‘We’re bringing discipline to the Fiscal Policy’

Non-Cabinet Minister of Economic Reforms and Public Distribution Dr. Harsha de Silva spoke to the Daily Mirror regarding his engagement with the International Monetary Fund (IMF) and future plans. 

Excerpts:

• We’ll look at some intertemporal shifts to strike a balance between public concessions and revenue targets 
• We know this is an election year
• If you eat more today, you will have to exercise more tomorrow

Q  Recently, you interacted with the key officials of the International Monetary Fund (IMF). What are your arrangements with regards to the Extended Fund Facility (EFF)?

On October 26, 2018, the Central Bank reached a staff level agreement with the IMF. It means everything was going well at that moment. They were supposed to make the announcement.  Then, the coup took place on October 26, 2018. 

The new illegal regime made all kinds of statements- to get rid of the fuel pricing formula, changing taxation etc.  That is in violation of the agreements related to the EFF. To make matters worse, all three rating agencies downgraded Sri Lanka. Yields on the bonds in the secondary market suffered. The credibility of the Sri Lankan economy was seriously damaged. 

The illegal regime was not able to raise even a single dollar, not even from their so called best friend ‘China’.  They could not even organise a swap agreement. It came to that level. When we legitimately got our government back, we realised that the 52-day failed coup had created very complex economic problems.  We have repeatedly indicated that we have these huge debt obligations. 

We have to settle US $ 5.9 billion in foreign debt servicing. This is the worst year in the history of Sri Lanka as far as debt serving is concerned. Luckily, we have prepared for it. The October 26 incident is coincidental because that was the day when Parliament approved additional borrowings under the new Active Liability Management Act.  I mentioned the challenges that we were facing.  When I was having lunch with Minister Mangala Samaraweera on that day, Mr. Mahinda Rajapaksa came and told me, “You have been here with this government for three and a half years, why don’t you join me?”.

Q  Was he serious when he invited you?

I don’t know. He told me and Mangala. I laughed at him. He joked with Mangala. Later, he toppled our Government. Getting back to the topic, the Active Liability Management Act gave us the chance to   manage our liabilities. No longer are we constrained by the payments of our debts to be made. We were used to a stable payment spanned over a period of 30-40 years in the past.  Suddenly, we are now supposed to make bullet payments. You can only borrow the amount due that year. It is ok if what you have to pay back is also stable. But, if it is jagged a lot, the Government has to prepare ahead of time to settle what is due.  That is to manage the liabilities actively. 

With all these complications, the IMF did not complete the review. Therefore, there was no money released. We decided to speak to the highest in the bank and explained to IMF Chairperson Christine Lagarde regarding our situation.  

As an emerging economy, we are exposed to the volatilities in the international financial market. We cannot get fully concessionary loans. International investors are very harsh. If they see the country being irresponsible, they will not lend. Or, they will increase their interest rates.  

How do we rebuild the credibility that we lost? An international investor wants to see fiscal discipline, proper governance, appropriate policies etc.  When you see a bunch of illegal jokers running the country, what will happen in the eyes of international investor?  

Q  Under the EFF, you can borrow up to US 1.5 billion by June, this year. Are you now seeking to increase the limit of borrowing?

We can extend it. We can increase it. We can pay it off early. All these options are there. 

Q  What did you seek to do this time?

First, we sought to explain our situation and to make sure that the review is completed successfully. It is more than money. It is not really money. It is the rebuilding of credibility that matters.   It is about fiscal responsibility.  

Q  How are you going to raise the money required to pay off US $ 5.9 billion as you mentioned? 

We are not planning to borrow from the IMF. Having a programme with the IMF is a signal to the international market that Sri Lanka is a responsible Government. 
 If the international investors believe that we are a responsible Government, they are willing to lend us. Raising money is not a problem for us. 

• The illegal regime was not able to raise even a single dollar, not even from their so called best friend ‘China’. They could not even organise a swap agreement
• If they see the country being irresponsible, they will not lend. Or, they will increase their interest rates.  How do we rebuild the credibility that we lost?
• We had a primary surplus of 0.5 percent of the GDP in 2017 and 0.6 percent in 2018. Never has a Government had a primary surplus before 

Q  How much money are you going to raise for debt servicing this time?

We have multiple borrowing options. What we need is credibility. We don’t need to raise that kind of money from the IMF. We can go to the market and raise money.  The EFF will remain.  We are in contact with the IMF. We will make some   adjustments to the original EFF. There are various arrangements we have structured.   

Q  In your view, how much would it be this time?

We have to wait and get the correct assessment of the full calamity after the coup. Those will have to be adjusted. When Mangala presents the Budget, all those will be taken into account. We will have to make some adjustments because of the disruption that took place.  I can not exactly tell you what it could be. We will have technical discussions and figure out the best course of action for us. 

Q  Initially, your Government introduced some tax reforms. The 52- day Government did away with some of these tax reforms. How are you going to proceed with it?

Since 1956, Sri Lanka has had only two years of primary surplus. Those two years were 2017 and 2018. What it means is that current expenditure and spending. You have income. Then, you have expenditure. A part of our expenditure amounts to interest payment. The interest is not determined by the current Government. We are paying the interest rates agreed upon by someone. Mahinda Rajapaksa agreed to a 6.3 percent interest rate for the Hambantota Port Project. 

We did not agree to any interest rate as high as that. Interest rates are not something that can be controlled by the sitting Government. The primary surplus takes out the interest component. It looks at how well the Government of the day manages its day-to-day expenditure. We had a primary surplus of 0.5 percent of the GDP in 2017 and 0.6 percent in 2018. Never has a Government had a primary surplus before. That is an important point. That goes to show that the Government has been responsible. It is creating a surplus. 

Q  The 52-day period of the Rajapaksa Government announced to give some tax concessions. It affects your original revenue targets. What are you going to do now? 

It does not affect. It was all lies. Mahinda Rajapaksa could not change the taxes by issuing a Gazette notification only.  It was a lie. He misled people. There is no legal effect. It has to be approved by Parliament to have a legal effect.    He did not have the parliamentary majority to do it. 

Q  How are you going to achieve your revenue targets?

As Mahinda Rajapaksa announced that he would give tax concessions, people asked as to why we could not do. That is our challenge. You want to run a disciplined economy. Then, you want tax revenue. Revenue has fallen to 10.7 percent of the GDP.  Now, it is back to 14 percent. You can give tax break after tax break. Then, there is no money. Then, you have to burrow. Then, you have to repay them at high interest rates.  Slowly we were bringing discipline to the fiscal policy. We created   a surplus.  

Q  All in all what sort of a Budget would you be presenting this time?

We have been a responsible Government. The Fiscal Management and Responsibility Act was introduced during the 2002/2004 UNP Government. By doing it, we wanted to hold the Government responsible for its day-to-day activities. We have not been splurging. We have spent responsibly.  Taxing is not popular. At the same time, one should not see our responsibility as our weakness. We know we are in an election year. We understand people’s difficulties.  

Q  People expect concessions from the Government. This is an election year. You need revenue though. How do you reconcile both in a crucial year like this?

We will look at some intertemporal shifts. We will have to make some adjustments. If you eat a lot today, you will have to exercise a bit more tomorrow.   We will balance it out. I am an economist as much as I am a politician. When I was an economist, I did not understand politics. With regard to the grassroots level, I understand the reality on the ground. For me it is a very interesting challenge. 

Q  What are your plans to stabilise the rupee value?

It has stabilized now.  It is now fairly stable.  There was an exogenous impact. The US dollar was strengthening. A lot of Asocial curries got the value of their currencies depreciated. It harpooned in India, Pakistan and Turkey etc.  That episode concluded by October, last year. By November, almost all the currencies appreciated except Sri Lanka’s.