20 July, 2024

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President Ranil Wickremesinghe Rescued & Stable Economy In Sri Lanka – An Inquiry 

By Asoka .S. Seneviratne

Prof. Asoka.S. Seneviratne

President Ranil Wickremesinghe‘s actions and the IMF bailout have relieved the public, but the long-term consequences are a significant concern. The high level of poverty, the closure of micro, small, and medium-sized enterprises (MSMEs), and the struggles of households with multiple pressures from high prices, income losses, increasing school dropouts and malnutrition, and underemployment have significantly affected the overall welfare and well-being of the people. The lack of transparency about restructuring foreign debt is a concern. The debt-to-GDP ratio of 90 percent by 2032 is inadequate as it highlights the continuous burden of the public in many ways. Also, the proposed Economic Transformation Bill stands as a massive barrier to stimulating investment. Among many, these facts starkly contrast with President RW’s notion of a rescued economy, painting a picture of the hardships faced by the people. Sri Lanka is self-sufficient, along with 75 new laws of Prez RW. Indeed, it is not the laws alone; transparency, credibility, accountability, and, most importantly, utmost commitment to generate the expected outcome are the matters. Prez RW had been sworn in as prime minister of Sri Lanka six times.

Introduction 

President Ranil Wickremesinghe (RW) often says, including in Parliament and public meetings, that he worked to rescue the country from economic collapse, and, therefore, the country’s economy is stable. Given the long queues for fuel and gas together, disturbances occurred in the power supply, so we agreed with the Prez RW. We have to appreciate and value the work of Prez RW. Otherwise, Sri Lankans will become an ungrateful lot. However, there is another aspect that people hardly know about it. This is undoubtedly the reality, even with his prosperity by 2048, of which Prez RW or I will not be alive. But the people will not be able to escape from hardships at all.  This article aims to explain to the public some facts against the assertion that the President managed to rescue the economy. For the above, I will use the nature and extent of the country’s current debt burden, the state of the economy and poverty profile, and why Prez RW and IMF are not transparent and credible in dealing with the economy of Sri Lanka.

How Parliamentarians Work With The Matter (s)

Among many, skyrocketed public debt is central to economic crises or downturns. I will not present details on how public debt is an immense financial burden because it is well recorded even though it is hardly known to most of the public in depth. Parliamentarians know it well, but government parliamentarians do not explain or educate the public on the sources and causes of the public debt burdens and the impact of the IMF bailout. They habitually raise their hands or approve whatever the Masters present to parliament. This is the most pathetic situation with the Parliamentarians. When the opposition wants to tell their part and explain, government parliamentarians often disturb it in whatever way possible. Then, it is a calamity, so the school children in the Parliamentary gallery walk away having the most valuable experience or lessons learned. Some Parliamentarians are tapping the tables and approving the Masters even before they finish their speeches. Slavery in white clothes cannot be comprehended along with Parliamentary Democracy. Given the above background, we cannot expect that the Masters or the government would provide accurate facts and figures to the public. In short, the impact of the IMF bailout (i.e., USD3 billion) and transparency in dealing with the IMF are hardly known to the public, who pay the ultimate cost of the bailout.

The Debt Burden Of Sri Lanka, The IMF Bailout, And The Economy 

The total debt burden of Sri Lanka is a staggering US$96 billion, with each citizen carrying a per capita debt of approximately Rs. 1.25 million. Our foreign debt is US$38 billion, while the government reserve is US$5 billion. To make matters worse, Sri Lanka must pay off a hefty US$6 billion annually, a payment that has been deferred or suspended. Another view is that along with the IMF bailout, Sri Lanka receives US$ 60 million monthly while its foreign exchange earnings are about US$1,800 million. It is impossible to expect debt cancellation, particularly for private foreign bondholders who do not want any debt cancellation. We must earn foreign exchange on exports and save a substantial part for debt repayment and the cost of imports. This is an ongoing struggle. Despite these scenarios, the government continues to borrow, further exacerbating our debt burden. This is a burden that every citizen of our country is carrying, and it’s a burden that’s only getting heavier.

I just provided the above information about the bitter truth that the President worked to rescue the country from economic collapse, and, therefore, the country’s economy witnessed some degree of stability following the revitalization stage. We can further inquire on the above.      

Regarding the country’s debt burden, the public often hears from the Prez RW that the government is restructuring the debt. This is a process that involves negotiations with the creditors, namely (i) debt, principal, and interest are differed or postponed or to be paid at a later date, (ii) cancellation of a part of the principal or interest, (iii) reduction of interest rate.  Based on the above, domestic debt restructuring has been finished with some pains.

I assume the government is discussing restructuring foreign debt with creditors based on the above three elements.  Amidst the above, Prez RW stated that he managed to defer or postpone some payments by talking to creditors, which is incorrect, as I understood. This is because, as the President, he did not speak to the creditors; hence, the creators agreed.  Sri Lanka declared bankruptcy and postponed the repayment, promising to add what’s in arrears to the principal at the same interest rate. This is the truth.  Furthermore, the president said he managed to reduce some of the debt. This is a lousy speech because creditors can’t agree even if the President made a request.  Indeed, it is transparent if the President discloses the names of those creditors. The point is that he told the aforesaid in Sinhalese. It would have been an utter shame if it had been in English because foreign debt restructuring is a more complex than local endeavor based on the abovementioned debt negotiation process. In short, RW is the president alone, and it is not a matter to the creditors to be lenient on debt because debt is the saving of individuals at the bottom.

Furthermore, the Minister of Foreign Affairs in Sri Lanka recently stated that the country wants to reduce its debt burden by approximately US$ 17 billion in the ongoing debt restructuring process. The current foreign debt is about US$38 billion, and US$17 million is about 50 percent of debt reduction. The credibility of the statement is essential, hence the transparency. Indeed, if this can be materialized, it will bring unprecedented support to the country and the economy.

The Sri Lankan government and the IMF are not transparent about what will happen to the interest payment on the US$ 3 billion loan. As I understand, Sri Lanka will have to pay about US$ 2 billion in interest over the next five years for the US$3 billion loan.  In addition to interest payments, there will be service fees and surcharges. In balance, one may ask about the net benefits of the IMF bailout. In short, the Sri Lankan government and IMF do not reveal the above, which is another sinister aspect of the IMF bailout because innocent public pay the above. Also, we did not hear that the IMF has agreed to restructure its debt. Given the above, the IMF states that it is happy with the progress made by Sri Lanka, while the government always showcases highly the pleasing statistics and words of the IMF, which is unfortunate.   

The government of Sri Lanka and the IMF are scratching back at each other, and people suffer like sandwiches. Given all the above, one may argue that the IMF bailout is for the benefit of the people of Sri Lanka or the benefit of the IMF itself. The following section is a committed inquiry into the above with some convincing evidence of the reality of the ground.

Rescued And Stable Economy Is Not The Reality On The Ground 

According to the latest World Bank update, the Sri Lankan economy has shown early signs of stabilization along the projected economic growth of 3 percent in 2024 with improved fiscal and external balances, supported by a recovery in remittances and tourism and the continued suspension of debt service. However, this will not reverse crisis-induced welfare losses as poverty levels remain elevated at about 33 percent by a continued increase for the 4th year, together with high levels of unemployment (Labor force participation declined from 49.8 to 48.8 percent between 2022 and the third quarter of 2023). Regarding poverty, the utmost priority of the UN Agenda 2030 is to eradicate extreme poverty. Hence, the situation in Sri Lanka is pathetic because it has only six years to go. The World Bank refers to a decline in labour force participation, particularly among women and in urban areas, exacerbated by the closure of micro, small, and medium-sized enterprises (MSMEs). In short, women’s situation and their role in the economy is so pathetic in many ways. Households are grappling with multiple pressures from high prices, income losses, and underemployment. This has led to households taking on debt to meet food requirements and maintain spending on health and education.

Indeed, households have adopted risky coping strategies for lower incomes and price pressures, including using savings, taking on more debt, and limiting their diets. Skipping meals is well known, along with food insecurity, which rose during the second half of 2023, with 24 percent of households being food insecure. Widening income inequality is a significant concern, as is increasing school dropout. Inflation has not stabilized as its increasing trend is the reality, maybe along with the rupee depreciation among many.   

The good thing is that the continued suspension of external debt service, provision of assistance from development partners, restricted imports, and postponed debt repayments have helped build usable official reserves of about US$5 billion. However, given the US$38 billion foreign debt, this is insignificant.

Risk Factors Are Still Ahead 

Given Sri Lanka’s heavy foreign debt burden, a stable exchange rate is a primary concern. In other words, exchange rate volatility is harmful in many ways.

Sri Lanka can boast that it has accumulated foreign reserves of about US$5 billion. This accumulation has been helpful, given the restricted imports and the suspension of foreign debt payment, particularly the latter. As a result of the accumulation of foreign reserves, Sri Lanka’s Rupee appreciated against US Dollar. The appreciation of the rupee has been a welcome aspect because the book rupee value of foreign debt is less compared to the highly depreciated rupee against the US dollar for some time.

According to a recent First Capital Research, the rupee is expected to depreciate to Rs 310-320 from the current level of about Rs.300. The rupee value of foreign debt will increase. Because of the above, the outcome of foreign debt restructuring is crucially important. Any debt reduction beyond the popular term of “haircut.’’, the economy will be comfortable. Simultaneously, the desire to relax imports may offset any “hard cut” benefit alone.  If it is possible to cancel debt as indicated by the Minister of Foreign Affairs (i.e., US$ 17 billion), Sri Lanka will be a winner, given the bailout.

The other risk factors are the proposed Economic Transformation Bill and the IMF bailout. Given the above, the 1978 Board of Investment Act, which governs the Board of Investment (BOI), will be repealed. The government is on the wrong side because opponents argue that the primary barrier to attracting investment is the lack of a consistent policy, not the BOI structure. Indeed, BOI helped the economy even during Covid 19. This calls for strategic and systematic changes to improve the investment environment rather than resorting to privatization and restructuring. The opponents argue that the proposed Economic Transformation Bill is a barrier as it will severely destabilize the investment sector, which is already grappling with economic challenges in supporting and enhancing economic growth. At the same time, the proposed Public Financial Management law has set a 13 percent primary spending limit (expenses before interest) as part of efforts to improve fiscal discipline in the future. Indeed, fiscal discipline is essential. However, the impact of this measure needs to be assessed on the welfare and well-being of the people and economic growth at large.

Sri Lanka May Need Repeated Restructuring 

Recently, an Economist indicated the above, and it is worth explaining. Debt to GDP measures financial leverage on an economy. Currently, debt as a percentage of GDP is 104 percent. Usually, a high ratio, among many, indicates a burden to the people, as is witnessed by the economy now. While people must pay high taxes, subsidies will be reduced or stopped. Both measures will affect the welfare and well-being of the people. The government is compelled to sell assets and properties. Government expenditure is curtailed. Because of the above two measures, the size of the government will become smaller. Given the above scenarios from the people and government, it is argued that the ideal government debt to GDP is less than 60 percent.

Because of the above, the Sri Lankan economy’s GDP growth potential is crucial to its stability. Constraints to consumption and production are massive. Accordingly, annual economic growth may be around 3-4 percent until 2032. Along with the above, debt to GDP is expected to be 95 percent in 2032 compared to 100 percent in the policy statement by the President in 2022. In other words, there is a vast difference between less than 60 percent and 95 percent. This means that even after the ongoing discussion of debt restructuring is successful, it may require repeated restructuring, and hence, austerity (maybe severe austerity measures) is needed to follow suit. In other words, aiming for a debt to GDP of less than 60 percent is a long way to go along a trajectory of at least 5 percent constant and stable economic growth and the capacity and possibility to earn increasing and saving foreign exchange.

The outcome of the debt restructuring will help bring debt to GDP close to 60 percent, paving the way for the IMF bailout to meaningfully support and help Sri Lanka’s economy. Otherwise, the people’s current suffering will continue even after 2048.

The above may be the reality that, among many, the impact of the Economic Transformation Bill and the proposed Public Financial Management law will have on the economy. At the same time, Sri Lanka is self-sufficient, along with 75 new laws of Prez RW. I wonder how the above will help to improve the welfare and well-being of the people, as such laws have failed over the last 75 years, of which Prez RW had been sworn in as prime minister of Sri Lanka six times. Indeed, it is not the laws alone; transparency, credibility, accountability, and, most importantly, utmost commitment to generate the expected outcome are the matters.

*The writer worked as the Special Advisor to the Office of the President of Namibia and was a Senior Consultant with UNDP. He worked as a Senior Economist with the Central Bank of Sri Lanka (1972-1993) before he migrated to New Zealand. The writer can be contacted at asoka.seneviratne@gmail.com

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Latest comments

  • 16
    4

    All that Ranil has done is: 1) Grab the Presidency through the back door when the people rejected not only him but his whole UNP party. Under his leadership, the UNP has only seen defeat.
    2) He has protected the Rajapaksa family and the crooks around them, including the family members.
    3) He has protected his Royal friends, who have been exposed even internationally to their overseas deposits and deals.
    4) He has avoided local government elections by not funding after allocating funds in the budget.
    5) Appointed Kappam guys, bribe takers, and human rights violators as Ministers, IGP and Secretaries. He even recommended an extension to the service of the Attorney General, who has repeatedly not moved the cases against ministers forward. He has been declared by the Supreme Court, where his recommendations have been considered a violation of the constitution.
    6) After promising for so many years, he has not done anything to bring about equal rights among citizens, especially has not resolved minorty issues. Even during his last visit to the North, he only promised what would be delivered next year.
    7) Illegally got bills approved by the Parliament that were against the Supreme Court’s amendments.
    8) Increased the debt load by borrowing more without concluding the debt restructuring agreements.

    Above all, his promises are always “coming in the future” but never arrive. It’s time to kick him out AGAIN!

    • 5
      0

      Ranil is a big bluffer. He was lucky as foreign exchange situation improved post epidemic with increased tourist arrivals and remittance by Srilankans. This had nothing to do with any effort by Ranil. Inflow of money is adequate to meet the import of essentials which ended the queues, which situation is continuing at present. Ranil must inform the public about FDIs which came into the country due to his effort in lobbying abroad in fairs and meetings. I read that Tamil Nadu is getting USD 5 billion investment from Google for mobile phone factory. Fact is that what is seen is only surface value and Srilanka is still unable to meet its sovereign obligation.

  • 8
    3

    A very useful analysis for people to understand the real threat they face under RW and IMF. First of all, the people of the understand that RW and his his team are not telling the truth. In reality RW using this opportunity to become an elected President of Sri Lanka which was denied by people. His aim is very clear. Most of the members of Parliament were did the same to the former President Gotabaya Rajapaksa. They praised him as a gift of God to this country. Even now they say the same to RW. It is 100% true that Gota was not a good leader and his attitude was wrong but none of the MPs questioned him but the economic problems or debt management did not happen within two years, it is an accumulated effect of wrong political move by both UNP and SLFP of 75 years rule. So, UNP and SLFP should take full responsibility and the country need to make complete change.

  • 6
    2

    Prof.Seneviratne

    Seems to me that you are have personal beef with RW or is it a subtle offer of your service to the next SL govt? Afterall, you are amply qualified with your Namibian & UNDP experience.

    In your analysis, in a nutshell, RW is blamed for lack of ‘transparency’ with the IMF. If I am not mistaken, particularly, the left parties, were up in arms for seeking IMF assistance but now, even the NPP is following suit, maybe, with anticipated ‘better’ terms & the ‘transparency’ you talk about. For the better or worse, the IMF was a lifeline but would anyone else have done differently? In fact, were there anyone else taking the challenge?

    I lost faith in RW years ago with his laissez faire attitude & arrogance but before heaping him with all the blame, why not blame those who were responsible for putting us in this mess? We were in a shit hole, so getting covered in shit is to be expected. It is those who put us there who should be castigated. Maybe it was sheer luck & no actual contribution from RW that the situation stabilised, at least, in the short term, & we are all aware of the tax burden, so what do you propose? SL has no major imports, even tea is no longer seen in supermarket shelves.

    • 1
      1

      The last paragraph of my comment is missing, presumably, because I had exceeded the word count, therefore, let me add my final say.

      We are quick to blame RW. I agree he is not the inspirational & capable leader we need now. RW’s loyalty to his cronies was greater than his pledge of allegiance to the country as PM & now, has done a deal with the devil for his own survival. Nevertheless, we overlook the fact that this situation arose because of mega corruption & incompetence of one family who let the cancer spread exponentially with their blessing. Today, our FOREX revenue is mainly from tourism & remittances of expats but beyond that, none of the hopeful parties & their leaders are able to provide a realistic strategy for the economic recovery & how it is to be funded.

      Ranil bashing is pointless. If the objective is a punch bag, there are others to be blamed for greater crimes. The focus should be on how those who hope to form the next govt. will get the country out of this mess.

  • 4
    3

    Dear Prof. S,
    .
    “Indeed, it is not the laws alone; transparency, credibility, accountability, and, most importantly, utmost commitment to generate the expected outcome are the matters.”
    :
    I think it is because of the established powers of the people of the country and the trade unions that the introduction of new laws and the implementation and enforcement of existing laws fail. Even the emerging economies of Southeast Asia do not allow trade unions to interfere with their development projects. The sad reality is that the Janata Vimukthi Peramuna and vanguard parties with the support of the university youth are spinning around the society creating new divisions in this country.
    Paradoxially, JVP led groups are taking power today and making every effort to rule this nation. How can they go even an inch in this country? They are like unwelcome guests in today’s life. If they were whole hearted, without power, they could have long ago joined hands with the rural people for their rural development projects, but the truth we see today is that JVP lived at the expense of others also to the manner the Sinhala- Buddhist monks abused it. So how to share their productivity for the development of the country?

    Tbc

    • 3
      4

      cont.
      .
      Moreover, there is a big obstacle of non-implementation of law and order in the SRILANKEN society, where socio-cultural forces cross their path with strong resistance.

      Disclosure of facts based on IMF interventions during Sri Lanka’s economic collapse has been reported 16 times before Sri Lankan govts and independent agencies followed through on commitments made with the IMF and their supporting agencies to achieve the ultimate goals. the LTTE. Just like the terrorists did to the common people in the north during the war, the Janata Vimukthi Peramuna-led groups are using people as human shields. It is like a curse to this country..

  • 2
    3

    “However, given the US$38 billion foreign debt, this is insignificant.”

    The goal should be to pay the interest on the $38B USD, not necessarily the full amount. Debt can be used to grow the economy, with proper risk management protocols in place. Similar to corporations.

  • 4
    4

    Ranil Wickremsinghe is one the country would have been better off WITHOUT.

    • 1
      3

      Thanks, hanchopancha, for saying that unambiguously.
      .
      Panini Edirisinhe (NIC 483111444V) of 51B, Golf Links Road, Bandarawela, Sri Lanka

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