After declaring the country to be bankrupt on April 12, 2022, it was obvious we needed a new budget to see our way for the remainder of the year and more importantly, out of bankruptcy. It however took us nearly four and half months to present a new budget in Parliament.
The main focus during this lapsed time was politics rather than economics. The Government tried every political trick to form an All Party Government. The Opposition used every excuse to stay out of it.
This was both curious and surprising. On four separate occasions since March 2022, we witnessed serious episodes of violence. MPs from both the Government and the Opposition including the then Executive President and Prime Minister as well as the Opposition Leader were directly targeted. It was the prolonged shortages in essentials and popular imports such as milk powder that precipitated and promoted the anti-Government agitation.
In such a background, one would have expected the policymakers to try and resolve the economic issues at the very earliest. Yet, constitutional amendments as well as individual political stance took precedence. In truth, the power struggle was a mere excuse. There was a genuine fear to take ownership of the current financial mess.
 |
| Lack of foreign reserves, a major problem. |
The main opposition parties obviously felt that it would be politically better for them to sit on the other side of the governing table and simply criticize and condemn the Government’s efforts. In the meantime, those who were in the Government broke away and divided and subdivided into independent groups.
Despite these divisions and disunity, the budget was passed with a comfortable majority vote. The USD 2.9 billion IMF bailout package was also agreed at staff level during this time. The timing could not have been better for the IMF package seemed to have reassured our lawmakers that light at the end of the dark tunnel was in sight.
Yet, a significant part of the debate on the proposed budget revolved around the controversies surrounding the incumbent Central Bank Governor Dr. Nandalal Weerasinghe. Some were clearly mistrustful of him whilst others, prominently Opposition Leader Sajith Premadasa, defended him.
Was Bankruptcy the Correct Step Forward?
The anti-Nandalal camp is very suspicious of him for a number of reasons. Topping this list was his advice to the then Gotabaya Rajapaksa Government to declare the country bankrupt. The Nandalal debate centred on this point with the clear demarcation between those who believed in his recommendation and those who did not.
When Dr. Weerasinghe advised the then Government to declare bankruptcy as the only way forward, his recommendation was executed immediately without even a debate on Parliamentary level. Though the Cabinet was made aware of this move, there was an absence of sufficient discussion or consensus within Cabinet level.
To be fair, Dr. Weerasinghe makes a very convincing argument. We had only USD 20 million in the kitty as at April 8, 2022 but the obligation to pay for two loans amounting to USD 200 million, both of which were maturing on April 18, 2022. Likewise, a string of loans were about to mature in quick succession thereafter. However, there was no foreseeable income to meet any of these financial commitments.
Furthermore, both the Central Bank and state banks had already started to default on Letters of Credit for want of forex. This was even before we declared ourselves to be bankrupt.
Without any money in hand, if we did not take any action, and just tried to evade paying, it would amount to a hard default, explained the Governor. After three months, we would have been automatically noted by the CRIB. Thereafter, we would not be able to secure a loan from any bank.
Instead, states the Governor, it is better to inform the creditors that we are without the necessary means to service the loans and thus to request for a restructuring of the facility. This would stop our name ending in the CRIB but give us the space to work with the creditors to agree to a scheme to only pay the interest component until we get our income back on track.
All these points were explained by the Governor himself to the Parliamentarians prior to the budget debate. While these may justify the then Government’s decision to declare bankruptcy, discernible action was not taken to prepare the country for its aftermath.
While financial experts such as Dr. Weerasinghe understand the gravity of such an extreme decision, the larger population does not. Therefore, until confronted with the repercussions, people do not know what to expect or how to face it. Hence, whether declaring bankruptcy was the best remedy or the only option before us is then a moot point.
Time may have been of essence, especially with USD 200 million needed within days and without any means to honour it. However, omitting this vital step to educate the country as to the reasons that necessitated this course of action, its expected consequences, how to respond to it and mitigate its negativity has left space for speculations, which keeps us from the real issues.
Despite the assurances that this was the best way forward, the country’s financial situation did not improve after declaring ourselves to be bankrupt. If at all, it worsened. No one wanted to lend us any money under any condition. This is a nightmare for a country such as ours, that survives on loans.
Even in the best of times our main revenues as tourism and worker remittance did not support our much subsidized, over consumerism lifestyle. These avenues are presently still recovering from the pandemic. Therefore, the seriousness of the situation Sri Lanka found herself in - without an adequate income or creditworthiness - need no further elaboration.
The moment of despair was capsulated by other nations’ reaction. Some European countries emphasized their travel advisories against our country and dampened tourist arrivals. Not many would wish to holiday in a country that may be without power for half the day, shortages in essentials and a potential powder keg that may blow up at any moment with riots and violence by frustrated citizens. UK based universities hesitate to enroll students for their undergraduate programmes for fear that Sri Lanka would not be able to support the respective parents to pay the course fee.
More seriously, manufacturers were still unable to open the necessary LCs. This placed entire business processes in jeopardy.
In turn, the entrepreneurs were at risk of losing their investments.
This is an unprecedented experience for us. Until April 2022, we were proud that we had never defaulted any of our creditors irrespective of the difficult challenges we were grappling on the day. Furthermore, after repeated assurances to uphold this reputation and honour our debt, the sudden reversal to default on our debt was a tremendous shock to the nation.
From the commercial sector many are annoyed with the Gotabaya Administration for what they call was a false bravado they put up until this juncture. Eventually, it is the entrepreneur who must face the full consequences of investing in the hope that the Government would be able to turn the situation around. If the expected return on the investment does not materialize, it can destroy their whole life.
Was Bankruptcy Declared as a Malicious Act?
However, the controversy surrounding Dr. Weerasinghe is not merely because he was instrumental in declaring our nation bankrupt. Since this act, another story has emerged that questions the very necessity to declare ourselves bankrupt.
The first to react with surprise at our announcement to go for an IMF bailout package was China. The Colombo based embassy immediately called upon a press conference to express their shock. They wondered at this sudden decision when China had just agreed to a USD 1.5 billion Credit Line.
Since then, it is been claimed that Sri Lanka was to be the recipient of USD 10.7 billion. Apparently, the Treasury had been officially informed of this expected forex inflow by the Central Bank just eight days before we declared ourselves to be bankrupt. These funds were said to come from:
• India – USD 1.5 billion,
• India ACU facility USD 500 million,
• China USD 2.5 billion.
Furthermore, according to this “other” story,
we were also expecting:
• USD 250 million from West Coast Power
investment,
• USD 500 million from Hilton divestment,
• USD 900 million from tourism inflows,
• USD 2 billion from green bonds,
• USD 1.5 billion from People’s
Bank of China facility
• USD 1 billion from Qatar.
It has been said that these would have enabled the Government to settle the maturing payments due in 2022. It has also been suggested that other existing loans such as the Sri Lanka Development Bonds and Foreign Currency Banking Unit (FCBU) loans could have been rolled over.
Dr. Weerasinghe is quite blunt that such a USD 10.7 billion was nowhere in sight. He claims that the roadmap presented by his predecessor Ajith Cabraal had promised such an injection of income, which never materialized.
 |
| Central Bank of Sri Lanka |
This leaves us in the uncomfortable position as we do not know who we should believe. Who is twisting the facts here? Did the incumbent Central Bank Governor push us to declare ourselves bankrupt despite funds to see through the rest of the financial year was just about to materialize? Or, could it be that these funds we were waiting for, according to Dr. Weerasinghe for the past six months, was not going to materialize?
The Missing Point
Judging by the Nandalal debate that overshadowed the budget debate, it is clear that the credibility of the Governor’s stance was entirely dependent on whether one believed (or not) the speculations. Unfortunately, we are in the habit of pinning the problem on another’s integrity.
It is unfortunate that our politicians’ focus was locked on Dr. Weerasinghe’s character and not on redressing the contracting economy. We are at an impossible juncture. We need to contract the economy to manage our meagre finances. Yet, we need economic growth to emerge from this crisis.
During his presentation to the Parliamentarians Dr. Weerasinghe made an interesting point. He observes that we do not have a robust export sector. Our economic growth has been primarily because of the activities in the local sectors as construction, transport and etcetera. However, without sufficient forex our economy was bound to get stuck.
It is at this point that we need to lock our horns. This reveals the stark truth that our main income is earned in Sri Lankan rupees, but we must pay for our essentials in US dollars. This means we need to produce and provide less of what is needed by us and more of what is demanded by the export markets.
It is on this basis that it is argued that it is better to import rice and other agricultural produce at cheaper prices than give subsidies to the farmer. In theory this may be sound, but in practice we are in effect giving another a stranglehold on us.
If we invest most or all our resources to improve our export markets so as to improve our foreign reserves to allow us to comfortably import essentials, we are laying ourselves vulnerable to the diktats of others. If we refuse to comply we could face cruel pressures such as sanctions that could literally starve us.
We need to understand that our real issue is thus with our dependency on the US dollar and not because of the actions of either the present or past Governors of the Central Bank. The criticism leveled against Cabraal is that he was waiting for funds that never materialized to roll out a home-grown solution to redress our heavy debt load. Therefore, he failed to take timely remedies to float the rupee or seek assistance from the IMF. This procrastination is said to have resulted in a debt situation that is now unsustainable.
Even if we had received the USD 10.7 billion as the Central Bank informed the Treasury, the respite would have been temporary, but our dependency on the US dollar would have deepened. Seeking assistance from the IMF too would have given us a short term relief as their prescription would have been to reduce our subsidies and strengthen our forest.
We hardly make a difference as long as we are addicted to the US dollar.
Whether we are forced to be at the IMF’s mercy or our debt is scattered among a number of banks and financial institutions, the end result is basically the same - we earn in rupees to pay our debt in US dollars. We must thus acquire a better understanding of our dependency on the US dollar and the exact ways it affects us. We need not grope in the dark as there are plenty of real life case studies for us to study.
Currently, nations such as China and Russia are adapting a number of strategies to wean from their dependency on the US dollar. These efforts too offer us valuable lessons.
[email protected]
To be continued
Add new comment