19 May, 2022


Economic Crisis: Sri Lanka Is Not Immune!

By Hema Senanayake

Hema Senanayake

Hema Senanayake

Economies collapse suddenly amidst apparent economic growth if monetary disorder takes place. In fact I have never seen or observed or studied an economic crisis occurred in any country in the recent past which did not trigger from a financial crisis. Such crises happen quickly. Such crises do happen even under the close watch of International Monetary Fund. The classic example is the Argentinian crisis which occurred in December 2001, because until the crisis was erupted Argentina was hailed as a good country that even could set an example for other Latin American neighbors. It was a total collapse with unemployment shot up over 30%. The IMF itself explained it as follows:

“Until shortly before the crisis, the country had been widely praised for its achievements in stabilization, economic growth and market-oriented reforms under IMF supported programs,” (The Role of the IMF in Argentina, 1991-2002, IMF Report). The IMF further observes that the events of the crisis, “have raised questions regarding the country’s relationship with the IMF because they happened while its economic policies were under the close scrutiny of an IMF-supported program.”

Many countries faced economic crises in the recent past. Chinese economy is in a crisis right now. Sri Lanka is not immune for economic crises too. Sri Lanka could face an economic crisis under the watch of IMF. I am not going to alarm the new government about it. But when the Sri Lankan rupee depreciated suddenly even after the Central Bank of Sri Lanka (CBSL) borrowed dollars 1.1 billion over a currency SWAP agreement signed by and between India and Sri Lanka, I feel things are not normal. The reason is that currency SWAP agreements are signed not to borrow by one signatory country or the other. Usually currency SWAP agreements are signed to promote trade between two signatory countries without using reserve currencies such as U.S. dollar or euro –And definitely it is not a financial arrangement to borrow. But Sri Lanka did it. This cannot be defined as a prudent or calculated move of CBSL but rather it must be a decision, at least, made with certain desperation.

Ravi KEconomists might feel proud about forecasting economic crises. Yet, I feel that they can be more proud by instrumenting in preventing crises. Accordingly, I made a simple and humble suggestion when the new government was sworn in, in the third week of August. In regard to economic governance, I suggested them “to begin with the country’s current account and balance of payment. Then simultaneously they can move into the fiscal and monetary policy” (“New Economy: Where to start” Colombo Telegraph, August 21, 2015).

In a way, my suggestion was a caution because the manifesto of UNFGG had been loaded with a lot of projects and programs. I further cautioned that, “If the government begins from project formulation end then there are chances in messing up macroeconomic fundamentals sooner than later.” Why should we worry about macroeconomic fundamentals? It is because, the rates of interests would go up, currency depreciates, country’s liabilities to foreign countries go up and inflation might set in when macroeconomic fundamentals are not right. The ultimate effect is that the country would not achieve its potential GDP.

For a moment just forget about what the UNFGG has promised in their manifesto to establish Megalopolises (Megacities), 45 High-Development-Zones such as Industrial Hi-zone, Agricultural Hi-zones etc. Now I invite you to look at the huge cabinet we have now. Each and every Minister, State Minister and Deputy Minister wants to do something. For an example a couple of days ago I heard that all journalists are supposed to get a six figure loan from Peoples Bank in order to get a laptop computer. The program has been devised and facilitated by a certain Ministry which deals with journalists. Since computers are not produced in Sri Lanka we need to import them. With any increase of import the country’s current account changes negatively. It is true that the money expended here is not government money but the program affects badly for the current account deficit. This particular program might be a smaller one, but the cumulative effects of the programs that all ministries would aspire to put in place could possibly be devastating on the country’s current account because these programs would come on top of the programs mentioned already in the UNFGG manifesto. This is why I insisted that the new government must begin with what is known as the country’s current account and balance of payment (BoP). Which institution should take care of these two accounts? It is the CBSL.

The CBSL governor, Arjuna Mahendran recently defined Sri Lanka as a “country having over borrowed.” He mentioned this before Sri Lanka borrowed dollars 1.1 billion over the currency SWAP agreement signed with India. Therefore, after the borrowing was made from India, the situation of “having over borrowed” might have worsened further. If this is the case, my point or my suggestion to the new government has more validity. Perhaps it warrants me to insist now that the country’s financial situation has mandated us to begin with the current account and BoP in economic governance. We should not begin from formulating projects; instead CBSL must set the financial limits and scope for the projects to be undertaken by the government under budgetary provisions and for the projects that could be undertaken out of budgetary provisions.

All ministers and elected officials especially on the government side must be made aware of their limits on off-budget items. Some of such expenditure items are truly huge. For example in the first quarter of this year UDA (Urban Development Authority) tried to issue debentures amounting to Rs.10 billion through the CSE (Colombo Stock Exchange). I can’t say this is bad. But cumulative effect of such expenditures undertaken by Ministries or government agencies could bring enormous pressure on BoP. So does the private sector too. Let me give you a quick example.

Very recently the CBSL reduced the Loan-to-Value ratio to 70% in regard to auto loans even though the ratio was subsequently increased to 90%. This decision would reduce the excessive credit growth occurred in this particular business sector and as a result would reduce the negative pressure it had put on the country’s current account and BoP. This example clearly shows that the CBSL keep an eye on private sector credit growth. Similarly, CBSL must closely scrutinize the credit growth that could possibly occur through government agencies as a result of undertaking off-budget projects and programs. Perhaps, such borrowings must be permitted subjected to the prior approval of CBSL –because Central Bank is considered as the official economic advisor to the government. Sometimes, economists argue that central bankers must talk and advise only about monetary policy. But I feel that if computer loans or UDA debentures or any other program bring in negative pressure on the BoP the CBSL must intervene proactively and appropriately. So, CBSL should do its job without trying to learn it from politicians. That would prevent Sri Lanka falling into an economic turmoil at least.

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Latest comments

  • 2

    “CBSL Governor Arjun Mahendran defined Srilanka as Over Borrowed”.


    Was this statement made before the Family Trust owned Perpetual lend our inhabitants LKR 10 Billion at ” concessional ) rate of 12 .95 % when the going rate was 9 %?..

  • 3

    I am not going to alarm the new government about it. But when the Sri Lankan rupee depreciated suddenly even after the Central Bank of Sri Lanka (CBSL) borrowed dollars 1.1 billion over a currency SWAP agreement signed by and between India and Sri Lanka, I feel things are not normal.

    Ravi K is far more loyal to the TNA than the UNP. He does not show it for electoral reasons. If TNA has a plan for SL then Ravi K will be stealthily assisting them from within.

    The guy is an incredible snake that needs constant monitoring.

  • 4


    What economic crisis??

    180 million rupees just for refurbishment and buying BMW limousines when neither is important and when such money could be better spent on money generating projects.

    This is Sri Lankan economics in a nutshell.

  • 5

    Economic Crisis is only felt by the ordinary man, poor and middle class. Governments survive by printing money and borrowing. Corruption thrives even in the midst of an economic crisis.

    If not how does Mugabe and other Banana Republics survive.

    The collapse is already on Sri Lanka. It started long ago. No need to wait for the world economy to collapse.

  • 2

    Another minister wants to open tea boutiques all over the Island.
    must be to give jobs to all his supporters.

  • 2

    Who says Sri Lanka is not immune ?

    High level Chinese team has met up with MS.
    More than the Chinese Deputy Foreign Affairs Minister has privately met up with Mahinda .
    When Mahinda comes back the economy will have no problem with Chinese loans and aids.

  • 1

    Writer theory of economic development approach is totally wrong footing ,it has nothing do with collapse of UNP-RW of orthodox type of growth. Messes of Paskeraliagan, Arjun Mehanderan and Singaporean school of political-economic is purely depend new type of Tamil colonial growth. It will created path for New Tamil Eealm regime on economic crisis to be by partition of Island back by US Global agenda in Indian Ocean.

    On going that Tamil Singaporean base in Sri lanka has building newly supertitles conditions of speculating monetary and Financial policies by to be undermined national economy support by UNP-RW guide lines.

    Indeed, IMF, World Bank and ADB also giving wrongful advices to UNP political leaderships to diverted economy growth in different directions. All of them under-estimated capital investment from China. The group of Tamils thinking tanks in ‘gang of Singhoporean Tamils’ are politically an opposed capital an investment for growth of Sri lanka, that national Economy by encouraging Indian capital.

    This is new conspires of economic policies manipulated by current UNP- leadership headed by Ranil W…..
    Leaders of UNP are ignorant and lack of economics realities of World and Emerging economies trends and shifting new capital market. UNP-RW want to remained Old Capital market as well s depend on Indian poor capital formations. That will never come in to reality this century.
    MS and CBK has no knowledge of what is happen surrounding them!

    We have enough room to expanded of system of development and growth in an Island overall. But UNP political line and writer mind set never permitted an approach that new world economy by their political line of thinking.

    Current UNP political economy is not that belongs to newly growing capitalism, it is semi-feudal and backwardness of simple commodity productions to be remain in US and Indian orbit by under-development of pre-capitalist features encourage. By and large Tamil backwardness political class; which is promoted in UNP inner circulars of policy makers headed by RW is working on anti-Capitalism.

    The crux of matter is not that an economic crisis or collapses of economy, but the key issues is path and model of sustsnibility of development of innovation of modern capitalism Development and Democracy what is ours urgent task in political agenda.

    The UNP lack of political leadership for capitalist revolution by own poverty of knowledge growing capitalism.

    Indeed UNP of RW working for the counter-revolution steps to development of political-economy of Sri lanka.

  • 1

    We live in a world where 85 individuals have more wealth than 50% of the worlds population (upfront Mehdi Hassen, Al Jazeerah). Economic indicators seem to ignore this reality when reporting on developed status.

    The balance of payments indicates if the country is living beyond its means. We are always negative which means we are getting poorer and poorer. We try to address this problem by borrowing and devaluing our currency. This will never work.

    The dice is loaded against us unless we are self sufficient in food and other basic requirements. Above two factors are a reality check as to how we are doing. Weakening of the rupee is an indication that we are getting poorer. Disparate social income is an indication of corruption and capitalist policies.

    Govt should focus on these two issues and get our act right. Become self sufficient in food. Provide more jobs by increasing Industrial Production by providing incentives to the SME sector. Increase interest rates to promote savings and discourage living on other peoples money.

  • 1

    Dear N.Wimaladasa,

    Could you please tell us what it is your trying to say?!
    Your ( Singlish) puts The Queen’s English to shame and your extra ordinary talent to bullshit certainly qualifies you to run for the highest political office in Sri Lanka!!

  • 1

    It is all several billions of Dollars send by the women working in Middle eastern countries these people spend like theie money.

    After Arjun Mahendran Scandal they borrowed money from India through currency Sap.

    Now, they another humongous bond sale through the web and any one can apply. It is worth in trillions of rupees.

    But, a week or two ago, Galleon Ravi was blaming the previous govt for high interest borrowings.

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