“Govt’s IMF programme a day late and a dollar short” - Dr. Harsha de Silva

• The IMF cannot resolve our problems any longer
• The IMF can only provide us any financial assistance if we agree to a debt restructuring programme
• If they (Government) did not go to the IMF they would be skinned alive
• We cannot even get a Rapid Financing Instrument loan from the IMF amounting to US $ 7 to 8 million
• I agree with you that this is a problem that got built over a period of time  
• You cannot give everything free to everyone. Let’s understand it even now!
• The president should have sought better advice
• The entire previous monetary board is responsible

Samagi Jana Balawegaya (SJB) MP Dr. Harsha de Silva who is vocal about economic issues takes questions in an interview with the Daily Mirror on the present crisis. 
Excerpts: 

 Q  You have advocated that the Government should reach out to the International Monetary Fund (IMF) for an arrangement to escape from the current crisis. How hopeful are you of economic recovery?

I am not very hopeful because this is a day late and a dollar short. It was in the third quarter of 2020 when I urged them to go to the IMF. This is the second quarter of 2022. During that time the economy deteriorated and the problems became much complicated. The most significant change was debt becoming unsustainable from being sustainable. We now belong to a bunch of countries where there is very little confidence among international investors and private credit market community. The IMF cannot resolve our problems any longer. So, we have two things in parallel that need to happen. One is that the Government and the IMF should come into some sort of agreement- how to stabilise the economy- and to agree on an extended fund facility which is a structural adjustment programme that will take about three years. While that is happening, our lawyers-yet to be appointed unfortunately- will have to start talks with our bond holders or creditors. They will have to agree on how much of what we owe them is to be given up to be cut off, and for how long they are going to wait before they start collecting our money. These two things should go in parallel. The IMF can only provide us any financial assistance if we agree to a debt restructuring programme with the bond holders or creditors. They will not do it unless there is agreement between the government and the IMF on a fiscal discipline programme. That will increase revenue, rationalise expenditure and have market clearing prices for various commodities and so on. It is a chicken and egg situation. We are unfortunately in it. Given the political situation of the country without a stable government, a conclusion of what has now begun in Washington cannot happen unless and until a stable government with legitimacy among the investor community is established. That they have gone to the IMF does not mean anything at all anymore.  

 Q  At least at this juncture the government went to the IMF. What do you think of it?

If they (Government) did not go to the IMF they would be skinned alive. People are so angry. They destroyed the lives of 22 million people. This is irresponsible and criminal negligent. They will have to be held responsible. They did not understand what they did. They were criminally irresponsible for what they did. They ruined this country. Now going to the IMF is no excuse. If they had not gone, they would have been lynched.   

 Q  Don’t you think some sorts of dividends will come through this exercise?

 I don’t know what dividends and dividends to whom. I am no longer willing to give any credit to these people. They ruined us all. What are the dividends? Will it shorten lines for fuel or gas? The price of a 400 gram packet of milk powder has crossed Rs.1000. How can people survive? This need not have happened to this country. They will have to face the people’s anger. There is no dividend coming to anyone.   

 Q  In any democracy it is conceivable that the opposition can come to power at one point or another. If your party comes to power and you become the finance minister, how will you address the crisis?

This is not rocket science. All you need to do is to understand how an economy works. That is why I said for the last one and half years that they were going to take us down the tube to this destruction. I said it. We foresaw this and understood it. We realised that this was a toxic combination of liquidity crisis and a solvency crisis. We would never have got into this mess. In the middle of the pandemic we would never have banned the importation of fertilizer and pesticides. They have created it. If we have to take over, it is going to be a difficult one- year or 18 months period going forward. We have to go through austerity like we had never before. People will have to live or somehow manage to survive a very difficult period ahead of us. What we will do is to put this country right. We will reset this.  
We have the story about Indian Prime Minister Narasimha Rao bringing Dr. Manmohan Singh and Dr. Montek Singh Ahluwalia and resetting India’s economy, after kicking out License Raj. That is a story how India opened up and engaged with the rest of the world. That is what we need to do. This country needs to be integrated with the world. I have always said that we need to break down the walls around this country and build bridges to the region and beyond. In simple terms, we need to bring dollars in. It means others have to consume what we produce rather than us consuming what others produce.   

 Q  This is an issue triggered by the shortage of foreign exchange. It is an issue built over a period under successive governments. We import more than what we export. Do you also hold all the past governments responsible for it?

No. I agree with you that this is a problem that got built over a period of time. This is not just a liquidity crisis. It is a toxic combination of liquidity crisis and a solvency crisis. When this Government took over there was a large debt overhang. We were on precarious ground. The IMF report dated November 1, 2019 said Sri Lanka’s debt was sustainable. You have to make sure that the path taken by late Finance Minister Mangala Samaraweera by introducing the 2017 Inland Revenue Act will have to be maintained. The programme of recovery is based on a revenue enhancing model. When they threw the IMF programme into the dustbin they went against all good advice and created the problem. They took a completely different path. How did this problem of solvency get created?  

That is because we were inward looking. We were not integrated with the world. We created so many barriers for foreign investments to come in. We created tariff walls, para tariff walls, duty walls and so much friction between us and the world outside. That is the reason why we became a difficult terrain for investors to come in and work over a period of time. Doing business in this country is so tough. We rank around 100. The countries and territories like Singapore, New Zealand and Hong Kong are top rankers. I don’t blame every government that was in place. In 1977, then President, the late J.R. Jayewardene, did some reforms. He was moving in the right direction, but it was stalled due to various other reasons. In 1988/89, the then President the late R. Premadasa did the second round of reforms. Then, in 1994 /95, Mr. Mangala Samaraweera, under the Chandrika Bandaranaike government, did quite a bit of reforms. He reformed Sri Lanka Telecom and created the IT platform. While certain heads of governments tried to do right things, they had to pull back due to various political reasons. Others had taken over the ideology of a closed economy, self-sufficiency, welfare politics and giving things free. A lot of people are to blame for where we are today. I am not just blaming President Gotabaya Rajapaksa. He triggered the collapse making unwise decisions. If he had not made those unwise decisions, we would not have collapsed despite having some trouble.   

 Q  As a politician you agree with the IMF in principle. When you strike a programme with the IMF you have to do reforms such as privatization of the public sector and curtailment of public services. These are not populist measures in a country like Sri Lanka. How do you address that issue politically?

Why is Sri Lanka poor? We have not followed the right principles. You cannot give everything free to everyone. Let’s understand it even now! Most of welfare money goes to the rich not to the poor. You said about reduction of public welfare and all. The truth must be told. Sri Lanka is the lowest tax to GDP country in the world. It is less than eight percent. In the early 1990s, our tax to GDP was around 20 percent.   
When President Mahinda Rajapaksa took over, it was around 17 percent. When the Sirisena- Wickremesinghe government took over , it was around 9.5 -10 percent. With the next tax law introduced by Mr. Mangala Samaraweera, it increased to 12.5 percent. Now it is back to eight percent. Can you run a country like this? On the one hand you can have low tax to GDP if every service is market priced. Or else, if you want to give free, everyone has to be taxed. You cannot have Singapore style tax regime and a Sweden type welfare state. It is contradictory. In Sri Lanka we say we tax people very little. At the same time we will give everything free. It cannot work like that. People will have to understand the reality.   

 Q  You mean to say that populist measures will no longer work?

 How can they work? One thing is that people should say that they are willing to pay 60 percent of their incomes as taxes. Then, we can give everything free. Or else, if they are going to have certain taxes, subsidies must be targeted.   
I am not saying that subsidies must be cut altogether. I am for subsidies. But, subsidy must be given to the receiver, not to the supplier or the producer. Subsidy must be given to the consumer. The consumer who receives subsidy must be selected based on some transparent criteria. If you belong to the bottom decile, you are eligible to receive subsidy. But, if you are in the top ten households of the country, why should you receive subsidy?. Equal opportunity is something I believe in. If we create it, we will all be better off.   

 Q  You said the president triggered the collapse making some unwise decisions. Are you holding only the president responsible for it?  

It is the president who decided overnight to ban the importation of fertilizer. I recall how many ministry secretaries were sacked. I remember the case about Prof. Buddhi Marambe. Then, the professor who took over as the secretary to the ministry was sacked. Who has the power to sack people like that?  
As far as blocking the decision to go before the IMF earlier, it was not only the president, but people like Ajith Nivard Cabraal, P.B. Jayasindare, W.D. Lakshman, Basil Rajapaksa and S.R. Attygalle who should be responsible. The president should have sought better advice. He did away with all the checks and balances. He took all the powers into his hand. After having taken over power to his hand he has no right to say I am not responsible. He is responsible. With the 20th Amendment he took away all the powers. No oversight committee was ever appointed in this Parliament. According to the Standing Orders, the chairman of the Public Finance Committee- which is the most powerful committee in terms of public finances- taxes, subsidies, levies and the Central Bank- should be someone from the opposition. It was my name that was proposed. What happened? They suspended the Standing Order and appointed another. There was no way even for the constitutional right we have to be exercised.   

 Q  Do you have faith in the new Central Bank Governor, Dr. Nandalal Weerasinghe?

I said we welcomed him. I stand by it. We don’t want to play politics with everything all the time. He needs to try and stabilise this economy. I have known him for a long period of time. He is well qualified to do this job. He has been in the Central Bank for a long period of time. I don’t care about his past politics. What I care about is whether he is willing to do the right thing for the people of this country. I hope he is able to do it. At the same time, I want to say, he has no right to whitewash certain people who were part of the decision making process. The entire previous monetary board is responsible. Some of them are dear friends of mine. Everyone responsible for these decisions will be held accountable.   

 Q  Now there is an economic crisis. Your party and its leader talk about pruning executive powers. What is the programme you put forward to overcome the economic crisis now?

It is a short term and medium term solution. The short term solution is stabilisation. You are talking about macro variables to stabilise the exchange rate. No one knows where it is heading. You have to stabilise it. You have to stabilise interest rates. They are hitting 27 now. For treasury bills of one year, it is 25- 26 percent. It probably hits 30 percent.   
You have to make sure that the entire businesses and the Small, Medium Industries do not collapse. You have to look inflation. Food inflation is 30 odd percent. How do you stabilise macro variables and bring growth back? Growth is going to suffer. How are you going to do what needs to be done right away to get the economy within some control? Then, structural adjustments have to go in. You have to look at fiscal responsibility, how to increase revenue and rationalise expenditure. Then, you have to look at all the tax breaks that have been given to people. Some people don’t pay any taxes. There are so many loopholes in the law.   

 Q  It will take a long time for such measures to yield. But people have immediate concerns. They don’t have fuel and gas. Prices of essential items have gone through the roof. What is the plan to address them?

What you need is some sort of political stability. Without political stability nothing can happen. We cannot even get a Rapid Financing Instrument loan from the IMF amounting to US $ 7 to 8 million. That is bridge financing they hope to get to deal with gas, milk powder and fuel issues. They cannot get it because they have not been able to find a way to get out of the unsustainable debt issue. There is no magic bullet. There is no way that we come tomorrow and resolve. We are begging India to help from the time we run out of money. When the Indian credit line finishes in July there is no more money to bring fuel, medicine or anything. From that point to the delivery of IMF assistance, where is money coming from. These people have nobody to get this money from. We will actually give confidence to our friends overseas. That confidence will make sure that they step up and help us. There is no other way. You cannot get any commercial funding unless they believe you have a solid debt restructuring programme in place.   
It is our international connection that is going to help us. We are confident we can do it. We already had discussions with various people. Of course the World Bank and others will give us some money –US $ 500-600 million.