Foreign reserves issue: Direction needed in Budget: Economists

  • Budget should have indicated a plan
  • Sri Lanka needs to build credibility 
  • Needs structural economic reforms, not short-term measures

By Skandha Gunasekara

While the Budget 2022 earmarks billions of rupees for a range of projects, it has failed to address the country’s biggest fiscal problem – the foreign exchange crisis and debt obligations. 

Experts were quick to point out that given the serious nature of the current economic environment, a plan on what would be done to address key issues ought to have been included in the Budget. Popular or ad hoc decisions and short-term remedies will not solve a long-term problem, experts warned. 

Earlier this year, Sri Lanka implemented strict import controls, including the total restriction of vehicle imports, as a stopgap measure to stop dollar outflows while the Central Bank of Sri Lanka (CBSL) has continued to keep the exchange rate fixed at Rs. 203 against the dollar, despite the actual market price being between Rs. 225-230 per dollar.

Despite such moves, and in some cases as a result of them, dollar inflows are few and far between, with even foreign remittances seeing a 50% drop in September 2021 compared to September last year, per a statement issued by the CBSL. 

Debt restructuring vital

University of Colombo Lecturer and economist Umesh Moramudali highlighted the need for the Budget to contain a direction for the economy to overcome this issue with the extreme circumstances the country is facing. 

“One of the major weaknesses in this particular Budget is that they haven’t mentioned any plan or direction as to how they will address the foreign exchange issue or the foreign debt servicing issue. The current context demands such a plan within the Budget itself.” 

He noted that at present the Government had several options as to how they could address the issue. The first of which would be to seek financial assistance from the International Monetary Fund (IMF). He explained that this would come at the price of having to follow several conditions, such as raising taxes, stringent control on public expenditure, and then having to let go of the exchange rate where the rupee will float.

The second option would be to carry out a debt restructuring programme, Moramudali said, which would see Sri Lanka postponing its debt obligations and receiving some “breathing space” to recover from its current economic woes. 

The third method is what the Sri Lankan Government is currently implementing where strict import controls are put in place to limit dollar forex outflows. 

However, Moramudali expressed concern over the sustainability of such measures, especially with the significant debt obligations looming in the near future. He questioned if Sri Lanka can expect an inflow of $ 2 billion or $ 3 billion from tourism. 

“My worry is how long we can sustain these short-term methods such as leasing out assets and import controls? We have sovereign bond maturities upcoming until 2030, so there is significant foreign loan repayment we will have to undertake while simultaneously, significant imports will have to come into the country.” 

Pegged rupee spells trouble

Meanwhile, Advocata Institute Chief Operating Officer (COO) Dhananath Fernando warned that the current measures of pegging the rupee were backfiring, as it was discouraging exports and promoting imports, adding that foreign remittances had reduced in September for the same reason. 

“The solutions (to the forex crisis) will not come through popular decisions. At present, what’s happening is that you are encouraging importers and discouraging exporters. This is because exporters are buying US dollars at Rs. 203 when the market rate is Rs. 235-240, while importers are selling dollars at Rs. 203 when the market rate is Rs. 240. There is a fundamental issue there,” he said. 

He said that allowing the rupee to float would help in this context, even though the Government’s unwillingness to do so was understandable, as it would also result in Sri Lanka’s debt-to-gross domestic product (GDP) ratio skyrocketing and thus leading to a credit rating downgrade.

Fernando asserted that structural economic reforms were the way to go which would see dollars coming into the country. 

“There needs to be a combined solution where the currency is allowed to depreciate and a structural reform programme needs to be implemented at the same time. This is because for people to bring money in dollar terms, they need to see a proper, comprehensive, credible programme, where investors will see some effort from the Sri Lankan authorities where they are serious about bringing about reforms.” 

SL needs to restore credibility

Fernando echoed the sentiments of others that seeking out the assistance of the IMF would boost Sri Lanka’s chances in gaining foreign investments, as it would lend credibility to the country and Government. 

He stressed that while credibility brought by procuring the help of the IMF was important, structural reforms were imperative, as any agreement with the IMF would ultimately entail such reforms in the form of conditions. 

“In my view, it’s not a matter of the money we receive from the IMF or what conditions they bring; what is important is the supplementary value that is added by the credibility lent to us by engaging with the IMF.” 

Former State Minister of Finance and Samagi Jana Balawegaya (SJB) parliamentarian Eran Wickremeratne told The Sunday Morning that the incumbent Government must gain the confidence of the international markets, which could be primarily done by upholding the rule of law and respecting human rights, or risk future investments and economic facilities such as the Generalised Scheme of Preferences-Plus (GSP+). 

“The Government needs to instil confidence and trust in market participants. This is a reflection on those governing and their policies. The rating agencies have systematically downgraded Sri Lanka over the past two years. The present Budget does not address the issues related to improving ratings. Sri Lanka has lost many potential investors and may lose export opportunities by risking GSP+ facilities in both the US and Europe.” 

He went on to say that emphasis must be put on the development of small and medium enterprises (SMEs) to develop Sri Lanka’s exports.

“Secondly, we must give priority and incentives to SMEs to expand exports. Government subsidies in technology and government intervention in identifying global markets for SME goods and services are essential.” 

While pointing out that the IMF could provide confidence to investors through its support to Sri Lanka, he said that the Government had to ensure it significantly reduced the budget deficit. 

“With or without the IMF, the Government has to pursue economic policies of fiscal consolidation. The budget deficit has to be brought down from double-digit figures to below 5% of GDP. Government revenue, which was destroyed by glib electoral promises made by Gotabaya Rajapaksa, needs to be revived. Investors are wary of the Sri Lankan economic environment. The IMF can provide confidence to the investor community by its support.” 

Meanwhile, Treasury Secretary S.R. Attygalle said that both the Government and Central Bank were working on short-term measures to address the forex crisis, and that he could only reveal further details “when things are materialising”. 

He argued that the Budget had laid out several long-term measures to boost foreign currency inflows. 

“In the long-term we are going for the export markets, and the Budget has focused heavily on production; the IT sector is to be developed; underutilised assets are also to be utilised and these can have foreign investments coming in,” the Treasury Secretary said.