to what India did, allowing rupees to settle foreign trades, is a good move. It can have long-term benefits. We need a big repo rate cut; however, there’s little light on the action in the forex market. The banks need to be stabilised with good regulations. He also needs to close the negotiations with the IMF for a bail-out package worth up to $ 3 billion soon. Way forward The expectations of the Prime Minister are very clear – fix the oil and gas queues as soon as possible; bring back the 19th Amendment; prosecute those who have plundered and mismanaged the economy; and fix the forex liquidity in the economy.  The first two can be done with the support of Sri Lanka’s friends. The 19th Amendment will require the political will of the 225 in Parliament; the people will not stop protesting until this is accomplished. Fixing the economy will require time, skilled and dedicated people, and objective action. Unfortunately, people have lost patience. The CBSL cannot say they are independent and do what they think is best for the country. They need to synchronise with the Government.  The high-interest regime must change before it kills businesses and banks. Very soon, Government revenue won’t be sufficient to service the Government debt. Inflation is not demand-pull inflation or the increase in aggregate demand; we are importing inflation. Forex management needs innovation, and the financial system needs a fresh injection of capital.  The Foreign Ministry and the Board of Investment (BOI) must be restructured fast. They have failed to deliver. They must no longer be allowed to gobble up our foreign exchange. We can no longer rely on bureaucrats to take the lead. They have failed us and failed us miserably. We need leadership and inspiration to come out of this crisis. President Ranil has the maturity of a Statesman. What he does in the next three months will either make Sri Lanka or will reignite the genuine “aragalaya” types to make their presence painfully felt once again. (The writer is the immediate Past Chairman of the International Chamber of Commerce (ICC) Sri Lanka)  ………………………….  The views and opinions expressed in this article are those of the author and do not necessarily reflect those of this publication.      

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