Sri Lanka is bankrupt in every respect: Dr. W.A. Wijewardena
- If Ranil Wickremesinghe fails, Sri Lanka will also fail
- Current economic status is catastrophic
- Drastic reduction in food production due to insane organic policy
- Inflation is galloping; external sector worst affected
- Lankans will have to learn to live through enormous hardships
- Only strength Sri Lanka has is its human capital
- Country has to revert to pre-2019 tax regime
By Marianne David
Protests and shortages are the order of the day in Sri Lanka today and outrage against the Government is growing as people find it increasingly difficult to eke out an existence. The situation is worsening by the day, with medicines, fuel, and gas running out, regular power cuts, and prices of essential items skyrocketing, even as the political crisis adds more fuel to the raging fire of the economic crisis.
Sri Lanka’s current economic status is in fact nothing short of catastrophic, with the country’s economy hit on every front and the Government budget in peril, asserted Economist and former Deputy Governor of the Central Bank Dr. W.A. Wijewardena, in an interview with The Sunday Morning. “In every respect, Sri Lanka is a bankrupt country,” he noted, adding that the challenge of the new interim 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 in existence as a nation,” he warned.
Following are excerpts of the interview:
How do you view Sri Lanka’s current economic status, especially in the backdrop of the political developments of the last few days and the resultant uncertainty and upheaval?
The current economic status is catastrophic, to use an unconventional term. From every front in the economy, Sri Lanka has been hit. Economic growth is in the negative range. There is a drastic reduction in food production due to the insane organic farming policy implemented by Gotabaya Rajapaksa on his own.
The Government budget is in peril with a huge reduction in revenue, about 4% of GDP, ballooning of the budget deficit from 6% of GDP to over 12%, and the Government’s resort has been to borrow from the banking system – Rs. 3.7 trillion during the 27-month period from January 2020.
The increase in the money stock, which people refer to as money printing, has been Rs. 4 trillion or 52%. As a result, inflation is galloping – now at 30%, according to official sources, but at 151% according to inflation tracker Steve Hanke of Johns Hopkins University.
The external sector is the worst affected. Foreign reserves have fallen from $ 7.6 billion in December 2019 to a usable reserve level of less than $ 50 million at end April 2022. However, this does not portray the alarming situation faced by the country. That is, the net foreign assets of the Central Bank is negative at $ 4.4 billion at end March 2022. As a result, the rupee has been under pressure for depreciation and due to the insane attempt of the Central Bank to keep it at Rs. 200 per dollar, when there was no forex in the formal banking system, a lucrative black market – the worst enemy of a central bank – has thrived.
The Central Bank has been forced to give up its goal of maintaining the rupee at this artificial level and now it is in a freefall. It is now around Rs. 380 per dollar, but the black market rate has been above Rs. 400 to a dollar. With the perilous budget and the drying up of forex reserves, the Government has been forced to suspend foreign debt servicing, which amounts to selective default of loans. In every respect, Sri Lanka is a bankrupt country. The challenge of the new interim government is to make it solvent.
To say that the economy is staggering is no exaggeration. What do we need to do immediately to bring about some stability?
Sri Lanka’s main issue now is the lack of forex. With no confidence of the international community and those who earn foreign exchange flows in the present Government’s policies, formal forex flows have dwindled. There is a trust deficit.
The immediate requirement is to restore confidence. That will depend on Sri Lanka’s ability to successfully negotiate a bailout package from the International Monetary Fund (IMF) that will entail implementation of a credible economic reform programme. It involves increasing taxes, halting the money printing race, tightening monetary policy, successful debt restructuring, and making the Central Bank independent from unwarranted political interference.
Since it takes time to get a bailout package, Sri Lanka should immediately go for a bridging financing facility. The likely donors are India and China. However, given the enormity of the funding requirements during the next six-month period, estimated at $ 6 billion, it is unlikely that these two countries can bail out Sri Lanka. What this means is that Sri Lankans will have to learn to live through enormous hardships like foregoing many of the things they are enjoying today.
The Central Bank Governor, whose appointment just over a month ago was widely welcomed, on Wednesday said he would step down if political stability was not ensured soon. How do you view the Governor’s position and what do you propose needs to be done to ensure stability and continuity at the CBSL?
This is a bold statement made by a Governor of the Central Bank. The other Governor who made a similar announcement was Sunil Mendis, who held the Governor’s post from 2004 to 2006. When the Mahinda Rajapaksa administration at that time made his life miserable as Governor by intervening in the bank’s work, he announced that he would be leaving immediately. Hence, both Weerasinghe and Mendis deserve our commendation.
Now an interim Prime Minister has been appointed, but he too has run into stormy weather. We are yet to see whether that Government will receive the approval of all the parties, including those protesting against President Gotabaya Rajapaksa. If it does, it is well and hopeful. But if it doesn’t, Weerasinghe will have to walk his bold talk.
Could you do a SWOT analysis of Sri Lanka’s economy?
The only strength which Sri Lanka has is its human capital, which can be easily engaged in producing saleable service to the rest of the world, but this requires Sri Lanka to shift its strategy from goods to services like ICT, education, healthcare services, and hospitality services. This is what other countries in the region like Vietnam, Malaysia, and Bangladesh are doing.
Our weakness is that our production system is outdated and relies on old technology. We are still in the Second Industrial Revolution, whereas the rest of the world has moved to the Fourth Industrial Revolution. As a result, Sri Lanka’s productivity is very low. Hence, Sri Lanka should introduce high technology to the production structure.
The opportunities are that Sri Lanka can still go for high tech products and become a partner of the global supply chain. What this means is that Sri Lanka should not endeavour to produce a whole product in the country but a component that can be used for producing a whole product elsewhere. Already we do this in the case of the canvas part of the Nike sports shoes and sensors for airbags for vehicles, but that is not sufficient. We should expand it to cover thousands of such important components. That should be the medium- to long-term strategy of Sri Lanka.
The threats are coming from within as well as from outside. Within, Sri Lankans are a backward nation believing that it can deliver prosperity to people by promoting import-substitution industries and becoming self-sufficient in everything they consume. There are even senior academics at universities and top policymakers who share this view. Outside, the threats are from its competitors who are still in the low-income category and have moved into producing the labour-intensive products which Sri Lanka has been producing. As a result, Sri Lanka is now snared in what is known as the middle-income trap.
What this means is that it has been an easy journey for Sri Lanka to move from a low-income country to a lower middle-income country. But without the needed high technology, it cannot elevate itself to a higher middle-income country and later to a high-income country.
What is the best course we should chart to recover from where Sri Lanka now stands?
The roots of the current economic crisis are found in Sri Lanka’s failure to move along with the rest of the world. This was what was done by successful countries like Singapore, South Korea, Taiwan, Hong Kong, and Malaysia, to mention but a few.
Sri Lanka should introduce a roadmap spanning over, say, 10 years to convert it from a low-tech product country to a high-tech product country and integrate it with the rest of the world seamlessly. Vietnam introduced such a roadmap in 2020 aiming at joining the Fourth Industrial Revolution by 2030. This is the importance of integrated national planning.
What are your thoughts on the ongoing negotiations with the IMF and what can we hope for?
Since Sri Lanka is without any foreign exchange today, it is having a huge balance of payments crisis. The IMF will support the Central Bank to build up its foreign reserves. What is in the pipeline is some $ 800 million to be drawn immediately, under the Rapid Financing Facility, and another $ 3.2 billion under the Extended Fund Facility to be drawn over three years in instalments.
An important factor here is that IMF support is for the Central Bank and not for the Government. Even then, it is a necessity today because of the gravity of the balance of payments problem.
Moving beyond negotiations with the IMF, what is your advice for Sri Lanka in the long-term to ensure economic stability?
IMF support is necessary, but not sufficient. It is necessary for Sri Lanka to overcome the balance of payments crisis. But that is a development in the financial sector. What is sufficient is with the resolution of the BOP problem, Sri Lanka should develop its real sector, consisting of those real goods and services that we consume or use as an input for further production.
Our prosperity, wellbeing, and wealth comes from real sector development. For that, Sri Lanka should go for an integrated plan like a 10-year road map about which I have spoken of earlier.
What kind of tax regime do you propose as the best way forward for Sri Lanka?
Sri Lanka has no choice but to go back to the tax regime that existed prior to 2019. The Gotabaya Rajapaksa administration distorted it by offering an unsolicited attractive tax concession to both income and value added taxpayers. The result was the loss of tax revenue by about 4% of GDP. Now, what has been lost has to be regained.
What are your thoughts on the ‘GotaGoHome’ movement and the changes that have come about as a result of the peaceful protests?
The failure of the economic policy of Gotabaya Rajapaksa has caused innumerable hardships and suffering to people. The failure is multi-fold. Imprudent tax cuts, insane overnight organic drive, artificial fixing of prices and the exchange, horrendous money printing that has paved way for inflation to raise its ugly head and the rupee to depreciate in the market, and refusal to seek IMF support in time are some of the economic follies of Gotabaya Rajapaksa.
These sufferings have brought people to the street. Since there was no solution offered, the protests have culminated in a campaign demanding that he step down, tagged as ‘#GotaGoHome’ first and later extended to his elder brother, the then PM Mahinda Rajapaksa, in a new hashtag of ‘#MainaGoHome’.
These are peaceful protests by the people and a part and a parcel of a vibrant and dynamic democratic environment. Many countries do not have such peaceful protests extending for such long periods. I have nothing but admiration for the youth who have taken themselves to this peaceful engagement against the Government. They have already won almost everything they have agitated for. What is remaining unfulfilled is Gotabaya Rajapaksa’s resignation from the presidency.
Are you hopeful that things will turn around? If yes, how bad will things get before they get better? How do you think the next few years will play out?
Hopes will not help because they are imaginations in the mind. One has to work on the ground to attain one’s goals. Hence, the agitations for a real change in the systems in Sri Lanka should continue. What these people are demanding is a corruption-free society ruled by people who are accountable for their actions.
This has to be enforced from outside the system with a legally-mandated governance system, establishment of inclusive institutions that do good for the people, elimination of the possibility of establishing extractive institutions that rob people of their wealth, and placement of proper checks and balances to prevent the abuse of power by rulers. This is the job of the interim government of Ranil Wickremesinghe.
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 in existence as a nation.