Sri Lanka tackling huge economic challenges
Sri Lanka is heading towards an unprecedented economic crisis, with the Central Bank (CB) printing money, facing a severe shortage of foreign exchange which are dampening investors’ confidence
In this back-drop CB Governor W.D Lakshman recently issued a statement on the forex situation emphasising that self-serving speculations are unwarranted and are harmful to the general public as well as to the business community themselves.
These speculative comments have naturally created some unnecessary short-term imbalance in the foreign exchange market between inflows and outflows, he said. Economists said the problem was the mismatch between export income and import cost.
Total import values have remained considerably high at a monthly average of US$1.7 billion during March, April and May 2021.
High imports were recorded in specific essential commodities including sugar as a result of the government’s action to bring down taxes on several essential commodities including sugar up to 25 cents.
This has resulted in the so called Sugar Scam allegedly carried out by some importers which has cost the Sri Lankan state Rs. 15.9 billion in tax revenue, the Ministry of Finance told the Parliamentary Committee on Public Accounts (COPA) said in a report submitted in March this year.
During this period several other scams like importation of contaminated coconut oil, palm oil imports and organic fertiliser imports took place in the island.
However, the trade deficit’s temporary shrinkage may not be sustainable if there is no increase in exports, economists said.
To increase exports, Sri Lanka needs to remove hurdles on input supply, remove distortionary tariffs, exploit market opportunities under the rule-based free trade system, they added.
Accordingly these indirect barriers will affect the imports of 175 items including, tiles and sanitary ware which are allowed to import under a license scheme.
Analysts have warned that in order to maintain outflows within inflows the central bank has to stop injecting liquidity. When market participants armed with excess liquidity generated from Treasury bill purchases demand dollars, there is a shortage.
Governor Lakshman has assured that the conditions of foreign currency liquidity observed in the domestic market at present are temporary and are driven by excessive speculative activity.
The CB has estimated the total debt at 101 percent of GDP, by ignoring the debt held by state-owned enterprises, which is often turned into government liabilities, former State Minister of Finance and MP Eran Wickremaratne disclosed.
Foreign debts, which are face value obligations, have been accounted for at market value. Therefore, the real debt-to-GDP is 112.4 percent.
The CB is also classifying the International Sovereign Bonds (ISBs) purchased by local banks as domestic debt, although ISBs are strictly governed by international law, and therefore should be classified as foreign debt. The government must desist from providing misleading statistics, as markets function on credibility and confidence, he pointed out.
The government is currently trying to manage its reserves carefully, so that it can both repay debt (Sri Lanka Development Bonds SLDB of $180 million due June 30 and $1 billion due 27 July) and pay for imports.
In December 2019, the CB had reserves of $7.6 billion. This fell by $2billion to $5.6 billion in December 2020.
Today, this figure is at a historic low of $4 billion, he said adding that, “We have been locked out of the international markets for a while, since we were downgraded by Fitch and S&P last year, driven by our deteriorating fiscal position”.
The government is managing its short-term liquidity needs through multiple SWAP agreements with Bangladesh, China and India.
Other economists said that the inability of some banks to open Letters of Credit for customers and the deteriorating real exchange rate, are consequences of poor economic management.
It is imperative that
Sri Lanka honours its international treaty obligations, commits to build a Sri Lankan identity, improves its foreign relations, focuses on fiscal consolidation, and integrates with international markets by opening the economy, they said adding that clearly a change of policy direction will need to be preceded by economic leadership changes in government ministries.