Three of the most important men entrusted with steering Sri Lanka’s economy spent the past two weeks painting three entirely different pictures of the same country. One, President Anura Kumara Dissanayake who is also the Finance Minister, effectively called for the nation to move into economic ‘safe mode,’ warning that difficult choices and reductions in spending, including pressure on critical imports like fuel, may be necessary to avoid greater pain. Another, his own Deputy Minister Anil Jayantha Fernando, insisted that the depreciation of the rupee was not necessarily alarming and that exchange rate movements carry both costs and benefits. He is apparently of the view that nothing requires radical change at this point. The third, Central Bank Governor Nandalal Weerasinghe, warned that the period ahead remains uncertain and that Sri Lanka must prepare for shocks yet to come.
If those responsible for managing the economy are speaking in three different voices, which voice are the people expected to trust? That question becomes even more pressing because economics is ultimately not only about numbers, it is also about confidence. As Opposition SJB MP Harsha de Silva, fresh from a vacation in the US, was quick to point out in Parliament on Thursday (21), markets run on confidence and consumers spend based on confidence. Investors make decisions based on confidence, and once confidence weakens, numbers alone struggle to repair the damage.
Last week, Bloomberg reported that the Sri Lankan Rupee had become Asia’s worst-performing currency for the month and had dropped to a three-year low. A country that only a few years ago was celebrated for a recovering currency, suddenly found itself once again at the opposite end of the table. The immediate official explanation points towards external pressures: rising oil prices, uncertainty generated by conflict in the Middle East, and a strengthening US Dollar have placed pressure on many Asian economies. Countries heavily dependent on imported fuel naturally feel the impact first and Sri Lanka belongs squarely within that category.
But blaming everything on external events would be far too convenient. To understand why, one has to return to 2019. When Gotabaya Rajapaksa came to power with a commanding mandate, one of the earliest economic decisions was a major reduction of VAT and other taxes. Economists including de Silva, Opposition politicians, and independent observers warned at the time that such measures could significantly weaken State revenues. Those concerns were dismissed because the immediate appeal of tax cuts proved politically irresistible, and as some claim, was obligatory political payback.
The consequences are now part of modern Sri Lankan history. Government revenue declined sharply, fiscal space narrowed, and the country entered a period where subsequent shocks – from the pandemic to the collapse of tourism – became far more damaging than they otherwise may have been. While the 2019 tax reductions were not the sole cause of bankruptcy, they undeniably became one of the most consequential policy errors of the period.
There is a lesson in that history: short-term policy decisions made without considering secondary effects can eventually produce consequences far larger than anticipated. The concern now is whether Sri Lanka is once again approaching a similar trap, given the increasing global uncertainty and significant downgrading of global growth projections.
In this regard, recent attention has turned towards vehicle imports and the extraordinary movement in Letters of Credit (LC) opened ahead of the Government’s decision to impose a temporary – three month – 50% surcharge on vehicle import duties. Figures cited in Parliament indicate a dramatic jump in dollar demand in the days leading to the measure. Daily LC openings reportedly rose from relatively modest levels to more than $ 23 million on one day before easing thereafter. The Government’s intention behind the surcharge may have been to slow import demand and reduce pressure on reserves, but markets often react according to incentives rather than intentions.
Instead of waiting, importers rushed to act before additional costs took effect. The result was immediate pressure on dollar demand. Whether information regarding policy changes reached sections of the business community before the official announcement is a matter that deserves serious scrutiny if public confidence is to be maintained. Because if a select few benefit from advance knowledge while the broader public bears the consequences through a weaker currency and higher prices, the issue extends beyond economics into governance itself. The very type of governance this regime swore to change.
However, even though there are similarities, it would be inaccurate to suggest that Sri Lanka is reliving 2022 in identical form. The economic fundamentals today are different. Foreign reserves stand at around $ 7 billion. Fiscal discipline has improved compared with the pre-crisis era. Debt restructuring has progressed considerably and the IMF programme remains active. The IMF itself recently noted that Sri Lanka’s reform programme has produced stronger-than-expected growth and revenue performance while emphasising the need to continue building reserves amid global uncertainty.
Yet different does not necessarily mean safe. Sri Lanka remains exceptionally vulnerable because it is still operating with limited room for error. A nation dependent on fuel imports, external financing, and worker remittances cannot afford repeated policy miscalculations.
The reality becomes evident in another painful fact: the most immediate relief currently available appears to be the expected release of approximately $ 700 million under the IMF programme together with additional external funding support. There is nothing inherently wrong with international support. Sri Lanka required it and continues to require it. But if every sign of stress immediately leads to dependence on the next inflow of external financing, then deeper structural questions remain unanswered. The supreme irony is that the very party that routinely condemned and criticised the IMF is now solely dependent on it and is not embarrassed to admit that either.
How exactly can Sri Lanka build its critical reserves and how can exports become more competitive? How will investment increase? How will dependence on imported fuel be reduced? How will growth be generated without depending on consumption-driven borrowing cycles? These are not questions that can be postponed indefinitely. The current regime cannot forever depend on external bailouts given that the ongoing IMF programme ends next year and it must come up with viable alternatives and answers to these critical questions thick and fast.
The Opposition, too, cannot escape criticism. Calls for all-party conferences and statements of concern may create headlines, but people are increasingly looking beyond criticism alone and the usual ‘we said so’. If the Government appears uncertain, then the Opposition must offer more than warnings. It must demonstrate an alternative path. Otherwise, politics – which the ordinary citizen is already fed up with and the single biggest reason the NPP is in office today – risks becoming a contest between competing speeches rather than competing solutions; something of little interest to the man on the street trying to figure out where his next meal is going to come from.
Sri Lanka has reached this point before; the queues of 2022 did not appear overnight. They were preceded by warning signs that many dismissed, explained away, or simply chose not to see. Perhaps the greatest danger today is not the depreciation of the rupee itself. Currencies rise and fall and external shocks come and go. The greater danger is confusion at the very top.
Because when the people responsible for navigating the aircraft cannot agree whether there is turbulence ahead, whether the skies are clear, or whether emergency procedures are necessary, passengers naturally begin looking for the nearest exit. And history has already shown what happens when public confidence leaves the cabin first.