By Kumar David –

Prof. Kumar David

Ranil Wickremesinghe (RW) has set his main target as addressing the admittedly serious worry about External Debt (ED), above concerns about Domestic Debt Restructuring (DDR). My view is that this is a mistake; it is the conflicts and crises in DDR that are more likely to be his undoing. The point will become clearer as I proceed. I have long argued that international actors, without exception, will NOT allow Sri Lanka to descend into chaos. Too much is at stake to allow one of the last surviving democracies in the post-colonial world to collapse into anarchy. Western liberalism and the IMF will not allow it and now India has thrown in its considerable weight. Union Minister of External Affairs Dr Jaishankar is on record saying “India has done more for Sri Lanka than the IMF”. The meaning is very clear, India does not want the country on its southern tip to descend into chaos – a very sensible attitude from India’s own point of view. 

China too is changing its approach; it seems to me that it will accept a “hair-cut”, something it has never done before. In the past China would agree to reset dates of loan repayment but not to trim amounts.  And we seem to benefitting from oil-shipment pricing in the context of the war in Ukraine as it strives to reduce the impact of Putin’s highhanded misadventure in a small country. What I am suggesting is that though the foreign or dollar debt scenario is bad, international actors will be ready and willing to help us avoid the worst, that is economic and social collapse. In summary, my hunch is that that the conjuncture of circumstances will help Lanka pull through its foreign (dollar) debt dilemma though it seems the IMF, World Bank and ADB will lend a hand with the worst impacts of domestic debt as well.

Domestic Debt Restructuring

Nevertheless, I reckon that the predicament in respect of domestic debt is far more challenging and RW will face great difficulties in dealing with it. In the simplest terms what is domestic debt? It is the money that the Treasury (the government) owes people at home. When the Central Bank (CB) prints money it “sells it” for example to the Treasury in exchange for Treasury Bonds which are IOUs. Domestic banks take part of the print run and become creditors of the CB. Other domestic actors such as the Employees Provident Fund (EPF) and domestic bond issuing companies do likewise. If these participants lose confidence in the notes and bills that they hold the domestic economy becomes unstable. Take the banks as an example. If bank depositors and investors in bank-capital lose confidence in the quality of their investments or deposits an immediate bank-run will follow. This is what led to the collapse of several banks in the USA in April and May this year. The crisis over here may be far more serious because the banks involved are our premier institutions including the Bank of Ceylon and Peoples’ Bank.

I also grant that it is correct that international agencies including the IMF will help Sri Lanka bail out not only from the dollar-debt bottleneck but help with domestic deb toot. The ADB for example has over the last two years given the country $880 million in backup monies to support emergency imports (food) and help the “vulnerability of the poor and particularly women”. So, assisting with DDR is within the agenda of international actors. Of course, the ADB as expected adds “the country must remain committed to reforms, enhancing tax revenue collection, good public financial management, improving state-enterprise management and independence of the Central Bank”. It is clear that International players are setting themselves up to assist with both DDR and dollar-denominated external debt management.

Notwithstanding all this I do believe that the challenges facing RW in domestic debt management are gruelling. Austerity measures including public sector wage reductions, cut back in social program and increases in taxes are unavoidable. There will be reductions in subsidies and increasing inflation as belt tightening programmes to raise productivity are put in place. Inappropriate SOE privatisation (CEB, the Telecom Backbone) will end in conflict with the people. Inflation will not go away anytime soon and this will upset political stability in the mass arena while the well to do will resist income-tax increases, wealth-tax and capital gains-tax. RW will find himself roasted on both sides. Will he resort to his familiar method of blatant repression? It’s quite likely as he is grooming the military. 

But without an electoral mandate a President who derives his legitimacy only from a parliamentary selection process will not be able to withstand the mass protest campaign that the JVP has promised him. Therefore, I will repeat by refrain, it’s not dollar-debt restructuring but the political and social conflicts connected with attempts to restructure the domestic economy that will prove to be RW’s undoing.  

Export Led Growth 

I need rub this in by emphasising the need to strengthen the balances of trade in import-export. The recovery of the economy, crucially, needs to be export led; or to put it in simple words Lanka needs to greatly increase its exports to achieve economic strength. This means encouraging the private sector to enhance its performance while at the same time ensuring that the state retains its role in guiding the economy. There this no formula for getting the balance right, it’s something to learn on the wing. There are examples to pick up the odd lesson here and there from, Singapore, Vietnam, South Korea and China.

But my point here is that economic recovery has to be export led, we cannot turn inward and expect economic take-off by domestic strategies alone. If exports are to play the key role imports have to be curbed. Of course, the obscene obsession with luxury cars, SUVs and extravagant things has to be curbed, but also imports of everyday consumer goods such as food will be restricted. The implication is that prices will not be brought under control, certainly not in line with people’s expectations. RW will be caught in a cleft stick and encounter political instability and disapproval. Hence stability of the domestic sector, the DDR problem, will be the more serious issue. 

Another conundrum is to satisfy the emphasis on Central Bank independence specified by the IMF and overseas creditors. The CB has a dual role, (i) inflation targeting and (ii) encouraging growth and holding up employment. In the textbook of the classists this is contradictory and the classic role of the CB should only be targeting inflation via monetary policy, manage the money supply and supervise financial institutions. Growth is the responsibility of government and the CB should not be burdened with economic policy, at least in theory. Well it has not been like that for ages and even giants like America’s central bank the Federal Reserve (Fed) has been roped in by successive governments to do its share to assist in economic and employment strategies in addition to its traditional inflation targeting role. The role of the Fed is said to be setting interest rates, managing the money supply and regulating financial markets, but It also acts as the government’s fiscal agent and gets dragged into supporting government economic policy which purists argue is none of the Fed’s business. It has become holder of controversially high levels of government (Treasury) bonds, so called Quantitative Easing and guarantor of mortgage-backed securities which crashed when the housing market went belly up. It is no wonder that Sri Lanka’s CB is not pristine pure either. 

RW’s strategy is economic and political. He is attempting leverage IMF economic backing which is sympathetic to helping Sri Lanka avert domestic disaster (the West will do all it can avert anarchy in this democratic polity), two big ADB loans to ease the  pain of domestic consumers, a $700 million loan from the World Bank now being negotiated, Japanese largess and new found Chinese flexibility to strengthen his economic position in the domestic economy. At the same time he is strengthening his military power, enhancing the position of Chief of Defence staff who holds office at the President’s discretion and pushing through a slew of anti-democratic regulations and legislation. 

He has a right to his economic strategies, I even wish him luck, but RW’s threats to democracy must be resisted. Repression is right up his street and has a bad reputation as the handy gun-hand of his trigger-happy uncle Dicky (JR) who incited murder, mayhem in massacre and military repression. As for shielding democracy RW is untrustworthy and must be treated with the utmost caution. He  postpones elections when he cannot win them, provokes the ire of the Election Commission by appointing his henchmen as election monitors, presents an Anti-Terrorism Bill more draconian than its hated predecessor, makes an allegedly unconstitutional appointment by appointing Rosy Senanayake Presidential Advisor on Local Government and a slew of such inappropriate actions.