20 June, 2024


Has The Economy Been Assassinated & If So, Who Were The Assassins?

By W.A. Wijewardena –

Dr. W.A Wijewardena

Has the economy been assassinated?

A popular belief among many Sri Lankans today is that Sri Lanka’s economy has been assassinated beyond resurrection. This belief is based on the severest economic crisis and economic depression in its post-independence history which the country is undergoing today. Many have tried to point the fingers at the identified assassins too. Connected to this conception is the bankruptcy of the central government because it cannot service its domestic or foreign debt – the work involving the payment of interest and repayment of the principal.

But what we mean by bankruptcy is a situation in which an individual, an entity or an organisation including the government does not have sufficient earning assets to pay out to liability holders. Since liabilities to outsiders are more than the assets, its net worth is negative. As a result, the affected party cannot continue its business or in the terminology of business, it is not a going concern. If it is a business organisation, in terms of the current laws, it should be compulsorily wound up. Sri Lanka Government has not fallen to this depth so far. It can still raise revenue through taxation though that level is insufficient to meet all its expenses.

To meet a part of those expenses, it can still borrow from the local market without unduly increasing interest rates. To finance some of the projects, it can borrow from the multilateral lending institutions like the World Bank, ADB, or IFAD. But it does not have enough cash to make out all the payments it should do. Hence, the problem faced by the Government is more of a negative and inadequate cash flow than being completely bankrupt.

To alleviate the cash flow problem, it has already suspended the servicing of commercial loans mainly through the issue of international sovereign bonds and those loans obtained from friendly countries like India, China, Japan, and so on commonly known as bilateral sources, on the external front, and rescheduling a part of the domestic debt, on the national front, supported by a bailout package from IMF. This has been strengthened by the introduction of the most stringent import and exchange controls which a government has resorted to in the recent years. The process is continuing, and the country is not yet out of the woods. The outcome of the process is also not yet known.

Shyam Nuwan Ganewattha’s book on assassination of the economy

In this backdrop, an economics journalist who writes to media and addresses public forums – Shyam Nuwan Ganewattha – has released a book under the title ‘The assassination of the economy: The true story of making the country bankrupt’ recently. He says that the bankruptcy of the country is not accidental or spontaneous. It is man-made due to the wrong policies adopted by successive governments in the recent few years. It is the cumulative outcome of many such policies. He has not tried to identify those responsible. However, he has narrated the story in chronological order from around December 2019 so that the readers could make the judgment for themselves.

He says, regarding the shortage of foreign exchange reserves, the top leaders of the Government in 2021 and 2022, along with those in the Central Bank, had pleaded with friendly countries for assistance, but those pleadings did not bring in any help. Hence, the inevitable result was the suspension of the foreign debt servicing, shortage of essential imported items like fuel, cooking gas, and medicines, long queues for same products, long hours of power cuts, and a crippled industrial base due to lack of the needed raw materials.

The book has reproduced an interview with the rescue man of the economy – Central Bank Governor Dr. Nandalal Weerasinghe – who has claimed that he had inherited an economy which had already been assassinated. This may be too strong a statement because if the economy had already been assassinated, there is no prospect of resurrecting a dead economy. A more appropriate description would have been that the economy had been crippled and making it stand on its own feet had been a gargantuan task.

Ganewattha’s book is an easy reader and meant for the ordinary public. Ganewattha using his versatile journalistic language has met this objective. Hence, it contains a simple analysis that can be easily understood by ordinary readers. Yet it provides an opportunity for us to examine the real causes for the crippling of the economy, how it was orchestrated by policymakers, how it degenerated gradually at first and pretty fast later, and how the warning signs were ignored by those who are responsible for taking corrective action.

Crippling the economy by rising public debt

The main contributor to the present economic catastrophe is the ever-rising public debt – defined as the debt contracted by the wider public sector that is made up of the central Government, the Central Bank, State banks, other State enterprises, and the private sector on the strength of guarantees issued by the Government. This does not mean that borrowing is an evil activity. If one does not have enough savings, he could tap the savings of others to finance his expenditure programs. However, a prudential requirement is that money so borrowed should be used for productive investment, and not for continued consumption, enabling the borrower to repay the loan with interest as promised. If prudence is practiced in this manner, money borrowed for productive investments does not pose a problem.

Surplus budgeting by ancient Lankan kings

Sometimes I am asked the question by interested readers that if the ancient Lankan kings could build reservoirs as large as oceans – for example King Parakramabahu I could build the Parakrama Samudraya – without borrowing from abroad, why should we do so in the present period. This is a very pertinent question, but we cannot compare the public finances of ancient Lankan kings to those of the modern-day democratic governments.

In ancient times, there was an inclusive tax base under which all citizens – farmers, businessmen, and aristocrats except religious institutions – paid taxes to the king. They were accumulated in the Treasury of the king and the power of the king was measures in terms of the value inside the treasury. Hence, the king spent less than what he got as taxes. In today’s parlance, ancient kings had surplus budgets whereas modern democracies do have deficit budgets. Taxes in ancient times were also high in ancient times. Farmers paid on average about 30% of their crops as taxes to the king.

In addition, there was a system of free royal work, known as Raajakaari System. In that system, every able-bodied person should provide free service to the king for about three months. This is equivalent to the polls taxes that are being imposed on individuals by modern democracies. Hence, the Raajakaari System was equivalent to an additional income tax of 25%. As a result, the average tax rate applicable to an ordinary citizen was equal to about 55%. With such a system of surplus budgets and high tax rates, ancient kings did not have to borrow to finance their capital expenditure programs. But kings were very prudent in using those scarce resources to build productive capital works.
Fiscal prudence by colonial rulers

Similar prudence was exercised by the colonial rulers in borrowing for financing capital expenditure programs. An example in this connection is the financing of the old Ceylon’s railway system. As revealed by the Colombo University’s history don, Indrani Munasinghe, in her 2002 book The Colonial Economy on Track, the Colombo-Kandy railway line was constructed by borrowing £ 3.5 million at interest rates ranging between 3-6% from the London capital market and Rs. 2.5 million locally. When the request for borrowing was presented to the Colonial Secretary, he approved it on three conditions: the loan proceeds should be used only for building the railway line, it should be self-financing, and a sinking fund should be established out of the surplus moneys to repay the principal of the loan and the interest thereon.

This practice was followed for other railway lines too. Hence the borrowings were prudently financed by the colonial rulers and in 1905 when the project was completed, the outstanding loans amounted to Rs. 39 million and the funds in the sinking funds amounted to Rs 41 million. Hence, the debt servicing was not a burden to general taxpayers of the country.

Abolition of sinking fund system in 1984

Building a sinking fund is a must if a borrower is desirous of paying back a loan without getting into loan default. The colonial administration in ancient Ceylon just did that. They incorporated it as a legal requirement when raising a loan by the Government by providing for the same in the Registered Stocks and Securities Ordinance or RSSO under which the Government raised medium to long-term loans.

Accordingly, when they handed the reign to Ceylonese in 1948, there were two specific sinking funds, one for foreign loans and the other for domestic loans. Foreign loans amounted to Rs. 125 million or 4% of GDP. But the foreign currency sinking fund had resources amounting to Rs. 43 million bringing down the net borrowing to Rs. 82 million or 3% of GDP. With respect to domestic loans, the outstanding balance was Rs. 368 million or 13% of GDP. The rupee sinking fund amounted to Rs. 47 million reducing the net domestic borrowing to Rs. 320 million or 11% of GDP. This prudent practice was continued by local rulers after Ceylon got independence from Britain in 1948.

However, due to the foreign exchange shortage faced by the country, the rulers had to abandon the continuation of the foreign currency sinking fund in early 1960s. But they continued to maintain the rupee sinking fund because it provided a partial relief to debt servicing. Accordingly, as at end-1983, the outstanding rupee loans amounted to Rs. 31 billion but the sinking fund of Rs. 11 billion provided a cover of 35%. The moneys in the sinking fund were reinvested in new government securities so that there was a reflow of funds to the Treasury. But it helped to introduce discipline to the Ministry of Finance.

Flimsy arguments for abolishing sinking fund system

But as from 1 January 1984, the Government decided to abolish the sinking fund system on a recommendation by the Monetary Board of the Central Bank. The reasons adduced were short-sighted and lacked a prudent long-term vision. One reason was that it would help the Government to reduce the size of the budget since contributions to the sinking fund to cover interest were charged to recurrent expenditure and capital part to the capital expenditure. When you remove both, the size would fall. Another argument was that there was no necessity for a sinking fund to ensure reflow of funds to the Government’s borrowing program because 97% of the contributions have been made by captive sources which had to do so compulsorily in terms of their statutes.

A third argument was that the sinking fund arrangement was just a book-keeping without transfer of real cash from the Government to the fund and vice versa. Hence, there was not any economic impact arising from the system. A fourth argument was that the abolition of the sinking fund system will reduce both the gross expenditure and the gross borrowing of the Government. A fifth argument was that the Government can always refinance the interest payments and maturing government securities and therefore there was no risk of servicing the public debt.

These are all flimsy arguments because they had overlooked the more important role of the sinking fund system enforcing discipline on the use of public finances of the Government. It is the lack of discipline that contributed to the ballooning of public debt beyond the ability of the Government to service them without refinancing the same. When the refinancing flows ceased, the Government could no longer service the debt and had to suspend the debt repayment pending debt restructuring. The rating agencies and IMF had continuously declared that Sri Lanka’s public debt has been unsustainable on this ground.

It is not clear why the Monetary Board which is supposed to be looking at the long-term effects of economic policies made such a grave error of judgment in recommending to the government to discontinue the sinking fund system. Making prearrangement to repay a debt is a prudent measure taken by any long-sighted borrower.

Better to restart sinking funds for new loans

Today, it is impossible to go back to the sinking fund system with the massive debt of the wider public sector of the country. However, it is prudent to cover every new loan to be contracted by the central government and all other public sector entities with a mandatory sinking fund requirement. This is specifically important in the case of borrowings by public sector entities and loans raised by the private sector on a guarantee by the Government. Parliament which takes pride in being the manager of the public finances of the country should see that this arrangement is followed in the case of every loan to be raised. Otherwise, it is impossible to avoid being a bankrupt country again in the future.

This is a good learning experience for the present Governing Board and the Monetary Policy Board setup under the new central banking arrangement. They may take decisions today just looking at the benefits in the present period. But their adverse implications may fall on the economy many years after the decision has been made. As Frederic Bastiat said in 1850, a good economist will look at not only what is being seen today but also what is to be foreseen in the future because of the policies implemented.

Otherwise, the present policymakers may run the risk of being named assassins in the future.

*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

  • 6

    “What is an example of a sinking fund?

    Real-world example of a sinking fund :

    Let’s say you want to take a vacation in a year that will cost around $1,200. Rather than withdrawing money from your emergency fund or using a credit card to pay for your trip, you can set up a sinking fund. Each month, you’ll add $100 to the sinking fund. Apr 10, 2023.


    Now King Charles’s Port City Colombo is not going to be a sinking fund. Opposite: It’s going to be an elevated, ascending, floating fund for the rich of the world to concentrate their wealth to ensure their money won’t devalue for another 1,000 years. Thus, will the Lankan billionaires live the luxurious life, sanctified by Ranil who feels such things are right and proper as it involves King Charles, while the common masses scramble to find a new form of financing for sustenance.

    • 4

      Bankrupt Motherland being not old-colonial-monied England, oil-rich Saudi, oil-rich Dubai, intelligent Singapore, intelligent S. Korea, et.al, can’t….CAN’T…… be serious about Lankan US$$ billionaires like the Rajapaksas placing the money of the hardworking-suffering-Lankan masses on Colombo Port-City to prop up the global billionaire class! We need the NPP-JJB to force them to put the money into our sinking funds till! 🛐

  • 15

    1) Mahindananda of all people says Lanka loses 500 Billion annually due to corruption and inefficiency. Two decades of Rajapaksas alone works out to ????? 2) He further added 85 % of revenue/ colleced tax is from just 450 clients 3) Reportedly Inland Revenue has more than 2500 staff to track those individuals, that’s more than 5 to 1 ratio 4) One of the assassin ,( the Chairman of oversight committee) knows all about the assasination.5) it’s like Maulana telling C4 who are the masterminds 6 ) country like no other.

  • 7

    The ancient Kings had the solutions ! They had the perfect tax system and justice prevailed !

    As long as people are fed this kind of nonsense we will never get out of this losers mind-set.

    Human beings in any country and era are the same . Our kings and ancient people were no exception. How these uneducated, feudal minds ran a perfect country is never explained. In every other country they look at their feudal past with embarrassment , a regrettable part of their growing up . There were no freedoms for the people and King and his family exploited the ignorance of the people.

    What was taxed ? What did they produce ? If tax was in the form of the rough rice grown then, what did the king do with it May be he ate it all and died of diabetes ! Even today there is no market outside for the rice we grow !

    What about the inherent corruption of the Sinhalese -maybe the King ran an effective Bribery Commission !

    Our history cannot be the exception, in fact looking at the human specimens in this country now, it is clear they were underfed and exploited to the Maximum for 2000 years. Their only salvation were the fairy tales told in Temples and rock carvings which they could not read !

    • 5

      It is not the economy, that is assassinated, but democracy in Sri Lanka.

    • 0

      I wonder what all the palace intrigues we hear about concern!

  • 7

    Our academics have a regular path-free education in Sinhala/Tamil, scholarship to the West given with Western money, either stay behind in the West or come back and become a know all !

    They write such common place articles that it is painful !.

    Small fish in a very small pond, posing as huge fish in an ocean.

    Remember-those who can -do it, those who cannot-teach !

    This country is a paradise for those who cannot or could not do it !

    From DS to RW no leader has achieved a break-through economy. No public servant has performed to expected levels ! Every government department stinks-pathetic. They will not answer the phone nor reply your letters. They only exist to make these fellows ‘mahathayas”, wearing a tie , driven about in government cars while humble looking peons serve them tea.

  • 2

    Has The Economy Been Assassinated & If So, Who Were The Assassins?

    The Great intellects of sri lanka should know who what and when with one button everyone are floating in the air finding this so how can they change take place. When a political options to the racist card, it’s a sure sign of moral bankruptcy: there’s no decent argument left in the source

  • 2

    ”However, a prudential requirement is that money so borrowed should be used for productive investment, and not for continued consumption, enabling the borrower to repay the loan with interest as promised. “

    This is not an educated Account/Economist/Central Bank officer’s word. These guys are the ones borrowed $400B on LCs to carry out Genocide on Tamils. The man is well aware that China broke the back of Langkang and forced it to bankruptcy by carefully planning the projects’ Cash Flow for its advantage. Watch what they do on a single project. The Hangbangtota loan fell due on the Yahapalanaya government as soon as it started. It was borrowed by the Chitantees, after the war. But For China to make an income out of the retake of the port, which China financed and built, it wanted 200 years and another additional supporting asset, the 5 Villages land. If China wanted 200 years to breakeven the takeover, how did it calculate loan repayment date, when Langkang was already bankrupt and was borrowing money on Western Financial Markets to keep rolling it Chinese’s war loan LCs. What is this writer thinking about him and the Chitanta government and Yahapalanaya, who jointly the frauds.

  • 3

    When the Central bank robbery of Yahapalanaya broke out (that was publicized only because there was a Tamil involved), it came out that there was 1,000 times larger fraud took place and was very effectively hidden by Central Bank Viyathmagas.

    “for example King Parakramabahu I could build the Parakrama Samudra – without borrowing from abroad, why should we do so in the present period. That is not how an educated economist defines a financing problem that exists. This question came to the mind of the people who were preached Sinhala Buddhism by this author. The author has been faking in presenting Langkang was as a heaven in olden days and Lord Buddha was ruling it. Sometime back, we cited here the real nature of the suffering of the subjects, when two war mongering Hindu Tamil Kings, Dutugemunu and Ellarla, were fighting, though those two Kings were caring for their subjects and honest to everybody. But when Sinhala Buddhism flowered in, that rosy picture disappeared from olden day’s Ceylon. Mahavamsa wrote some true contemporary history of those days (i.e., after 6th CE), in that, the throne was always changed hands by back stabbing, traitorous murders, torture, tyranny, war….…. throughout the country. It was King Dhadusena and Kashyapa, Queen Anula, Vickramarajasingan and his adhikaries- Ehelepola and Pilimatalawwe……

  • 2

    Further, in Olden days, the kings were forced to fight wars unlike the modern days. For example, Japan and Germany swore to stay out of wars only to develop their economy, and history proved that is 100% possible, but only if the government’s commit for that.

    “In ancient times, there was an inclusive tax base under which all citizens – farmers, businessmen, and aristocrats ……….paid taxes .
    I already see commentators blasting this fake analysis. Unlike in the olden days, any work for the king is work for the country, in modern Langkang people paid taxes not coming back for them but invested in high yielding securities in foreign bank accounts for robbers. In Australia, Finland, Denmark, Switzerland, Norway like countries, the governments start to pay social payments for their citizens as soon as they born, irrelevant of the parents’ income. Then their citizens are listed as high income/head and happiest citizens in the world, with income distribution at a high level. But we show the situation on Langkang, when a woman pulled off to protect from attackers, whose milk power she stole to feed her baby. So, I don’t agree with neither author nor the commentators on those lines.

  • 2

    The true reason for Parakirama Samudra and Kalawewa’s success was their project evaluation part. Excellent location, commercially viable and needed projects, technically viable. While kings were feeding from their treasury the unemployed men who were employed in these projects, kings created arable lands for the subjects to cultivate, when the project was over. Other than billions of dollars to Rowdy Royals to deposit in foreign, what benefit does anybody in Langkang get from the Hangbangtota project? Watch what happened with Uma Oya. It was technically impossible, and there was a massive strain on finance and the environment. The project failed 100% on the first attempt and was shut down but was forcefully completed on the second time. Upcountry is going to suffer for its entire future because the rowdy Royals wanted to have that water diverted for them, not the Indian Tamil Coolies working on the mountains.

  • 1

    What is the point of creating a sinking fund, when the government started to borrow for deficit budgets, year after year, and in turn depositing the fund in treasury bonds? Sinking fund is to control the overspending of the borrowed projects’ income. When the government started to borrow and import and consume without encouraging local economic growth, why does one want the sinking fund? Modern Monetary theorists like Langkang’ Appe Aanduwa have no faith in the government’s sinking funds. More credits created in books than debits make more money to roll in the market and thus more economical activity. So, they don’t want to restrict the banks to create credit and lend it, until everything ends in bankruptcy, like now. Author bluffing it as cash flow proem but not accepting productivity-income problem, aggravated by foreign deposits. On the other side, if your project creates $100 cash flow every month, you save $50 towards paying the project loan. If the project you did costing you additional $24 million to keep it afloat, like Hangbangtota Project did to Langkang, or Matale airport doing now, and Sri Lankan Airline operating basis by leasing planes for long term, then what point it makes additionally borrowing more money on high interest and saving it as Sinking Fund, unless a minister come out with a novel, smart idea of putting it in his foreign account?

  • 1

    See this EPF boys’ story: Once a dad presented a piggy bank for his son’s birthday and told “Son, you are a big boy now, start to save as a habit and no toys for you this birthday, have fun, Best Birthday!” The child was putting the wages mommy pays for his help around in the house. Noticing that his bank was not growing as he expected, the boy complained to dad. Mommy interfered in that saying, daddy took it for a family emergency; he will return it with interest, anyway your piggy doesn’t give you interest, does it? The dad gave a big “Yes son” and the boy was happy and dreaming of buying a lot of things on his next vacation trip. But when the school declared summer holidays, the favorite son went to dad and asked, “Dad where are we going to, this vacation?” Mommy again interfered “Son daddy lost his job, so no vacation for this family this year”. The disappointed boy went to his room, still to count and feel happy about his saving. There he noticed that his EFP investment on treasury bonds were empty.

  • 1

    He picked up his piggy bank running, shouting “Daddy…..”. One more time the mother interrupted him, “you remember son, we are now bankrupt?” He said, “but he promised he will return with interest, no?” This time Mr. Evil replied for his part “all along it was my money, which I gave to you mommy, and she gave it to you as the wages”. The boy looked at mommy with pleading eyes and said, “I should have demanded a toy for my last birthday. See now, what this piggy bank did to me; has made me lose the wages that were paid for my hard work. I lost everything……. My fun time, my money, my birthday present, my vacation…..Daddy tricked me and stole my money.”
    Child’s piggy bank sinking fund can work only if Dad brings home money from a steady work. Otherwise, they add emotional dramas, as Evil daddy’s ill-treats the child and mom sits and watch not being able to resolve this misadventure tragedy, in addition to the fact that it bothers her that the family is bankrupt now.

  • 9

    Dr. WA Wijewardena,
    Why you are afraid to tell that the islands economy is in crisis because of the wrong Political culture in this country.The country is in Bankgruptcy/ unable to pay back internal and external debts borrowed because of the greediness of power hungry corrupted Sinhalese politicians. For the past eight decades our Sinhalese politicians assasinated the peace and unity of the people in the name of race and religion.

  • 4

    We all know who were responsible for the current economic situation. Who ever the minions were, the Buck stops with President(s) of the country who allowed the CB, with the blessings of the Finance Minister, to continue the mismanagement. Books can be written but unless there is an official enquiry into the catastrophe & those responsible held to account, we can talk & write till the proverbial cows come home. Those who enriched themselves at the expense of the average citizens are laughing.

    Last week, I was in Italy & while having a glass of wine in the evening with an Italian colleague, he asked me about the recent public ‘protest’ (aragalaya) & if any good came out of it. He thought GR was in exile & corruption was being investigated as a result but I had to say that GR is back & every thing is hunky dory as before in SL.

    • 4

      Raj UK, only in Silly Lanka you get such unlimited entertainment. Those corrupt not only bankrupt, then they write books to gloat, how they did , for SB retards to buy, read and enjoy. See the recent report and comments from “Mother of All “, Chairman of oversight Committee ???? Mahindananda, going after Constitution Council, for not giving free hand to people of his kind. (to the extent of instigating violence). Namal insinuates, Aragalaya responsible for bankruptcy. Mahinda / Ranil. R singing in tandem “all local and no international inquiry “. (after ….. years), Cabraaaaaaal writing his own Economics, Kamala blowing own trumpet “road to prosperity and splendor”, SF’s daily monologues, Pissu Sira’s theatrics, Waiting for Gotha’s book ” My fugitive days”, Mahinda’s “Sorrows of Kaputas’, Wimal’s “Conspiracy files – unlimited edition ……….

    • 2

      I think it might be in ROME, right? I ll be in Melano by the end of November on my return from Sri Lanka. I have my hearted friends (Italian, cardiologists,biometricians, biologists and biochemists) in Milan and Rome. They treat me like my own family every time I meet them. They treat me with the best & most expensive food and wine they own. Also I have never made friends with any Sri Lankans in Italy but I heard some corners of Milan are full of them. Most of them are former Rajapakshe- supporters. Some of them EVEN threatened me to death to the same manner “SINHALA_MAN” is after me today. Sinhala man gave the order to his JVPrs to chase me during my trip to lanka in July, 2023.
      That’s all about them, however, not everything you say is false, except that takeover of RW settled some sort of normalcy even though you and the ilk may have forgotten.
      As my CT sister Manel Fonseka and others with some sanity have confirmed loudly that we cannot rely on anyone but RW at this crtical stage of the country.

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