The last few months were characterised by three denials. First, the global recession that was enveloping the world, it was said, would not have any significant impact on the Sri Lankan economy. Second, the foreign exchange reserves in the country it was claimed were quite adequate and there was no problem with respect to it. Third, it was clearly stated that the financial sector in the country was solid and there was no reason to fear any instability in our financial institutions.
Today we have three problems. One: the economy is being severely affected by the global crisis. Both agricultural and industrial export demand is affected and prices have come down. There is shrinkage in export earnings. Two: foreign exchange reserves are so low that the country is turning to the IMF for the largest ever bail out package. Three: people are on the streets demanding their deposits in financial houses and a number of financial institutions are being brought under the control of the Central Bank and there is a fear of a run on the banks. One of the biggest private commercial banks has been placed under a state bank with a new Board of Directors.
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Even as the country’s exports were getting a beating and the economies of the world were gearing to a slower growth, the experts in Sri Lanka maintained that the Sri Lankan economy was sound and that the economy would grow by 6-6.5 percent, a figure that was revised subsequently. In any event we are told the economy grew by 6 percent last year and it would grow by 5.5 percent this year. Given a growth of only 4.3 percent in the fourth quarter, it is most unlikely that this year’s growth would reach 5 percent. Whatever be the growth statistic, there can be little doubt about the downturn in the economy, growing unemployment and increase in poverty.
The severest sign of the recession was its effect on the demand for the country’s exports that were quite visible in the second half of last year. Yet, it was denied that the Sri Lankan economy, despite being an export dependent economy, would feel the adverse effects of the global recession in any significant way. And this was at the turn of events when garment factories were closing down and industrialists were complaining that they were not competitive. Despite visible signs of the global recession on the economy, there was an optimistic assertion that the Sri Lankan economy would be unscathed.
Despite a huge trade deficit of more than US$ 5800 and an outflow of invested funds, the country’s foreign exchange reserves were considered very adequate for its imports. Various figures were trotted up, including the counting of the Asian Clearing Union reserves, to convince the general public that the situation with respect to the country’s foreign exchange reserves was quite adequate. Then there was a sudden turnaround with the country turning to the IMF for a bail out package. The IMF team is now in the country to discuss the state of the economy, sort out the factual position with respect to the reserves and indicate the conditions on which the IMF would provide relief.
This was quite a reversal of the country’s policy of borrowing commercially to replenish its reserves, as had been done in the last few years. Either the government realised the folly of this expensive and onerous method of financing or it simply failed to obtain commercial loans. It is also possible that the friendly countries in the region on which the government laid its hopes and expectations disappointed it. Whatever be the reason it turned towards the IMF to rescue the low reserve position.
Although the global financial collapses had very little to do with the banking system in the country, there were signs that we were having our own home grown financial crisis. There is no need to elaborate on what has happened. Whether the Central Bank is responsible for allowing this state of affairs of a group of companies remains contentious. To the credit of the Central Bank it must be said that there were repeated warnings to be careful of companies that were offering high rates of interest. The Bank also kept publishing the names of registered companies that had the legal right to accept deposits. People placed a huge sum of money in a credit card company and its associate companies owing to their ignorance of or ignoring of these warnings, the advertising campaigns of these companies, the high interest rates offered by them or in order to avoid taxation. One or several of these reasons made people take the risk or not perceive a risk.
On the other hand, there is a school of thought that the Central Bank had a duty to keep an eye on these institutions’ activities. Then there is the issue of whether they could have regulated them when their transactions were not disclosed. Apparently when information was sought by the Central Bank, information was not provided. In any case the collapse of a huge credit card company and the domino effects on the other companies of the group has been serious on the finances and incomes of people.
A precondition for the resolution of a problem is the recognition of the problem. How can any corrective economic action be taken when there is no recognition that the country was facing several economic problems? The consequence of this attitude was that there was a postponement of corrective actions and policies. Even now when the crisis situation is so obvious, the tendency is to underplay it. This is an unhealthy approach that may lead to too little corrective action too late. Now there may be a need for deep surgery and severe hardships on the population.
Let it be openly admitted that the country is facing severe hardships that can lead to worse conditions. The global recession is not likely to be resolved soon. It is most likely that it would get worse before it gets better. Therefore there is a dire need for financial discipline, economic reforms and good economic management. Since we are unable to do these on our own, it is most likely that they would be imposed on us by the IMF.
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