22 February, 2024

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Bankrupt Sri Lanka Celebrated Independence, But Now It Is Back To Hard Economic Realities

By W.A. Wijewardena

Dr. W.A Wijewardena

A bankrupted country celebrating independence

Sri Lanka celebrated the 75th anniversary of independence from Britain last Saturday. This was done at a time when Sri Lanka had been bankrupted economically and had fallen to an irrecoverable depth politically and socially. Given the present dire state of the economy, many critics had requested President Ranil Wickremesinghe not to spend Government’s hard-earned money for this celebration.

However, the President justified his action that if Sri Lanka does not do it, the rest of the world will judge that Sri Lanka is unable to celebrate even the independence. However, another third world leader from Africa, the Tanzanian President Samia Suluhu Hassan, has cancelled the official celebration of independence and diverted the earmarked sum of $ 445,000 to build dormitories for schools catering to students of special needs.

Sri Lanka’s celebrations that had costed the coffers nearly Rs. 200 million directly and several times of that amount indirectly are now over, and the country is back to its economic, political, and social woes.

How bad is the country’s situ from the economy’s point?

Macro woe 1: High inflation

On the macroeconomic front, general price level in the economy has accelerated to a very high level. As measured by the Colombo Consumers Price Index, commonly known as CCPI that tracks the price levels in the Colombo district, it has increased by 101 units from 143 in December 2021 to 244 in January 2023. This is a 71% increase over the 13-month period involved, though the Central Bank has said that annually it is just a 54% increase. The Central Bank’s pronouncement is misleading from both the welfare of people and the monetary policy point.

From the welfare side, the cost of living of a household in the Colombo district has increased by 101 units amounting to Rs. 61,000 over this period. What this means is that if the real buying power of a family in December 2021 was Rs. 100, it is now only Rs. 29. That is why there is still public agitation against rising cost of living though the annual change has recorded a marginal decline. People are asking for higher salaries and it has led to social instability which is a killer of long-term economic growth initiatives.

From a monetary policy point, the Central Bank goes not by the headline inflation of 54% but by inflation that is directly determined by the increases in money supply. That inflation is called Core inflation that excludes the increases in food items and transport expenses. That inflation has accelerated on average from 35% in December 2022 to 38% in January 2023. This is a very high rate of inflation to be subdued. Hence, it is too early for the Central Bank to relax its tight monetary policy package which it has introduced since April 2022.

Macro woe 2: Precarious budget

The budgetary situation of the country is still not in good shape. The Government is planning to earn a revenue level of Rs. 3.4 trillion in 2023 as against a gross expenditure of Rs. 11.7 trillion. The latter is made of the Government’s recurrent expenditure, capital expenditure, and the expenditure needed to repay the maturing foreign debt that is not subject to restructuring, and new and maturing Treasury bills and Treasury bonds. That is a massive gap of Rs. 8.3 trillion or 28% of GDP which has been estimated at Rs. 30 trillion for the year.

This massive consumption by the Government is a killer on the private sector initiatives. What is to be done is therefore is not merely increasing the tax revenue but a drastic cut of the Government size that will reduce total expenditure which is the real burden falling on the people. President Ranil Wickremesinghe is reported to have informed the Cabinet of the dire state of the cash flow of the Treasury in January 2023. Instead of making this complaint, he should take immediate action to cut the size of the Government and extravagant expenses. Strangely, as explained below, this is the demand made by the country’s international sovereign bondholders too. Without this, there is no peace for the Treasury and consequently for the people.

Bondholders’ demand 1: Shrink the inflated sumo

The ad hoc Sri Lanka international sovereign bondholder group in a letter to the Managing Director of IMF last week has asked for speedy action to shrink the size of the Government, inter alia, as envisaged in the proposed IMF bailout program for Sri Lanka.. It says that the annual gross financing needs, that is, the shortfall of the gross revenue from the gross expenditure, should not exceed 13% of GDP in the period between 2027 and 2032. The current gross financing need of the Government, as mentioned in the previous para, amounts to 28% of GDP.

What this means is that the Government should have a clear policy of increasing revenue on one side and cutting the gross expenditure, on the other. The gradual curtailment of gross expenditure requires the government to shrink itself, like a sumo fighter whose body has been artificially inflated is shrunk to its normal size. If this is followed, both in the spirit and to the letter, by all successive governments from today, all expenditure programs should be based on a predetermined scale of priorities. The present Government which seeks an IMF bailout may adhere to it. But getting the consent of future governments for such a voluntary shrinking program will be a challenging task.

Macro woe 3: Debt crisis

The current economic crisis was manifested as a foreign exchange crisis that led to the depreciation of the rupee on one side and imposition of drastic import and exchange controls, on the other. The Government sought an IMF bailout rather late but there were some preconditions which it had to fulfil. Most of these conditions have been met except the major one relating to the restructuring of the unsustained public debt.

Out of a total foreign debt of some $ 61 billion, the Government has been planning to restructure only the commercial debt of the central government and what had been borrowed from the bilateral sources. There, China, a major lender, had been uncooperative with the rest of the creditors. After long negotiations, it had offered only a loan moratorium of two years which would indeed increase Sri Lanka’s foreign debt obligations. Hence, the bailout is now notorious for getting postponed every month. Bangladesh which does not have this debt sustainability problem was able to secure the loan within two months. With the non-delivery of the IMF bailout in time, Sri Lanka’s foreign exchange issue has now become more catastrophic.

Macro woe 4: Slowing growth

On the growth side, Sri Lanka’s economy is shrinking every year. Growth had been in the negative range by 9% in 2022 followed by a further negative growth of about 4-5% in 2023. President Ranil Wickremesinghe is planning to make Sri Lanka a developed country by 2048 when Sri Lanka will celebrate the centenary of independence from the British. To reach this goal, it is necessary to increase the per capita income which stands at about $ 3,000 at present to above $ 12,000 by 2048. The underlying minimum growth rate needed to reach this goal is about 8% at a compound rate over the next 25-year period. This requires a concrete economic plan to be implemented by all the successive governments. The plan should aim at converting Sri Lanka to a high-tech export economy, the status which the winners in the future global economy will acquire.

The world is fast moving today toward the Fourth Industrial Revolution or Industry 4.0 or 4IR. Vietnam introduced a time-bound roadmap to in 2020 to become a 4IR country by 2030. If Sri Lanka starts it today, probably it can reach that level by 2040. For this purpose, the abandoned Tech City at Pitipana, Homagama and the connecting high-tech zone from Malabe to Pitipana should be immediately started. It requires capital investment by both the government and the private sector. To release resources for this purpose, the Government should avoid spending hard-earned tax money for tamashas and galas like celebrating independence when the country is economically and financially bankrupt.

This is a formidable challenge, and the clock is ticking down fast toward the day of reckoning. The Ranil Wickremesinghe administration needs to act very fast to avoid this eventuality.

The elusive IMF bailout

The biggest worry of Sri Lanka today is to successfully complete the proposed IMF bailout program. Bangladesh which started negotiations with IMF for a similar package in November 2022 managed to get it by end January 2023.

That is because Bangladesh whose total public sector debt is mere 39% of GDP does not have a debt sustainability issue as prior action. Its foreign reserves are at $ 30 billion by March 2023, down from $ 46 billion two years ago, but not near zero level as in the case of Sri Lanka. Hence, it was a cake walk for Bangladesh to access IMF resources. Sri Lanka has completed almost all the preconditions for an IMF bailout except the resolution of the debt sustainability issue. Now it has become an unsolvable problem because of the intransigence of China which holds about 52% of the country’s bilateral debt and the pressure exerted by the sovereign bondholders for additional concessions.

China’s intransigence

The bilateral debt, also known as official aid assistance, is from other donor countries like UK, USA, China, and India. The debt resolution with these countries is negotiated at an informal arrangement with creditors who meet in Paris, France. Hence, that group is known as the Paris Club. China and India are not members of this Club, but India has participated in its meetings earlier as an observer.

In the case of Sri Lanka’s debt rescheduling negotiations, India has expressed its willingness to participate as an observer and go by the decisions made by the Club regarding a cut in the principal or the interest or both. In the terminology of debt restructuring, this is known as a haircut. Hence, it is a compliant country for Sri Lanka.

But China has been reluctant to accept a haircut. That is because if it does so for Sri Lanka, it should extend the same concession all the other countries that have borrowed from China. That amount out there is more than $ 1,500 billion and a 50% haircut amounts to losing about $ 750 billion. Instead, it offered earlier to Sri Lanka a new loan to repay the old loans and carry the new loan in Sri Lanka’s books as a new liability. This was not acceptable to either the Paris Club or the IMF. Now, China has made an alternative offer in which it will suspend the loan recovery for two years, known as a debt moratorium. Since the loan instalments so suspended are added to the principal, it will not reduce the foreign debt liability of Sri Lanka. Instead, it will enhance such liabilities. This is a spanner thrown into the path of Sri Lanka’s debt rescheduling program.

Bondholders’ demand 2: Reorganise domestic debt

Now, international sovereign bondholders who have organised themselves as an ad hoc group have thrown another spanner. As mentioned above, they have written to the Managing Director of IMF seeking three concessions.

One is as explained above, cutting the government to size by shrinking its gross financing needs from the current 28% of GDP to 13% of GDP between 2027 and 2032. This gross financing needs include the new borrowing for continuing with government operations and the money to be borrowed for repaying the maturing debt. Since maturing debt is already in the debt book of Sri Lanka, it cannot be avoided. Hence, to reduce the gross financing needs to 13% of GDP, it is necessary to cut new borrowing, both domestic and foreign, drastically. According to the bondholder group, the domestic debt borrowed by Sri Lanka under the local laws should be ‘reorganised’ to ensure debt sustainability and financial stability. While the term debt reorganising does not mean debt restructuring involving a haircut, it is a reduction of the level of domestic debt voluntarily by reducing the total gross expenditure of the government.

Bondholders’ demand 3: Consult us too

The second is that bondholder group requires IMF to do all the negotiations with Sri Lanka to bind the country to what is agreed. However, the bondholder group also wishes to be consulted in this exercise and be permitted to offer suggestion. What this means is that debt restructuring is no longer a mere Paris Club affair. It is a multiparty consultation involving IMF, Paris Club, Sri Lanka, and Sovereign Bondholders. The third one is the most important request made by the group. It requires IMF to see that the principle of comparable treatment, also known as the principle of equal treatment, is met. What this means is that what is being offered to China should also be given to all other creditors. If this happens, the planned debt restructuring will simply be diluted.

As it is, China has emerged as the holdout creditor – one who would block any restructuring plan – in this exercise.

Time is clicking down fast for Sri Lanka

Sri Lanka has celebrated its 75th anniversary of independence. But its economic, social, and political woes are looming over it menacingly. Any delay in resolving them means moving toward the day of reckoning faster.

*The writer, a former Deputy Governor of the Central Bank of Sri Lanka, can be reached at waw1949@gmail.com

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Latest comments

  • 8
    0

    Sri Lanka’s celebrations that had costed the coffers nearly Rs. 200 million directly and several times of that amount indirectly are now over, and the country is back to its economic.

    The gasoline and gas went up for cover up of the expenses, Patients are suffering with no medicine. One day Independant and all other day dependant all

    • 7
      1

      When there is a tamasha for leaders, 225 must pay a percentage from their pay to enjoy themselves and not tax citizens and cause hardships. Then only does it not become robbery. Aragalaya must unite and have leaders to be effective communicators to bring system change. Simply protesting without achieving goals is not helpful for robbed citizens. Transformation must be seen as worthwhile and constructive.

      • 2
        2

        DAVID-ALL 225 NEED NOT PAY A PERCENTAGE ONLY SINGALA MP,S WHO LOOTED THE COUNTRY AFTER INDEPENDENCE SHOULD PAY THIS.HOW EVER RANIL HAS COMPLETED HIS LIFE TIME AMBITION TO RECEIVE THE SALUTE FROM THREE FORCED AT THE EXPENSE OF SUFFERING POOR SRILANKANS.

  • 4
    4

    Dear Wije,
    .
    Many thanks for the article. There have been so many prophesies of gloom that the average citizen may not be taking them seriously.
    .
    That will be a grave error.
    .
    These words are very important: “several times of that amount indirectly are now over,” – that’s about expenditure on Independence celebrations. The same is probably true of the Rs 10 billion expenditure on Local Government Elections. That sum probably represents what the Elections Commission has to spend. When you take account of many “expenditures” that remain hidden, e.g. the salaries drawn by regular government employees on the days devoted to election work. etc, the expenditure will be much more.
    .
    We must be conscious of such hidden expenditure in all accounts that are presented to us.
    .
    However, the spending on elections is spending on an absolute necessity, although Ranil will try to make out otherwise. The celebration of “Independence“, on the other hand was sheer irresponsibility, and once we do manage to shake off this illegitimate government, punishment being meted out to all those responsible will be very much in order.
    .
    Panini Edirisinhe (NIC 482111444V)

    • 3
      5

      Panini from Bandarawela, nice to hear from you again. Love your trolling!
      Sadly poor old Wije here seems to be in his Second Childhood!
      Guess that’s why he’s so good at drafting “Child’s Guides” to everything under the son these days. Guess all those years in the Bondscam-ridden CBSL had an impact on his logical thinking skills??!
      Have a good day!

  • 6
    13

    Hey Wije: How come you seem to revel in Sri Lanka’s purported economic woes?!
    You are like your patron Ranil Rajapakse who gaily announced last year that there would be Famine and 15 hour power cuts in Sri Lanka if Lankan don’t dance to the Washington Twin’s tunes and the corrupt ISB traders who revel in Odious Debt traps and the Bailout Business who have no right to tell Lankan citizens what to do?!
    RW’s threats were a big CON/ a psychological operation (PSY OP), to scare people and enable the IMF’s Disaster Capitalism and firesale of Sri Lanka’s lands, telecom, energy, transport infrastructure
    How come you are such a big supporter of the Fake narratives of the Corrupt and criminal Eurobond traders led by BlackRock and their and their money collectors — the IMF and Colonial club de Paris?!
    How much do they pay you to be their con artist and promote their fake Debt DATA and narratives?!

    • 5
      13

      Wije: Has no one told you that:
      It is the US govt that is Bankrupt with $ 32 Trillion Debt, and the world is fed up of the American War machine and is currency of last resorts and the Washington Twins Fake Data Debt traps, and hence De-dollarizing?!
      Everyone knows that the Dollar has been weaponized against other currencies through sanctions and currency manipulation to beggar the rest of the world and enable BlackRock and its Indian Front Adani to asset strip, But now Adani is in trouble and so too BlackRock, BlackStone, Black Water — the US the mercenaries who kill civilians in Afghanistan and Iraq.
      Washington and its twins’ Debt narratives are a big numbers game and the truth about how they manipulate Sri Lanka’s Debt numbers is leaking out!
      With their Fake data and numbers games they stage the depreciation of other currencies so that Washington can debt colonize the world.
      But the whole world is de-dollarizing so please wake up from you day dreams and do some real calculations. The Lankan rupee was deliberately crashed by the US Warmachine in its proxy war on China and the Rise of Asia! Wake up dude!

      • 3
        3

        Dear anonymous “Dinuk”,
        .
        I type this in to tell you that what I see above are two unexcusably rude comments. The tone and the vocabulary are both unacceptable.
        .
        I know Dr Weerakone A. Wijewardena slightly at a personal level. I don’t read everything that he writes because Economics isn’t my cup of tea. Wije doesn’t try to infuse unnecessary excitement into his writing. He does take the trouble to write clearly so that even laymen understand him, but even they must have an interest in the subject to follow what is said.
        .
        When we don’t take the trouble to understand, it is most unfair for us to start insulting the writer, in this case a person who is clearly identified, and he even gives his email address. Why don’t you write to him? That’s how I first got to know him.
        .
        But the problem, I guess, is that you don’t want him to know who the cowardly “Dinuk” is.
        .
        So, then, stop trolling!
        .
        Panini Edirisinhe (NIC 483111444V)

        • 6
          2

          We know who Dinuk is, haven’t we heard enough ?????

          • 3
            1

            Chiv,
            “We know who Dinuk is, haven’t we heard enough ?????”
            Apparently poor SM isn’t aware of the Princeton alumnus from Hell……..
            😵‍💫😵‍💫😵‍💫😵‍💫

          • 3
            2

            Are there not many enough who have heard enough from each us?
            Some have heard enough from the rest of us and left the scene.
            *
            Intolerance is the foe of democracy, even where misspelled wilfully or not.

            • 0
              0

              Of course, how can we forget that poor guy who left the scene in a hurry. OC , by any chance do you remember the son of TULF MP ( who was killed) , an expat, poor soul was here in CT mostly sharing his unresolved grief and then …

              . heard enough from just ome and left the scene.
              .

              • 0
                0

                Chiv,
                If you check the archives from 10 years ago, there are lots of people who have disappeared. Might be due to the registration rule.

                • 0
                  0

                  OC, thanks. Didn’t I tell, you’re wise and mature. You sidestepped for a good reason.

              • 3
                0

                We have plenty of matured , wise genuine people among us, just to name a few, Lasantha. P (even he was told not to curse ????), Sarath, Native, Mahila, OC, Agnos, Nimal . F, Agnos , Manel and many more. I may not agree with all, but have great respect for their views. We sure can do without those cut and paste types , conspiracy theorist, stereotypes, deniers, enablers, racists, childish / oppositional defiant, retards, those who victimize the victims, narcissistic, hypocrites, . . . . .again many more. I remember well, years ago a person admitting his purpose of being in CT , is to “needle others”. ( cheap thrills ). My usual response to such people are ” get lost A. H ole”.

              • 0
                0

                Not just him.
                I notice many more absences.

                • 2
                  0

                  Chiv

                  I just read an article by Kamanthi Wickremasinge titled “Dispute over Kinthusity Cemetery as caste issue surfaces” published in Daily Mirror
                  (8 February 2023).

                  What is China’s Man in Sri Lanka doing to deal with such serious
                  anti human activities of his fellow Tamils in the North? Is he just marking time to pass his day, night, evenings, ….. apart from carrying …….. ?

        • 0
          0

          Yes I agree with this brave Sinhala man….

  • 4
    0

    One thing for sure is these lot cant governs a country
    Stalin take the North and the East as territory, had enough of the suffering and difficulties

  • 8
    2

    The bungling bumbling imbecile Ranil had his celebrations. …….. Is the country any better? …….. Are the people any better? ……. Does even he, feels any better?

    We don’t have economic woes ……. we have mental disease.

    What Ranil has is a mental disease.

    We don’t need economists; we need psychiatrists ………. not corrupt to the core incompetent Lankan quacks/shrinks …….. but people of the calibre of Freud, Jung, Native ……. who can get to the heart of the disease.

    • 2
      0

      nimal,
      I know who Freud is; I know who Jung is.
      Who is Native … ?
      Is this a riddle?

      • 5
        0

        Nathan,

        Good to see you …….. thought you got into some mischief.

        Native is the only Lankan psychiatrist I trust …… he mainly treats himself …….. results are plainly visible for everyone to see …….. he has come a long way

        Now, he doesn’t go off the deep-end when he encounters women ……… China; well, that’s still a work in progress.

        If we could only replicate his progress to the rest of 22 million – 1 ………. we might have a country to live in …..


        Native, Why you shouldn’t short sell China: learn to speak Chinese and eat Chop Suey with chopsticks …….. or get ready for water-torture. …… https://www.youtube.com/watch?v=gPpAL_pG_Wc

  • 7
    1

    “the President justified his action that if Sri Lanka does not do it, the rest of the world will judge that Sri Lanka is unable to celebrate even the independence.”
    Who are the rest of the world who do not know that Sri Lanka is a corrupted country and now it is a bankgrupt country that is begging all over the world? The whole world also know now that the former Presidents of this country and many political leaders did not participated in this celebration. There was no mention of those who brought this so called independence day. You promised to find a solution to the ethnic problem before 4th Feb 2023, but you couldn’t even touch the basics. You continue to allow corruption but talk on investment fortunes. The power greedy including President Ranil made Sri Lanka to this state and you only talk very very high.

  • 5
    5

    Wije: Please do some real research, rather than act like a Talking Head, cheer leading for the IMF to deepen Lanka’s debt trap for the IMF’s and Colonial Club’s de Perpetual Bailout Business. Just look at the plight of Argentina with succeeding Defaults!
    On December 26, 2001, Argentina defaulted on a total of US$93 billion of its external debt. Argentina is still in the Washington Twin’s bailout Business. Meanwhile, the CIA continues to make the Argentine “Economy Scream” and stage protests that keep that country de-stabilized.
    What is the logic of Fake advice from the IMF and Colonial Club de Paris which represent the Eurobond traders, and borrowing more from the same Eurobond traders who put Sri Lanka in their Debt trap in the first instance after signing the 2.9 billion to unlock access to private capital markets?!
    Is there not a massive Conflict of Interest in the IMF and PC telling Sri Lanka a sovereign state what to do. Of course we know that the Washington Force backed Economic Hitman Ranil Rajapakse came to power to erode Economic and policy sovereignty and bailout the hedge funds.
    The only aim of the Eurobond Traders, , Washington Twins and PC is to force Sri Lanka to borrow more from them and keep it a Dollar Debt Colony!

  • 4
    4

    Missing celebrations especially at a milestone like 75 years will certainly send a wrong message or one that some dearly wish to hear.
    Let us be a little truthful. How many of us who claim to dislike the idea of celebrations would have commended the government if it did not celebrate?
    Is there not a little hypocrite living within our minds that we seldom notice when pointing fingers at the hypocrisy of others?
    *
    Criticizing pomposity is another matter which we have not adequately denounced on earlier occasions..

  • 1
    4

    Sadly poor old Wije here seems to be in his Second Childhood?! Poor dude!
    Guess that’s why he’s so good at drafting “Child’s Guides” to everything under the sun these days.
    All those years in the Bondscam-ridden CBSL had an impact on his logical and critical thinking skills??!

    • 2
      1

      D
      You are getting unduly personal.

    • 2
      0

      Dinuk

      It appears that Ranil has completely rejected Tamil’s demand for Land and police powers under 13th A for all 9 provinces due to pressure from Saffronistas. Will SJ summon up the courage to organise a black flag protest against Ranil and his entourage on Saturday in Jaffna?

      I doubt he has the b***s to enter Jaffna leave alone participating in a black flag protest.

      No Action Talk Only. (NATO).

  • 1
    0

    Dinuk

    It appears that Ranil has completely rejected Tamil’s demand for Land and police powers under 13th A for all 9 provinces due to pressure from Saffronistas. Will SJ summon up the courage to organise a black flag protest against Ranil and his entourage on Saturday in Jaffna?

    I doubt he has the b***s to enter Jaffna leave alone participating in a black flag protest.

    No Action Talk Only. (NATO).

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