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PUTTING ON A BRAVE FACE: Central Bank Governor Professor Lakshman issues statement on state of dollar reserves and appeals for calm and restraint, day after printing 208 billion rupees in paper money

People may be compelled to brace themselves for a brewing financial storm that may make landfall soon and possibly leave the country’s economy flattened in its relentless trail.

On both the domestic and the international front, the rupee has come under siege with no relief in sight. In the domestic sphere, the Government took the extreme step of physically printing an unprecedented Rs 208 billion on Monday, after having already printed Rs. 23 billion last week. With this input of fresh liquidity, the Central Bank holdings of government securities or the printed money stock reached a record breaking trillion rupees or  Rs.1,127.65 billion to be exact from Rs.919.22 billion on June 25.

On the international front, a crippling debt burden has left the Treasury coffers stripped to the bone with only 4 billion dollars remaining in the kitty which may not be enough to service the annual interest to international lenders, let alone meeting other commitments, thus risking a worldwide blacklisting should the Government fail to make good on the loans on the allotted day.

And to make the bad news even worse: Only 35 percent of US$ 100 million Sri Lanka Development Bonds placed for auction had been taken up. Had confidence in the economy eroded to such an extent that Lankan bonds now face the danger of being condemned as junk?

On the day after the Central Bank had used its licence to print money for the second time in June and delivered the fresh and crispy paper money to the Treasury, Central Bank Governor Professor W.D. Lakshman issued a special message to the public on the financial health of the economy.

Peppering his message of bad news with a surfeit of appeals for calm which only heightened the underlying unease, Governor Lakshman, listed the serious concerns that have arisen due to the foreign reserves crisis.

First in the list was to explain the reason why he was issuing this message to the public. It had been occasioned by the flood of reports, he said, that had been circulated by some media channels attendant with ‘serious negative viewpoints which can be harmful to the country’; and he was issuing the statement, ‘to explain the true position about this subject’.

Outlining the Central Bank’s position on foreign currency liquidity in the domestic market, he said: “We request these operators in the market to remain calm and not fuel undue speculation, which is not in the national interest, as the careful management of the situation without undue disruption, will result in a beneficial outcome to the country as a whole.’’

On the foreign exchange crisis, while Governor Lakshman grudgingly admitted, “there may be short-term fluctuations in this level of foreign reserves in the period ahead due to debt servicing of the Government,” he was quick to point out the good news of “inflows to the country”, lined up to “maintain reserves at sufficient levels.”

And what were these inflows? Apart from the Gross Official Reserves which remain at $ 4 billion, without considering the standby SWAP agreement of approximately $ 1.5 billion with the People’s Bank of China, the lined up inflows acting as heaven sent saviours of the Lankan economy, like the lined up inflow of expected COVID  vaccines of the health sector,  include the SWAP facilities of

n    $ 250 million from the Bangladesh Bank expected in July 2021,

n    the SAARC Finance SWAP facility from the Reserve Bank of India of $ 400 million expected in August 2021,

n    and the special SWAP facility of $ 1,000 million being negotiated with the Indian counterpart, and

n    a facility of around $ 800 million under the IMF SDR allocation expected in August 2021,

n    and the Central Bank purchases of export proceeds and worker remittances from the market, which would help the Central Bank to build Official Reserves through non-debt inflows of around $ 700 million annually in the period ahead.

But will that suffice to keep the wolf even temporarily away? Will borrowing from Peter to pay Paul be the Lakshman solution to postpone today’s problem to a future date, even though the debt burden will be even greater?  But what else can a drowning man do except clutch at a straw to keep head above water till a prayed-for-miracle arrives.

But never-say-die Governor Lakshman has the last word on the impending storm, which he puts down to one driven by rash speculation which he says will soon blow over.

“I wish to assure the media, the general public, the business community and the investor community that the conditions of foreign currency liquidity observed in the domestic market at present are temporary and are driven by excessive speculative activity.”

In other words, the economy was cruising nicely, doing a comfortable steady 60 on the dash, but a deluge of loose talk with negative vibes had swamped the financial highway, and hence the slowed, bumpy ride on the pot-hole-ridden once carpeted road. So bear the bumpy ride, keep cool and ‘every little thing is gonna be alright’.

But in contrast to the Central Bank Governor’s bedside manner and optimistic attitude toward the leaking, flaming, sinking Pearl of the Orient, akin to a smoothly composed pastor giving the last rites to the terminally ill but yet assuring all will be well if he could but hold on a little longer to dear breath, the opposing view of SJB’s Dr. Harsha de Silva, MP, is enough to hit the panic button and make a dash to the bank with the nearest wheelbarrow to cart home one’s meagre savings.

Like an 18th century prophet of doom come to hail the end is nigh, Dr. Harsha de Silva’s no-holds-barred analysis of the precarious financial situation prevalent today and which will continue in the coming years, destroyed the rosy hue that had settled all around with Governor Lakshman’s sugar-coated message of seeing the phoenix rise from the ashes.

With a new Fitch Rating report painting a bleak economic future, Dr. Harsha asked on Thursday: “As per the statement made by Fitch Ratings, total foreign debt services for the next few years will be US$ 29 billion while it will have to settle US$ 4 billion each year including this year. However, Sri Lanka will be left with usable foreign reserves of US$ 3.5 billion. The debt services for this year will be US$ 3.8 billion. How is Sri Lanka going to manage this situation?”

“Sri Lanka’s expenses for salaries, pensions and interest for loans for the first quarter of this year is around Rs. 727 billion whereas the revenue has been Rs. 482 billion, Sri Lanka will be compelled to request debt moratoriums from the debtors. If the economy plunges further I don’t know how the people can be controlled. Even the banking system may be at risk. Such a situation could be avoided only if the government goes for a debt restructuring programme with the assistance of the IMF,” he declared.

But seeking refuge in an IMF haven was pooh-poohed by the Government on Friday evening. Addressing a media conference, Money, Capital Markets and Public Enterprise Reforms Minister Ajith Nivard Cabraal ruled out any arrangement with the International Monetary Fund (IMF) for restructuring its debt servicing criterion, but asserted that there were alternatives for it though he did not spell them out.

Minister Cabraal insisted the economy was not on the brink of a collapse despite contrasting remarks by the opposition legislators and asserted: “This is exactly what the opposition wishes for. Once the economy is bankrupt, they believe they can capitalise on it to get back to power.”

Incidentally, on April 26 this year Minister Cabraal, during a television interview made the remarkable observation there was no relationship between printing money by the Central Bank of Sri Lanka and the depreciation of the local rupee in the foreign currency market.

He was asked whether the value of the Sri Lanka rupee showed a negative correlation to a surge in money printing by the Central Bank as the Opposition claimed and the State Minister replied, “Generally, people say it maybe because they don’t know. The issue is when those that claim to be in the know of these matters also say the same thing.”

And his advice to the public: “get on with your activities according to your methodologies without being nervous about it, then no issue will crop up,”

With last week’s Sunday Times revealing how the Central Bank has told banks not to request dollars from the banking regulator’s depleted foreign currency reserves, resulting in several private banks being unable to open Letters of Credit to importers even for essential items such as medicines, the public will certainly be less nervous if the Government showed it had a credible alternative master plan to revive the economy rather than merely claim it had one up its sleeve which would be whisked out at the right time.

Govt gets off high horse with EU’s GSP+ at stake In the face of the European Union threat to withdraw the GSP concession to local exporters if Lanka doesn’t clean up its human rights record, it is welcome to note that the Government has decided to end the stand-off by getting off its high horse and agreeing to brush up its tainted human rights act. On June 10, the European Parliament had adopted a resolution which called for the withdrawal of the GSP concession to Lanka in the absence of Government efforts to strengthen the fundamental rights of its citizens, a mandatory condition of EU’s GSP largesse. The main focal point of the EU Resolution was the controversial Prevention of Terrorism Act (PTA). EU’S GSP: Govt shifts stance, agrees to amend PTA As the SUNDAY PUNCH commented last week on the GSP crisis, the resolution  urged the Sri Lankan authorities to immediately take measures to ensure internationally recognised guarantees to the PTA detainees, and to be promptly brought before a fair trial on recognisable charges; and called on the Government to withdraw the counterterrorism regulations that permit arbitrary detention for long periods without trial; it also called for the repeal of the PTA and replace it with anti-terror regulations in line with the country’s international obligations and commitments. In answer to this demand, on Thursday it was announced by the Foreign Office that the Government has informed the EU of action underway to revisit provisions of the Prevention of Terrorism Act, with the study of existing legislation, past practice, and international best practices. According to the Foreign Office statement, the EU was informed of the decision made by the Cabinet of Ministers on June 21 to appoint a Cabinet Sub-committee and an Officials Committee to assist the Cabinet Sub-Committee to review the PTA and submit a report to the Cabinet within three months.  Toward this end, the Officials Committee was appointed on June 24, with senior representation from the Ministries of Justice, Defence, Foreign Affairs, Public Security; and the Attorney General’s Department, the Legal Draftsman’s Department, the Sri Lanka Police, and the Office of Chief of National Intelligence. The resolution had also stressed the disproportionate use of the PTA — often targeting ethnic and religious minorities — resulting in arbitrarily detaining suspects for months and often years without charge or trial. It made specific reference to the use of the PTA pointing to the arrest of lawyer Hejaaz Hizbullah and poet Ahnaf Jazeem, among others, who have been in ‘arbitrary’ detention for over a year. In response to this, the Foreign Office stated that the EU was further informed of the President’s Poson Poya pardon granted ‘to 16 former LTTE cadres convicted and serving sentence under the PTA’. The EU had also been apprised of the process that has been set in motion to release detainees who have been in judicial custody for a prolonged period, under the PTA. All this portend benefits, economic as well as citizens’ rights. The GSP scheme is limited by its declared singular object: to provide duty concessions on exports to approved applicants as an incentive to protect and enhance the human rights of the applicant nation’s citizens. The EU itself has no power to stray beyond this limited ambit. If a low middle class country with a low per capita income of less than US$ 4035 does not wish to avail itself of this human rights oriented facility, it need not apply. It cannot creep in, clad in sheep clothing, and obtain benefits under this scheme and then cry foul when its wolfish nature is discovered. It has taken the treasury to be beggared to its last dollar, and the prospect of losing over 500 million dollars in revenue should the GSP status be lost, for the Government to relent from its previous rigid stance on human rights; and come down a peg or two to discuss with EU officials how best to reform the PTA according to international ‘best practises’. Government officials should realise that any attempts to delay the time line, and puerile attempts through the appointment of committees and clusters of subcommittee will be spotted  and condemned as shabby attempts to pull the wool over EU eyes; and leave the Lankan Government branded with the pariah status as ‘cannot be trusted. It should be borne in mind that it is not the sovereign rights of Governments that are enshrined in the Constitution but the sovereign rights of the people.