Sri Lanka’s crisis of incompetence

0

By Athula Kumara

I debated with myself whether Sri Lanka’s present state was a crisis of incompetence or a crisis of arrogance and settled on incompetence. You could have someone arrogant but competent; it’s not perfect but it’ll do. Someone who is modest but incompetent would at least have the modesty to ask for help. But someone who is arrogant and incompetent is objectively worse. Not only do they not know what to do but they also would not ask for help. Hence, I will call it a crisis of incompetence.

How it started

The tax cut proposed in the Viyathmaga-drafted Vistas of Prosperity and Splendour were implemented in late 2019 – “the prevailing tax system has contributed to the collapse of the domestic economy”, it said. I think I do not need to expand on the irony of this, which by the way, the vistas document is full of. Several taxes, PAYE, withholding tax, economic service charge was scrapped, VAT was slashed and several tax holidays were granted. The government’s tax revenue fell by nearly 28%, completely upsetting the path of fiscal consolidation undertaken by the previous government.

In 2016, Sri Lanka had entered into an Extended Fund Facility (EFF) with the International Monetary Fund (IMF) equivalent to $1.5 billion, the purpose of which was to deal with the balance of payments (BOP) pressures (yes, they were not new problems), to unlock other financing and to boost investor confidence. In 2019, following its 6th and final review the IMF decided not to disburse the final tranche of the lending facility due to Sri Lanka’s U-turn away from fiscal consolidation.

By September 2020, the Sri Lankan government decided it would terminate a $1.5 billion Japanese funded light rail system saying that it was not “cost-effective”. One engineer even went so far as to claim the Japanese LRT was useless as it could not carry cargo on top of the carriages.

The ground work for the project had been done by the previous government, and the interest on the loan was a mere 0.1% with a 40 year payment period and a 12 year grace period. Anyone else would have thought we were ripping the Japanese off, not the other way around. To make matters worse for us, the Japanese firm which had been signed on as consultants to the LRT project claimed damages worth Rs 5.8 billion for violating the terms of the agreement.

By December 2020, the US Millennium Challenge Corporation (MCC) decided to discontinue the proposed $480 million grant to Sri Lanka that would have upgraded our urban transport network, land registration and built several rural road links to highways around the country without a cent in loans.

We can’t really blame the US for the cold shoulder after all the fear-mongering spearheaded by Podujana Peramuna politicians and their allies. Biology tuition master Tissa Jananayaka even went so far as to conduct a lecture on how the US would take over a 200 km strip of land with an area of 1.2 million acres connecting Colombo and Trincomalee and called it the American Corridor. This same biology teacher also helped lend credence to the now debunked Dr. Shafi hoax. Ah, the purveyors of alternate facts in Sri Lanka.

In December 2019, the Central Bank had $7,642 million in its reserves. Reserve adequacy which is measured in months of imports was 4.6 (basically Sri Lanka could fully service its import needs for 4.6 months if everything else was held constant). By December 2020, 9 months after Sri Lanka’s first lockdown, reserves were at $5,665 million, enough for 4.2 months of imports.

Now, at this point, it might have triggered some retrospect in someone arrogant but competent. None of us knew how long the pandemic would really last – it was a “novel” coronavirus after all. In April/May 2020, Sri Lanka’s sovereign ratings were downgraded to B-negative, immediately locking Sri Lanka out of international financial markets. So, raising financing through international sovereign bonds was no longer an option either. It was clear at this point, that Sri Lanka would need IMF support eventually.

But unfortunately, Sri Lanka decided to bank itself on the self-proclaimed Godfather of Russian tourists instead and pilot an ill-fated tourism bubble with Russian and Ukrainian tourists. The purpose of which was to increase forex inflows through tourism. At this point, Covid vaccines had not been rolled out anywhere else in the world (it started on January 2021), let alone in Sri Lanka.

Perhaps the only competence displayed was in the distribution of Covid vaccinations, but even that was not without issue. There were delays in the procurement of the 2nd dose of Astra-Zeneca and of course plenty of flexing connections to get Covid vaccines ahead of others.

How it went

In July 2021, the Central Bank of Sri Lanka settled a $1 billion bond, increasing the fragility of its external liquidity position. Reserves fell to $2,806 million by end July, just 1.8 months of imports. It was soon after in August 2021 that the Delta variant started spreading in Sri Lanka, and experts warned that things would get worse. It would go onto become Sri Lanka’s worst wave of Covid in terms of hospitalizations and deaths.

We were teetering on the edge. By October 2021, Sri Lanka’s reserves had fallen to $2,269 million, just 1.4 months of imports. It was in this month that governor of the Central Bank announced his six month roadmap. How it has been six months since this roadmap was launched and none of the inflows mentioned in the document ever materialized.

In November 2021, reserves fell to $1,588 million, just one month of imports. Despite the impossible nature of Sri Lanka’s economic crisis at this point, the government of Sri Lanka still refused to explore IMF support. The presidential secretary, P.B. Jayasundera, in November said the government will “restructure its loans instead of seeking the assistance of the IMF”, the hardline stance it had maintained throughout until this month.

Soon after Christmas, the Central Bank decided to draw down on a $1.5 billion Chinese-Yuan swap it has agreed to in March 2021 to boost Sri Lanka’s reserve position, at least on the books, to $3,139 million. Reserve adequacy remained bleak, just 1.8 months of imports. Who was the Central Bank trying to fool? I do not know.

Against all expert advice, the government of Sri Lanka opted to settle a $500 million bond in end January 2022, quite literally by selling the family silver, or rather the gold in this case. In early January, the Central bank sold 3.6 tons of 6.69 tons of its gold reserves. I do not know the rate at which the Central Bank sold its gold at, but in January, the market price of gold was $1,825 per ounce.

In early January Goldman Sachs had raised its 12-month gold price forecast to $2,150 per ounce expecting a slowdown in the US economy. By March, gold prices had hit a record $2,050 per ounce following Ukraine-Russia tensions. Goldman Sachs has now raised its 12-month gold price forecast to $2,350. Perhaps if we had competence, we would now not be here wondering what the market value of that 3.6 tons of gold we sold in January would be.

Between January 2020 and December 2022, the Central Bank of Sri Lanka had expanded broad money supply, defined as the sum of currency held by the public and demand deposits held by the public with commercial banks, by Rs. 2,726 billion, a 40% increase since the start of 2020. Ajith Nivard Cabraal, who was then a state minister and currently the governor of the Central Bank boldly claimed, “there is no relationship between money printing and rupee depreciation”.

This is what the Central Bank of Sri Lanka says about broad money supply, “studies have shown that the most appropriate monetary variable to analyze the relationship between the money supply and the general price level is the broad money supply”. Perhaps then, it is not a surprise that inflation is rising so rapidly – I suspect, with the devaluation of the rupee, that March inflation will likely exceed 30%.

At the same time the Central Bank decided to maintain an artificially low interest rate, along with an artificially low managed-float exchange rate. The second lesson I learnt at my monetary economics course during my undergraduate days was that the Central Bank much choose what it wishes to control: the interest rate, the exchange rate or the inflation. It cannot, in any sense, control all three at once because these are often conflicting.

But what we saw over the past two years was, in fact, an attempt to control all three. To keep interest rates low, it was necessary to supply more money but when you supply more money that causes the rupee to depreciate and inflation to increase. Hence, the Central Bank had no choice but to employ moral suasion to maintain an exchange rate that fails to reflect reality.

But the market is no fool. Worker remittances, one of top three sources of foreign exchange into the country, fell by 22% from 2020 to 2021, that’s $1.6 billion lost due to the Central Bank’s exchange rate policy.

In end February reserves were $2,361 million, that is about 1.4 months worth of imports. The rupee devaluation hit like a ton of bricks. The Central Bank floated the rupee earlier this month and today it is being quoted at Rs.300 by some private banks. That is a depreciation of one-third. It will likely stabilize at a lower rate eventually but will have a drastic impact on purchasing power and the cost of living.

The domestic banking sector is also now at risk. In 2020, there was a shift in the foreign-domestic composition of government debt. Instead of borrowing internationally, the government borrowed domestically, shifting the composition to a 40-60 ratio. Domestic commercial bank exposure to government debt increased from 28% of central government debt in 2019 to 43% in 2020. I do not have 2021 and 2022 figures.

How it’s going

The government has finally decided to seek IMF support but it is too little too late. The government, if it was not besieged with incompetence, would have gone to the IMF one and a half years ago. A debt restructuring program will likely take upwards of 11 months (according to Lee Buccheit), depending on how proactive the sovereign debtor is (the current Sri Lankan government is many things but proactive is not a word one would use to describe it). Whatever reforms undertaken will be slow yielding and we have also piled on short term debts like swaps.

If we take away the $1.5 billion Chinese-Yuan facility that definitely cannot be used to service debts, our usable reserves are below $1 billion. But we have a $1 billion bond maturing in end-July 2022. How does the government plan to make this? In the meantime, besides financial aid, the government has not sought humanitarian assistance for food and medicine for inevitable shortages that will occur. It will probably not be proactive about this either and wait until our backs are against the wall.

The $1 billion credit line from India will help but despite import bans on non-essentials our import bill in December 2021 was $2.2 billion due to global inflation and other factors beyond our control. The war raging on in Ukraine will affect global wheat prices shortly. Fuel prices are also higher than it was pre-Covid so even if we buy less, we may still be paying the same total amount. Russia is selling oil on discount but Sri Lanka cannot even afford to buy that.

The disastrous organic agriculture policy has affected domestic food supply and domestic production. Rice yields fell by 20% in six months, the drop in tea production is expected to cause a loss of $425 million. Without an adequate supply of food and fuel, we can also kiss our projected tourism earnings goodbye. On top of that, Russia, which is one of our top tea markets will most likely not be able to buy our tea for the foreseeable future.

Reforms will take time to bear fruit, exports will not double in a year, no matter what Finance Minister Basil Rajapaksa said at his budget speech. Some countries have issued travel advisories about shortages and power cuts, so tourists will be sceptical. Worker remittances may take some time to bounce back from informal channels.

The only option the government has is to cut its expenses drastically and immediately; this means stopping all infrastructure projects, sending everyone except a skeletal staff home, raising taxes to increase revenue and to immediately start seeking humanitarian assistance to meet its food and medical needs because the cost of living will soon be unbearable for many.

Sri Lanka is now in the perfect storm precipitated by this Rajapaksa-led crisis of incompetence. Will we make it out?

-This article was originally featured on groundviews.org

 

 

Leave A Reply

Your email address will not be published.

otc high blood pressure treatment blood pressure guidelines medications blood pressure pills that is safe for the liver high blood pressure medication levothyroxine blood pressure medication that reduces blood pressure is there any difference in blood pressure pills high blood pressure child medication blood pressure medication recommendation nose blue blood pressure medication blood pressure is 150 68 should i take my medication blood pressure medication while nursing taking a bunch of high blood pressure pills aerobic exercise and blood pressure medication good blood pressure medication acupuncture treatment for low blood pressure best over the counter pills for high blood pressure blood pressure pill amlodipine besylate high blood pressure signs and treatment moderna vaccine blood pressure medication which blood pressure drugs do not cause tinnitus blood pressure medication fights cancer blood pressure medication skin rash side effects of high blood pressure medication impotence medication to avoid on blood pressure medications high blood pressure rx medication peripheral neuropathy caused by blood pressure medication high blood pressure in pregnancy treatment nice runny nose do to blood pressure medication how to get off of blood pressure pills hiv medication and high blood pressure niacin treatment for high blood pressure two drugs for blood pressure that caused cancer high blood pressure causing medications high blood pressure medication names canada blood pressure medication side effects alcohol i take 3 blood pressure medication blood pressure pills that help with anxiety what iv drug raises blood pressure list of doctors who formulated blood pressure medications how to remember blood pressure medications sleeping pills blood pressure how fast does blood pressure medication take effect sweet n low high blood pressure medication home treatment for blood pressure high blood pressure medication matrocet high blood pressure medication doses blood pressure drug bystolic iberstaron blood pressure medication blood pressure medications st alphabetical celexa and high blood pressure medication does blood pressure pills irritation skin can i take combivent with high blood pressure medication blood pressure medications beta blockers list what to do if blood pressure medication does not work drugs to lower your blood pressure red beet pills for blood pressure taurine and blood pressure medications how ling for garlic pills to lower blood pressure blood pressure medication list and side effects can i take aspirin with high blood pressure medication blood pressure medication teaching about hot tubs water pills high blood pressure over counter what is an arb medication for blood pressure resveratrol high blood pressure medication high blood pressure medication and weight loss gum disease and blood pressure medication benzenesulfonic acid in blood pressure medication taking two blood pressure pills by mistake allergy pills for high blood pressure blood pressure prescription drugs safety blood pressure medication in pregnancy trazodone and blood pressure medication which blood pressure medication is linked to skin cancer list of blood pressure medications with the least side effects could blood pressure medication make blood thicker disadvantages of high blood pressure medication blood pressure medications ludipril typical drugs for high blood pressure otc water pills for high blood pressure blood pressure medications that do not doncause bowel blockage high blood pressure after corrosion treatment how soon does high blood pressure medication work blood pressure medication teaching amertyrine high blood pressure medication increased blood pressure and heart rate after drug overdose over the counter drugs high blood pressure blood pressure medication 25 is blood pressure medication a nitrate most effective blood pressure pills blood pressure medical does red yeast rice interfere with high blood pressure medication can apple cider vinegar pills lower blood pressure does blood pressure medication give you headaches high blood pressure medication and driving should you take blood pressure pills with food inn blood pressure drugs can you eat bananas if taking blood pressure medication popular high blood pressure medication blood pressure medication los blood pressure medication second drug low blood pressure and hypertension medication do water pills lower blood pressure high blood pressure pill aqunadine high blood pressure cholesterol medication how does medication lower blood pressure acetaminophen blood pressure medication blood pressure medication 30 mg that works around the heart what does grapefruit do to blood pressure medication can red yeast rice be taken with blood pressure medication pharmaceutical treatment for high blood pressure are blood pressure pills statins blood pressure pills that start with r blood pressure medication and male impotence taking baby aspirin with other high blood pressure medications what is the medical name for a blood pressure cuff leg cramps and blood pressure medication blood pressure pill name starts with p natural high blood pressure treatments blood pressure medication names losartan higher blood pressure with radiation treatment medical marijauna high blood pressure how to avoid medication for high blood pressure what time is best to take blood pressure medication medication for palpitations and high blood pressure latest news on blood pressure treatment what if i take two blood pressure pills does xanax interfere with blood pressure medication amlipan blood pressure medication vitamin e and blood pressure medication tell me the side effects of high blood pressure medication herbs pills to lower blood pressure blood pressure medication urge to urinate what medication will safely replace lisop as blood pressure medicine active ingredient in high blood pressure medication blood pressure medications cause adrenal tumors is biktarvy ok to take with high blood pressure medication alembic blood pressure medication sandoz blood pressure medication exercise high blood pressure medication grapefruit pills blood pressure treatment for high blood pressure at home blood pressure medication for patients with osa cycle on off blood pressure medication blood pressure drugs that do not cause heat sensitivity blood pressure medications that do not cause coughing what blood pressure medications do not cause rosacea pfizer blood pressure medication side effects do garlic pills really help lower blood pressure should i take medication for anxiety induced blood pressure treatment for uncontrolled blood pressure decongestant medication high blood pressure can stiff days be used with high blood pressure medication how long does it take medication to lower blood pressure what if i miss a blood pressure pill tribenzor high blood pressure pills law lawsuit 2023 treatment of sudden drop in blood pressure zoloft and blood pressure medication orange high blood pressure pill cancer blood pressure pill why cant people with high blood pressure take keto pills how long for blood pressure to go down mini pill should i get second opinion before taking blood pressure medication blood pressure erectile dysfunction medication high blood pressure medication m lot ben medical device lowers blood pressure puppy ate blood pressure pill are there medications for low blood pressure dod blood pressure medication is losartan a blood pressure pill combination drugs for blood pressure marijuana and blood pressure medication interaction blood pressure medication interactions with grapefruit can you eat bananas while taking high blood pressure medication steps before going on high blood pressure medication blood pressure medication when to cut down foods to avoid on blood pressure medication blood pressure medications depression blood pressure medication non beta blocker tattoos and high blood pressure medication what is the medications used to lower blood pressure quickly high blood pressure medication leg swelling blood pressure medication men in your 40s blood pressure medication wieight loss blood pressure medication hy can blood pressure medication lower blood sugar does blood pressure medication make you pee natural treatment high blood pressure during pregnancy can you take l arginine with high blood pressure medication what class of blood pressure medication can can blood pressure pills reduce appetite faa approved medication for high blood pressure high blood pressure medication during pregnancy best blood pressure medication for type 2 diabetes blood pressure and pain medication pain medication that does not affect blood pressure best high blood pressure drugs on the market if you take incorrect medications to lower blood pressure low blood pressure treatments does your body have to adjust to blood pressure medication why water pill for high blood pressure drugs for treatment of very high blood pressure during pregnancy can i drink grapefruit juice with high blood pressure medication can blood pressure pills make you feel cold high blood pressure medication that helps with weight loss amlodipine blood pressure drug blood pressure medication for infants varicose veins blood pressure medication life extension high blood pressure medication does tylenol interfere with blood pressure medication can i take diamox with other high blood pressure medications prestige medical blood pressure cuff calibration drugs used for high blood pressure chamomile tea and high blood pressure medication narcotics stored alongside blood pressure medications in does nutrigrove blood pressure pills work extremely low blood pressure treatment blood pressure medication for iga nephropathy blood pressure medication low side effects can i increase my blood pressure medication what is the best blood pressure medication to take drugs that cause increased blood pressure does biotin interfere with high blood pressure medication cani od on high blood pressure pills blood pressure medication that also helps with jerking blood pressure medication categories first line treatment of high blood pressure medication for low blood pressure in usa armour thyroid drug interactions blood pressure meds hepatitis c treatment high blood pressure high blood pressure arb drugs low blood pressure treatment with essential oils high blood pressure medication list for pregnancy blood pressure medication and snake venom blood pressure medication low dose liquid blood pressure medications ivf drugs and high blood pressure left my blood pressure medication does it matter when you take blood pressure medication can you take blood pressure pills twice a day privilin blood pressure medication how big are blood pressure pills once you start blood pressure medication can you stop diuretic in blood pressure medication what medication reduce blood pressure new blood pressure treatment prescribed home medications for high blood pressure blood pressure medication side effects forums taking blood pressure pills dizzy when bend over a lot blood pressure medication and nyquil cinnamon pills and high blood pressure temporary high blood pressure treatment single agent blood pressure medication blood pressure medication made in china fda approved medications to reduce blood pressure immediate treatment for high blood pressure at home best time to take blood pressure pills muscle loss on high blood pressure medication blood pressure medication when needed treat high blood pressure without medication blood pressure medication side effects for men cbd pills for high blood pressure blood pressure regulation without medication blood pressure medication and pre workout high blood pressure alzheimer disease and antihypertensive treatment miss blood pressure medication blood pressure pills suicide peaceful emergency drugs for low blood pressure common blood pressure medications in canada systolic blood pressure define medical viril and high blood pressure pills can statin drugs help lower blood pressure do you have to wean off blood pressure medication new drugs for blood pressure when is high blood pressure medication necessary drugs for hi blood pressure cold medications and blood pressure taking 2 blood pressure pills mistake why doctors stopped prescribing blood pressure medication common high blood pressure medication canada what side effects does blood pressure medication have ulcer medication high blood pressure can high blood pressure medication elevate alkaline phosphatase blood pressure medication warning getting blood pressure medication jamaica alkaline water and blood pressure medication blood pressure going up and down with medication drugs reduce systolic blood pressure treatment for rapid high blood pressure low blood pressure alternative treatment do all high blood pressure medications cause weight gain medication for increasing blood pressure blood pressure medication for african american males vitamins for high blood pressure treatment aleve with blood pressure medication how to lower blood pressure without pills blood pressure triple pill who blood pressure guidelines for hygiene treatment what drug reduces blood pressure blood pressure medications enalapril met blood pressure medication