By Sunil J. Wimalawansa –

Prof Sunil J. Wimalawansa

Part 8: Sri Lanka—Changing Pillows to Cure Headaches: Ways to Recover from the Fiscal Crisis

According to the Central Bank data, in 2021, it lost over five billion foreign reserves of USDs due to its erroneous policy of artificially maintaining the value of SLR (at Rs. 200) against the USD. Besides the bond scan, this was the next major blunder by the accountable people for this disastrous decision, which the tarnished secretary to the president pushed. The people need to notice that all public (senior) positions and decision-making power come with accountability.

Therefore, these officials must be financially accountable for these massive foreign exchange losses and fraud. The accountability for the callosal damage incurred by these perpetrators does not vanish or get off the hook following resigning or terminating them from administrative or ministerial positions. Fraudulent politicians and these groups of ex-public servants must bring to justice and should bar from holding any public or corporate positions for ten years.

Failed application of Modern Monetary Theory (MMT)—Inflation and SLR devaluation

The Central Bank of Sri Lanka opted to rely on modern monetary theory (MMT) by excessive monetisation to (create) get privileges for themselves, pay government servants’ salaries, and political-party based cash freebies to selected constituents. The USA and the UK also print enormous sums over long periods (also called Quantitative Easing: an unconventional monetary policy) without fueling inflation or devaluing their currencies.

Inflation and currency devaluation does not happen in these countries, partly because their currencies are international and get diluted through systematic large-scale daily global trading. Besides, there is nothing “modern” about MMT. It is neither a theory nor proven to work in emerging economies or developing countries. MMT is an extreme leftist/liberal economic agenda, dishing-out cash to pacify despondent constituents and use as a gimmick to attract their votes.

Unlike industrialised countries, developing countries have no luxury to cushion the direct impact of the callosal amounts of printed money coming into circulation. Consequently, monetisation flares up symmetric inflation and devalues the local currency as the money returns to the market. Therefore, short-sighted monetisation to satisfy local political agendas is highly inappropriate for developing countries. Monetisation in developing countries also enhances fraud, as printed money is less accountable and easy to pilfer. Excessive Quantitative Easing in Sri Lanka by the Central Bank proved disastrous. Despite continuing massive monetisation, it failed to narrow the extravagant budget-associated and trade shortfalls but escalated the inflation and the cost of living, worsening the situation (the country fell from the frying pan to the fire).

MMT should not have been used in Sri Lanka

Due to many reasons, the MMT approach is inappropriate for developing economies with weaker or unstable currencies. The Central Bank of Sri Lanka made a fundamental mistake by wasting precious USD foreign reserves by artificially maintaining the SLR rupee rate (i.e., pegging SLR to USD), yet failed to control the declining value of the Rupee, resulting in a massive devaluation of the Rupee. The rise of uncontrollable hyperinflation and further devaluation of SLR is probable.

Politicians (and those engaged in pillaging) are happy to push the MMT concept of printing vast amounts of money that the treasury does not earn (hence less accountable) for their pet social programs. The extreme liberal democrats in the USA champion this dangerous MMT-liberal agenda that causes significant long-term harm to the country and its sustainable development programs. When the monetised funds are spent rapidly, as is happening in Sri Lanka, it fuels inflation. Whereas, when the investors’ and consumers’ confidence is low, and the printed money is spent slowly over a prolonged period, it leads to liquidity-(money)-trap. However, when the liquidity trap burns out, real inflation will manifest, as currently is happening in the USA. Then the option for the Central Bank is to promptly reduce the money supply and significantly increase the interest rates to reduce the liquidity for a softer landing.

The need for austerity measures

Essential austerity measures include but are not limited to halting all unnecessary and less-priority projects, as the successive governments have been engaged (e.g., building per square meter basis, the world’s most expensive bridges to nowhere). Other items include beautification of pavements, road development, reversing the irresponsible broader tax cuts made by the president, raising the local tax base, and specific and concrete plans for sensible socio-economic development and growth. These measures are designed to close the budget deficits, increase exports, regain fiscal responsibilities, and make timely payments of capital and interest on loan payments.

Political mischievous and deep-debt trap and benefitting politicians

The politicians and their fraternities exclusively devoured the immediate benefits from the loans obtained for Sri Lanka: such as propaganda, commissions, financial contracts, etc. Because of these unnecessary high-interest loans, the Sri Lankan public must now pay the due interest and capital payments for generations to come. Meanwhile, the country’s credit rating worsened (i.e., the ability to pay back loans) due to the lack of foreign reserves and inability to pay and the lack of credibility of the current politicians. This led to the current defaulting on interest payments. Consequently, no country or organisation other than the IMF is willing to provide a bailout/loan needed to pay the dues. Obtaining adequate funding even from the IMF is not going to be straightforward.

Virtually all countries, especially the sharks, like China, have abandoned rescuing Sri Lanka. Even our neighbour, India, gives us only materials support, such as oil and food, rather than the critically needed cash to repay loans. Despite these, IMF and the World Bank are not true saviours or true friends of developing countries. While they can assist, they also have their own hidden and globalist agendas to control developing countries, including opening markets allowing them to dump their goods and enforcing the failed western culture. Working with besotted Sri Lankan politicians, they could be eying on grabbing our remaining precious assets, primarily commodities and those strategically located entities.

Summary

At this junction, any liberal economic philosophies or policies are inappropriate for Sri Lanka. The country needs a framework of sustainable economic development policy, a stricter fiscal policy, and a significantly smaller government. Based on the fiscal deficits and best taxation income (after revoking insane tax cuts in 2019), the Sri Lankan government can only maintain 50% fewer employees. Therefore, reducing half of the entire government (including all public employees) is required. Reducing regulations is crucial to let the private sector thrive, enhance jobs and exports, and let them contribute taxes to the government to facilitate economic development programs, including imports and exports.

*The next article will discuss the framework of structural changes that need to come out of the current crisis in Sri Lanka.