Rescuing the Sri Lankan economy
View(s):Earlier this month, Prime Minister Ranil Wickremesinghe announced a government move that many economists have been urging – for Sri Lanka to seek a bailout package from the International Monetary Fund (IMF).Strapped for cash and rather than going for expensive bond issues which are rolled over with fresh ones to pay off investors when one bond expires, economists have said the government has no choice other than seeking support from the IMF. The fund’s involvement in the economy will also hopefully kick-start more foreign direct investments and boost the stock market which has been operating in fits and starts despite the entry of a government vowing good governance, transparency and accountability, in addition to making it easy to do business – fundamentals that investors are seeking.Prime Minister Wickremesinghe told parliament that Sri Lanka will seek an IMF facility as the global economic environment is unstable particularly in the context of slow global growth, apart from the US, and ISIS militancy causing instability in West Asia which would then impact on Sri Lanka.
“I think it is prudent in the circumstance of all the international developments that we start discussing a stand by arrangement with the IMF,” Mr. Wickremesinghe was quoted as saying. Any instability in West Asia has a three-pronged impact on Sri Lanka – tea exports, oil prices and migrant workers.The economy is indeed in dire straits and in a “pathetic state”, according to W.A. Wijewardene, former Deputy Governor of the Central Bank (CB). Speaking at a meeting of the Sunday Times Business Club last week month, he said that within nearly nine months foreign exchange reserves have fallen to US$6.4 billion from $8 billion.Of this, he noted $4.5 billion is hot money which could flow out at any time while ‘readymade’ cash reserves is only $5.5 billion.He said, according to the CB, loan repayments (capital + interest) for the next 12 months would be $4.4 billion. “We have only $5.5 billion as free cash; thus if we pay out $4.4 billion, we won’t have any money,” he said.
Borrowing through bonds is also a costly option as one observer pointed out in a recent column in the Business Times. In a November 15th commentary titled “Sri Lanka’s recent Euro Bond issue: Success at a premium?” by Samson Ekanayake, Senior Lecturer in Finance and former Head of the Finance Discipline, Deakin University, Australia, also said that one of the concerns is as to how the proceeds of a bond issue would be utilised. ‘If this money is utilised for consumption purposes rather than investment purposes, then there will be a never-ending vicious cycle. At the maturity of the bond in 10 years the government will have to roll-over this bond by issuing another international bond, perhaps at a much higher rate of interest,” he says.Given the issues related to raising millions of dollars through bond issues or an IMF package and mostly a crisis triggered by the former regime, the government is on the correct path, notwithstanding the critical budget deficit issues, in placing its trust in support from the fund.
That Central Bank bond deal
Though the Government was hoping that the dust has settled on the controversial Central Bank 10 billion rupee bond sale, the opposition has raised the issue once again.Both JVP leader Anura Kumara Dissanayake and opposition UPFA parliamentarian Bandula Gunawardena have said the February 2015 bond deal that raised questions when a firm linked to the son-in-law of Central Bank Governor Arjuna Mahendran won most of the bids, would be raised in the newly appointed Committee on Public Enterprises (COPE) chaired by JVP MP Sunil Handunneththi.
The Supreme Court refused “leave to proceed” in a case filed by three civil society activists seeking a proper probe on the issue while a committee of lawyers connected to Prime Minister Wicremesinghe’s United National Party that was appointed as a ‘fact finding’ mission to examine the issues said the governor had no direct role in the bond issue, exonerating him. Opponents accused Wickremesinghe of trying to cover up the issue by appointing lawyers connected to his party.
Transparency International Sri Lanka (TISL), in a statement on the bond sale, said that it was of the view that there is a clear case of insider dealing which is a form of corruption, which can only be unearthed with a credible investigation. The public has a right to know who were exactly involved in the questionable insider dealing, it said.“TISL is of the view that it is only right that the Governor temporarily steps down from his position to ensure the space for an independent probe and that the faith placed upon the Central Bank by the public is respected. The government has a responsibility to safeguard the highest level of integrity in the Central Bank, which is the main regulator in the country,” TISL said.An earlier special sub-committee of COPE probing the bond sale came a cropper when committee chairman D.E.W. Gunasekera released some of its contents, just before the August parliamentary election, saying – among other things – that the committee was of the view that the sale of the international sovereign bonds worth Rs.10 billion would have been more beneficial if it was transacted at a lower rate of interest.
Gunasekera admitted that the committee was unable to complete its findings while UNP members on the panel accused the committee chair of releasing extracts of an incomplete report. As far as the public is concerned, many questions still lie unanswered from that bond sale and only a committee like COPE whose members come from parties represented in parliament could ascertain the truth and the facts as to whether the governor was involved or not, and/or whether the transaction was at the best market.Rather than delay the process, keep the issue hanging and in suspense like the Sword of Damocles, it is incumbent on the government to support the continuation of an independent probe that ended halfway and clear the air of any wrongdoing in the transaction.