Wheeler-dealing with the economy

• The government and the politicised central bank are plotting to  procrastinate the crisis, rather than solving it. Its reluctance to opt  for a debt restructuring programme with the mediation of the IMF has  cast a dark cloud of economic uncertainty
• Around US$ 7 billion of foreign reserves have been spent on serving foreign debt since president Gotabaya Rajapaksa and his government came to power. That came at the expense of the local farmers, consumers and investors

The Central Bank is expected to pay an international sovereign bond of USD 500 million at its maturity today, and would probably flaunt it with a celebratory tweet as if it were an epic feat. Celebrate! Indeed yes, if the primary function of the Central Bank were to prove its naysayers wrong even at the expense of everything else. Its choices have created an outcome that was the polar opposite of the Central Bank’s key role as ensuring fiscal stability. Sri Lanka is in an economic crisis largely due to the government’s decision to service its foreign debt while its foreign reserves are net negative. And its myopic policies such as an artificial and unsustainable peg of Sri Lankan rupees has resulted in even the traditional foreign remittance being routed through unofficial channels.  

The government dug into the last US$ 1.6 b of active foreign reserves to pay off the US$ 500 million of a sovereign bond. The winner would be the investors who bought the coupons when they were trading at a 40 per cent discount in early last year due to concerns over a potential default. Whether such purchases were driven by a good deal of risk acceptance of junk bonds and a commitment to honour them by a government that has developed a tradition of going back on its word- and not by some implicit understanding with those who rule the roost in CB and political high office- is a different question. Despite the government pledges to honour its bond payments, its bonds with maturities beyond 2023 have been trading in the mid-60s.  

With such a hefty discount in the secondary market, and the current downgrading to CC status, Sri Lanka can not rollover bonds. Instead, a government plan to buy back bonds at the prevailing discount rates (peaking at 69 in September) was abandoned by the CB on the assumption that there were not enough willing sellers and ‘any attempt by the issuer to buy the small volume available will not be fair by the large number of ISB holders who wish to hold the ISBs to maturity.’  

The government’s choices have worsened an economic crisis that could have been managed without subjecting the public to daily ritualistic humiliation, and local industries into an uncertain future.   

Around US$ 7 billion of foreign reserves have been spent on serving foreign debt since president Gotabaya Rajapaksa and his government came to power. That came at the expense of the local farmers, consumers and investors.   

The fertiliser subsidy cost on average US$ 300 million per year. The government that diverted limited hard currency to pay off debt, shelved the fertilizer subsidy and announced a ban on chemical fertilizer. While President keep reiterating the virtues of his organic agriculture, more than his ego fuelled ignorance, it was the crunch of foreign reserves that led to over nightly shift to organic fertiliser. The result is the 50 per cent drop in paddy harvest and skyrocketing vegetable prices. Farmers who lived on the fences of the poverty line are thrown back into misery.   

With US$ 500 million, the government could have provided fertiliser subsidies to farmers for both the previous and current farming seasons. The danger is despite the generosity to its bound investors, the government is yet to allocate funds to import fertiliser for the current farming reason, and the shortage has resulted in 3 fold increase in the black market.  

Long queues for cooking gas, milk power, building material are a result of the shortage of foreign reserves made aggravated by diverting the limited hard currency to service foreign debt. Daily explosions of cooking gas cylinders would have averted had the treasury allocated adequate funds to companies, which, in the face of dollar shortage resorted to homemade remedies and manipulated the composition of the gas cylinder.  

Still, Sri Lanka can avert probably the most devastating repercussions of the government policy. However, the Chamber of the Pharmaceutical Industry has issued a warning of a looming shortage of medicine. “At present, banks, both state and private sector, allow the Pharma Importers to open LC’s only when they have sufficient dollars to safely guarantee payment for the imports, “ it said in a statement.  

The country is experiencing rolling power cuts, though the Minister-in-Charge, say otherwise, and in the absence of substantial injection of foreign currency, the durations would get longer. President Gotabaya Rajapaksa has summoned an emergency high-level meeting with top officials of key institutions to discuss ways of raising US$ four billion required for oil imports for the rest of the year.  

On contrary to its expectations, the government’s decision to continue to service foreign debt has created unprecedented fiscal uncertainty. The world bank has cut the growth forecast for Sri Lanka for 2022 and 2023. In its Global Economic Prospects’ report, the World Bank has predicted the Sri Lankan economy would slow down to 2.1 per cent for 2022 and 2023, from m 3.1 per cent recorded in2021. Per capita income is projected to contract by 2 per cent annually for 2022 and 2023. Whereas the South Asian region is expected to grow at 8 per cent in 2022 and 6.8 in 2023. (Excluding India, it would be 4.6 per cent and 4.8 per cent respectively)  

Either way, Sri Lanka’s growth prospects are a fraction of its South Asian peers.   

The government and the politicised central bank are plotting to procrastinate the crisis, rather than solving it. Its reluctance to opt for a debt restructuring programme with the mediation of the IMF has cast a dark cloud of economic uncertainty, which is driving away not just that rare foreign investor, but also Sri Lankan workers sending money home.   

If this is a new line of economic thinking, it has proved to be a disaster. If this is yet another way of the national economy is personalising the wheeler-dealers who run it, probably there is an explanation.