By W.A. Wijewardena –
Sri Lanka was a prosperous nation at independence
President Ranil Wickremesinghe is noted for reminding fellow Sri Lankans that at the time Ceylon gained independence from Britain in 1948, it was a prosperous country which the British had left. Noting the positive stock of foreign reserves which Sri Lanka had inherited, he had said that during the Second World War, the country had even lent the colonial master. This was true because the bulk of foreign reserves had been invested in the UK.
His other elaboration was that the Gal Oya project, the biggest infrastructure project which the country had undertaken immediately after independence, had been completed purely out of the savings of the country without depending on foreign funding. This is mostly true because at the time of the commencement of the project in 1949 Ceylon had a comfortable foreign reserve balance sufficient for financing 17 months of future imports and the budget had a sizeable surplus in its revenue account which could, in theory, be used to finance the construction of the dam and irrigation canals. However, toward the end of the completion by 1955, the country had foreign exchange problems and to seek foreign funding for settling colonists. But this was a minor component of the total cost and hence, the project was substantially completed with local resources.
Ceylon’s high PCI at independence
When it came to per capita income, as surmised by Wickremesinghe, Ceylon was ranked among the top in Asia. The World Bank Mission that visited Ceylon in 1951 has this to say about per capita income in 1951: “With gross national product at Rs 4452 million, the per capita figure is Rs 570 (equivalent to US $ 120). Next to Malaysia, this is the highest in Southern Asia, and compares favorably with any country in Ceylon’s stage of development. The level of investment, at 11.3% of gross national product, is likewise highly creditable. The average for South-East Asia does not exceed 5%, for Latin America, it was about 8%, and in Western Europe in 1938 it was 12%. Nor is investment by any means solely by the government. More than half of the total is private, and this sector comprises an important element in Ceylon’s present and future prospect for progress” (p 8).
Today Sri Lanka is a bankrupt nation
What the World Bank has said is that though Sri Lanka at that time was not as prosperous as the Western world, it had the prospect for progress with a dynamic private sector and a disciplined government. But all this is to be changed over the next seven decades. Today, Sri Lanka is a bankrupt nation by any standard. Its Government with an overdrawn balance of Rs. 1 trillion in the main constitutionally established fund called the Consolidated Fund is run on an overdraft from the two state banks and the Central Bank. Not to be outdone, its Central Bank is indebted to the rest of the world causing the net foreign reserves (that is, gross reserves minus bank’s foreign borrowings) to be negative to the extent of $ 4.5 billion. This is the first time it has happened in its recent history. Amidst this negative reserve outlook, the usable gross foreign reserves have fallen to virtually zero and it cannot borrow anymore from friendly central banks to meet temporary liquidity requirements.
More money from Central Bank
The cash-strapped Government has heavily used the Central Bank money to finance the high budget deficit causing it to hold Treasury bills worth of Rs. 2.6 trillion. With high interest rates on bills at about 30% on average, the Central Bank is set to make a historic domestic rupee income of Rs. 780 billion which will be partly offset by net interest payments on foreign debt and local expenditure of the bank like operational and staff expenses. Yet the historic profit of more than Rs. 650 billion is a cash cow for the cash-strapped Government. If it is transferred to the Government in full, it is tantamount to the notorious money printing of which the Central Bank has been accused recently.
Foreign debt repayment suspension
With no foreign exchange available, the country has suspended the servicing of both commercial and bilateral loans from foreign sources. In its presentation to foreign creditors, the Ministry of Finance has reported the amount involved as $ 33 billion out of a total state sector foreign debt of $ 47 billion. This total debt does not include the country’s outstanding obligation to the Asian Clearing Union amounting to $ 1.9 billion as at end of June 2022 and the borrowing by the private sector and financial institutions from foreign sources amounting to $ 13 billion.
When these two items are added, the total country foreign debt amounts to $ 62 billion or 94% of the estimated GDP of $ 66 billion. Sri Lanka does not have foreign earnings to service these foreign obligations and it is likely that either they should be paid at the expense of other essential imports or defaulted at the end. Only a bankrupt economy is in this pathetic condition.
Sri Lanka from certain prosperity to bankruptcy
Singapore’s founding Prime Minister Lee Kuan Yew has aptly titled the second volume of his autobiography as ‘From Third World to First’. It is the story of how a poor country in 1960s was elevated to a rich country within a single generation by adopting appropriate and prudent economic policies. If a present Sri Lankan political leader who has experience in the country’s economy for many decades writes his autobiography, the appropriate title may be ‘From Certain Prosperity to Bankruptcy’. This is the distressing situation which President Wickremesinghe is facing today.
Ranil’s goal: Make Sri Lanka rich by 2048
Wickremesinghe on assuming the premiership first in May and presidency later in July 2022 declared that his foremost responsibility is to make a turnaround of the bankrupt economy within one and a half years and thereby put it on a sustainable economic development path by 2024. He even announced the long-term economic development goal of making Sri Lanka a rich country by 2048 when it would celebrate the centenary of independence from the British.
This goal requires Sri Lanka to reach a per capita Gross National Product level of about $ 12,000 by 2048 from the present $ 3,000 level. Given a population growth of 1% per annum, this goal requires Sri Lanka to maintain an annual real economic growth of at least 7% continuously over the next two and a half decades. With an expected negative real economic growth of about 5% in 2023, the real battle of reaching this goal should started from 2024. However, the slow economic recovery between 1 to 2% till 2026, Sri Lanka will have to run faster from 2027 over the next 21 years to reach the per capita Gross National Product level of $ 12,000 in 2048.
A rough estimate shows that the annual real economic growth rate should be a minimum of 9% over this period. It requires Sri Lanka to invest annually about 35-40% of GDP. But with domestic savings not exceeding 25%, a massive amount of foreign funding is needed to maintain this required investment level. But it will drive Sri Lanka to square one forcing it to accumulate foreign debt and getting into a second round of a debt trap. This need be carefully managed.
Elusive economic turnaround
Now the hope of a quick economic turnaround is going to be elusive. Sri Lanka expected a bailout package from IMF to tide over the immediate foreign exchange problem of the country. Though a larger amount was solicited, IMF finally agreed to extend an extended fund facility of $ 2.9 billion drawable in four years in half-yearly instalments provided Sri Lanka completes several pre-announced pre-conditions. All these pre-conditions were being gradually met by Sri Lanka except one crucial one. That is, agreeing for a foreign debt restructuring program with foreign creditors since, in the rating of IMF, Sri Lanka’s foreign debt was not sustainable.
In terms of the rules of IMF, it cannot lend a country whose public debt is not sustainable. Therefore, even if all other conditions are met, IMF cannot lend Sri Lanka until this last condition has been met. Following this, Sri Lanka Government started working on this condition by appointing two advisors, Lazard for financial matters and Clifford Chance for legal matters. Even with that expert advice, Sri Lanka was not able to get the consent of all the creditors for a possible debt restructuring because of the intransigence of the leading creditor, China, which holds about 52% of the bilateral debt of the Government.
This was because China’s policy has been not to go for a reduction in the principal or interest income, known as a haircut, but to give a new loan to settle the old loan, a procedure known as loan refinancing. China cannot go for a haircut because if it afforded that concession to Sri Lanka, it should offer the same to all other debtors that have borrowed from China. However, as revealed by Wickremesinghe at the CCC sponsored Sri Lanka Economic Summit 2022, the Chinese government seems to have washed its hands and asked Sri Lanka to directly negotiate with the two creditors, China Exim Bank and China Development Bank which are wholly owned by the government.
Thus, Sri Lanka should now restart negotiations with China all over again. The conclusion date is therefore getting postponed delaying the receipt of IMF bailout too. Sri Lanka had earlier expected to get China on board by August 2022. But this was postponed to November, and later to December. Now it seems that it will be done in the first quarter of 2023. If Sri Lanka succeeds in getting China’s support for the debt restructuring plan in the first quarter 2023, the IMF bailout will be delivered only after March 2023.
But there are two other issues that have arisen. One is how to survive through these intervening months. The other is how to avoid the possible demand for restructuring of the domestic debt of the Government.
How to survive till IMF money is received
Sri Lanka’s usable foreign reserves are down to near zero levels, and the expectation of a possible surplus in the current account of the balance of payments is far remote. Even with the crunching of imports through import controls, non-availability of forex, and reduction in the demand for fuel via rationing by the QR system of distribution, Sri Lanka’s trade deficit in 2022 will be around $ 5 billion, down from $ 8 billion in 2021. The consequential deficit in the current account will create a serious forex liquidity issue for Sri Lanka until an IMF bailout is arranged for the country.
The World Bank and the ADB which have promised an intervening bridging financing have affirmed that they will do so only after Sri Lanka receives the IMF bailout facility. Hence, Sri Lanka needs to get a sizeable trade financing facility from friendly countries to maintain the essential import program during this period. Failure to do so will force all Sri Lankans to go through a harsh period unprecedented in the recent history. To prepare the nation to accept this harsh reality will be the biggest challenge faced by the Ranil Wickremesinghe administration.
Avoiding domestic debt restructuring
So far, the foreign creditors have not raised the issue of restructuring Sri Lanka’s domestic debt. That is because the new Central Bank management has managed to obtain the entirety of the fund requirements arising from the issue of Treasury bills and bonds from the market. To facilitate it, the bank has allowed the bill and bond rates to move up to a level of around 30%. But this has raised the entire interest rate structure of the country to a higher level forcing the business sector, supported by political authorities, to agitate for immediate reduction in interest rates.
The Central Bank is now caught in a dilemma. Inflation rate is slowing not due to a reduction in prices caused by a fall in the aggregate demand or an increase in the aggregate supply or due to a combination of both. It is simply a technical development under which the rate of growth will become slower due to the high level of prices that had prevailed in the corresponding month in the previous year. Therefore, there is no relief to the consumers through the reduction in the inflation rate. As such, the Central Bank may allow the interest rates to fall at the risk of having to restructure the domestic debt. If it happens, the biggest casualty will be the Central Bank which holds some Rs. 2.6 trillion worth of Treasury bills.
A 20% haircut on Treasury bills will completely wipe out the entirety of the capital base of the bank needing the Government to spend its scarce funds for recapitalising the same. The other casualties are EPF, ETF, NSB, and financial institutions. If they are required to suffer heavy losses, the whole financial sector will face the threat of collapse.
What this means is that converting the bankrupt nation to solvency will be a challenging task for Sri Lanka in 2023. If this is not done quickly, the goal of making Sri Lanka a rich country by 2048 will be an elusive one.
*The writer, a former Deputy Governor of the Central Bank of Sri Lanka, can be reached at firstname.lastname@example.org
Nathan / December 29, 2022
‘the goal of making Sri Lanka a rich country by 2048 will be an elusive one’,
when converting the bankrupt nation to solvency in 2023 will be a challenging task.
Even if we hope to be rich by 2048, it would need a 25 year Plan, and a stable country.
What hope is there to bring about stability when we have not moved even an inch since 2009 towards a stable nation.
old codger / December 30, 2022
“Can Sri Lanka Drive Itself From Bankruptcy To Prosperity In 2023?”
In one word, no.
“at the time Ceylon gained independence from Britain in 1948, it was a prosperous country which the British had left.” True, but those were extraordinary times. The Japanese were foolish enough to invade the rubber producing countries of SE Asia, and so we could sell all the rubber we could grow. The rubber workers were practically enslaved Indians.
If there was another war today, we have neither the slaves or the rubber, sadly.
Nathan / December 30, 2022
“we have neither the slaves or the rubber”.
Now I know from where all the present ‘rubber-stamps’ originated!
chiv / December 29, 2022
In 1951 Lanka was next to Malaysia in South Asia, today we are bankrupt. The report card of our Lankan politicians reads “All F (FAILURE).” A very unique country in the whole world map. We recovering from bankruptcy is just another dream. “Have a prosperous , splendor new year”.
nimal fernando / December 29, 2022
“Ranil’s goal: Make Sri Lanka rich by 2048”
I’m laughing all the way …….. into the New Year!
2048 ……. All the promises are about the future, when one has escaped ……… no promises about here and now.
Ajith / December 29, 2022
“I’m laughing all the way …….. into the New Year!”
Why should you laugh about Sri Lanka rich by 2028? Ranil knows well that Sri Lankans are fools and he is more clever because he became President only with 135 votes. If Gota can become with similar lies 69 million people believed that lies why should he bother about 2048. IWho can prove that his prediction is wrong? If he can sell Sri Lanka to USA or China or Bill Gates, it may be possible.
Gus / December 30, 2022
It is not sri lanka’s prosperity that Ranil Rajapakse really meant. It is Rajapakses’ prosperity and the other sinhala politicians’ prosperity that he is ensuring.
Gus / December 30, 2022
Thank god that my grandfather had the foresight to leave ceylon in the 1930’s resulting basically in the family’s prosperity without fear of this prosperity being subject to looting and arson.
Balanced View / December 30, 2022
The Central Bank, a non-profit entity, holds “Treasury bills worth of Rs. 2.6 trillion” that pays on average an interest rate of 30%. Who pays the interest to the Central Bank? Is it not the Government Treasury? Does the Central Bank being a non-profit entity not pay the profit back to the Government Treasury? Is that not how Treasury funds the government spending? How is it is tantamount to money printing?
My understanding of money printing is increasing the money supply without issuing debts in the form of treasury bills or bonds. Am I wrong?
Mallaiyuran / December 30, 2022
This is not anything inferior to Shaymon Jeyasinge’s oratory in saving the Evil Emperor’s legacy. The author’s job is only saving UNP and its lifetime chief, the Evil Emperor. He is bringing figures from 1948. Then, in which bed was he sleeping at CB? Why was Ceylon’s systematic degradation of Ceylon by Sinhala Intellectuals not exposed until now? He is trying to halfheartedly accept that Sinhala Intellectuals (Viyathmaga, including him?) did destroy the country, but he does not want to accept what Evil’s real Objects are, whom the author portrays as an underdog forced to undertake to shoulder the unredeemable sins of the past Kings. But lurking Evil jumped onto the chair as soon as he saw it was empty, but he had no clue what the problem was & what to do about that. Evil was/is part of the problem. When protestors had a mild success in uprooting the problems, he forced himself though that fissure and now blocked without anybody bringing any solution. He did his best to block Chandrika’s constitution.
Mallaiyuran / December 30, 2022
Evil swore that he will follow only Don Stepen’s policy. (Don started the Tea Estate Tamils’ problem and thus destroyed country’s economy and racial unity; Don started the Gal Oya problem and many Tamils died there, while he gave a turn to the economy (from whatever Britain had built until that as modern capital market economy) to old feudal society & agrarian economy, instead of industrializing with the remaining balance of payment reserves.) Evil’s objectives but the author unwilling to recognize are 1). Save the Royals from UNHRC, ICC, and local courts (So Federalism can never be a negotiated settlement for Evil because Provincial courts can punish Royals and Evil for the war crimes/genocide crimes they accused of committing. 2). Keep democratic countries only at arm’s length for that matter, but beg them for freebies like GSP+, medicine, fertilizer….. 3). Fool Sampanthar Aiyya that before he dies a settlement must be achieved with Dudley’s age-old District Councils, but that is only a dragging technique of his Secret Solution forever. If one wants to settle the problems between two races, what is the secret in that? What is the true diplomatic strategy there? What are the honest explanations for why the races should not come to know about that?
Mallaiyuran / December 30, 2022
Say the Einstein-Newton theory of the “secrecy” worked, then after solving their problems, are the two races going to live openly amicably or still Sinhala Buddhists will use secret technologies like deporting estate workers, passing MMDA, introducing Sinhala only, administering Standardization, bring in PTA………. to destroy the enemies?
The Chinese government has transferred the loan renegotiations or restructuring process to its banks. Well, these loans were given to Langkang on the request of Old Rowdy King’s personal initiations. Some of the projects never existed. Never any Cost-Benefit evaluations were done. The Indian government refused to accept the Hangbangtota Harbor and Mattala Airport contract. The Chinese government came forward to finance based on a personal relationship with Old Rowdy. It is contended by public media that Old Rowdy accepted commission for these contracts and the money is deposited in Dubai, Uganda, Italy, Belarus…. (Evil Emperor Yahapalanaya government refused and resisted to investigate these matters and bring the truth out to the public and the money back to local banks. Evil even chased out of the country Darisha and Vamadeva, two Tamil Journalists, when they released some Chinese payout documents to the New York Times, which were already published by Government media. The author is whining that now the Evils are carrying all others’ past sins.)
Mallaiyuran / December 30, 2022
After the Chinese government had taken part in these robberies by hiding the nature of the contracts to the Langkang mass, Because of these frauds, almost every person in Lanka is broken by heavy debts. Now, how can the Chinese government let down the Langkang people by saying go and deal with the Exim Bank because Exim Bank is waiting to sue Lanka for the loans. Who was the signing party on behalf of the Langkang masses with the Exim Bank? Was the Langkang government or a private bank or the Royals appointed non authoritative individuals? Does the constitution recognize that person signing loans on behalf of people? Why did the Author did not consider releasing that information? He is defending that China is justified if it is not agreeing to restructuring because it may have to cancel all loans to other nations, whether they have failed or not. What kind of blind suggestion is that? Does that mean the Chinese communist party is such a gentlemanly organization, which treats all countries equally?
Mallaiyuran / December 30, 2022
The writer once wrote that Cabal was the one who won the war, by buying arms from China on 3 months LCs. The ultimate liability Langkang undertook for these LC credits are not yet settled in, after 12 years of end of the war. China is using the UN Security Council veto vote as as the security pledged for all these LCs and eventual loans, Langkang could not refuse to borrow from China. The Chinese government forcefully recruited Langkang, Sinhala Buddhist Modayas into BRI. The Chinese government forcefully created non-existing, non-evaluated White Elephant projects for Langkang Sinhala Buddhist Modayas. China forcefully gave loans to two individuals, who are Rowdy King & Evil Emperor, at an unrealistically high interest. Now the Langkang resident are broken by these loans, but the Chinese government does not want to renegotiate with people but referring loans to Exim Bank? What a tragedy of Lankaweyans, and travesty of the Chinese government!
Mallaiyuran / December 30, 2022
Remember when Hitler King returned the Chinese Hunu because it was not in decent quality, Chinese government blacklisted People’s Bank, charged $7M for the ship demurrage and filed action for libel over Langkang that it called their Hunu substandard quality! Come on! Where was the author that time to defend China that it was right because if Langkang refused to accept the Hunu, then in future nobody will buy the China Hunu. Why did the Evil Emperor pay a $250M penalty on Colombo Pong Ching and $15M on Pahadu Tower? The Pahadu tower is not in the hands of Lankang, still. Singapore will be holding it for 35, 50, or even 100 years. Nobody knows for sure what is happening. What is the explanation the author has for Evil’s actions on that? Evil & Hitler King paid China those fines because otherwise other countries would refuse to pay China enforcing arbitrary fines? When Philine, a friendlier country with China than Langkang, did not take China to IJC and had the case won? Was the China government successful in swindling the Entebbe Airport in Uganda? What is the Ugandan government’s explanation on that? Why did Evil & Royals never take China to any arbitration until now? Why did they give free land in Hangbangtota to China instead of paying like they did in April 2022?
ramona therese fernando / December 30, 2022
Was wondering if Raj Rajaratnam’s ill-begotten trillions can save the Motherland. I mean, we can always go back to independence times – pre 1960’s, and let the Tamils run the country admin. What a success things were with their brains. Of course they will have to use Sinhalese as main language as it is the language of the majority, with Tamil as the backup. Things are quite different from 60’s. People are more aware and understanding. Democracy is the keyword. No more country secession. All of Sri Lanka can be Eelam. Prosperity for Motherland is assured.
old codger / December 30, 2022
“All of Sri Lanka can be Eelam. Prosperity for Motherland is assured.”
Prabhakaran wanted only a third of the country. Wijeweera wanted all of it. But VP is more vilified than Wijeweera. Why is that?