The past week has indeed been an eventful week and the prevailing economic crisis only appears to be worsening by the day. The country’s debt is being restructured by two international firms and a report is expected to be submitted to the International Monetary Fund (IMF) by next month, but economists are questioning whether it would in fact be possible to restructure a complicated sovereign debt within a matter of weeks.
On top of this, the new developments that unrolled over the past week, further deepening political instability, are now expected to delay a potential bailout programme with the IMF, while, according to the Central Bank of Sri Lanka (CBSL), there are also a couple of policies that have created disagreement between the IMF and the Government.
The longer the bailout takes, the longer the Sri Lankan economy will take to recover from its current chaotic state. The delay in political stability aside, the Government has been largely late to do just about anything in recent times.
The Sri Lankan Rupee could have been floated much earlier, the sweeping tax concessions should have been restored earlier (although taxes should not have been slashed at all), Government expenditure should have been reduced earlier… the list goes on and on. The consequences of these delays are now wreaking havoc on the economy.
The delay in implementing certain policies has pushed the interest rate of Treasury bills to reach the highest rate in history at the time of writing on Tuesday (12) and it will only keep rising as long as economic recovery is delayed. The interest rate was around 30%, which was about 400 basis points higher than the rate at the previous week’s Treasury bill auctions. What is the assurance that it will not go up by another 400 basis points this week too? But we have no other options left but to borrow at an insanely high interest rate to keep what is left of the economy running.
Worker remittances have not improved much in May, remaining well below the average monthly figures of last year and also the previous year, which remarkably recorded Year-on-Year growth despite the pandemic impacting migrant workers and their jobs.
Usable reserves, as of end June, were at a mere $ 250 million. However, some kept praising Ranil Wickremesinghe (whose designation keeps changing faster than the U-turns of policy decisions made by Gotabaya Rajapaksa), for bringing the official foreign exchange reserves to $ 1.85 billion, by either conveniently or unknowingly ignoring the fact that the reserves include a $ 1.5 billion equivalent yuan swap from China which has been idling since December last year.
The swap came with conditions that made it almost impossible for Sri Lanka to use it anytime sooner and it has been there for the past seven months. It is quite unfortunate that the vast majority of Sri Lankans’ financial literacy is so poor that it makes them blindly believe any convincing yet misleading statement from politicians and vote for them at the elections. Is this not why we are now stuck with politicians who are good at misleading the public?
In a nutshell, political stability is imperative for the economy to recover. However, achieving political stability appears to be impossible at the moment, with greed for power, pride, and ego weighing down on the political reforms that are urgently required. The delay is severely impacting the overall economy, forcing investors to lose confidence in Sri Lanka, while pushing more people below the poverty line and children into starvation.
Political stability for economic stability
17 Jul 2022
Political stability for economic stability
17 Jul 2022