Tough times ahead for Sri Lanka’s economy
Sri Lanka, as a beaten-up economy, has taken a crucial turn for the better with fresh appointments and fresh approaches to the forex and economic crisis.
The new Central Bank Governor, Dr. Nandalal Weerasinghe’s announcements to increase interest rates and seek donor agency assistance while restructuring the country’s unsustainable debt were welcome by most stakeholders but industrialists and economic analysts said that inflation will rise further with the rise in interest rates.
The Treasury bill rate has increased to 24 per cent and the interest rates raised by 7 per cent. When the risk-free return is at 24 per cent, the scope for investment that anyone can make is limited and at this juncture only in government securities, they said.
The interest rates were increased to address the inflation but right now people don’t have excess money to invest, an analyst pointed out.
The prices of goods and services have increased almost double because the Rupee has crashed. Economists point out that the exchange rate or oil prices will not decline in a hurry which means the country will have to go through very high inflation in the future. They say that the exchange rate is a matter of confidence. “Just because of raised interest rates migrant workers will not send money to Sri Lanka. The priority should be to build confidence for them to send money,” an economist said.
The banks will pass the high-interest rates to the customers who will, in turn, pass it to the consumers creating further chaos. An industrialist said that these moves will kill local businesses.
W. A. Wijewardena, former Central Bank (CB) Deputy Governor, told the Business Times on Thursday that the economic crisis needs to be addressed in a two way approach. Receiving International Monetary Fund (IMF) support to getting out of the balance of the payments crisis is the immediate requirement whilst getting the real sector up and running is the next, he added.
Sri Lanka’s intentions to go for a bailout to IMF won’t solve the issue in the country – it will solve only a part of the issue, Dr. Wijewardena said. However he said that this is a step in the right direction.
Some analysts welcomed the hike in interest rates, saying that banks are now unable to leverage CB’s Repo window. “This window is effectively shut which will stifle growth but also curtail unnecessary spending,” a second analyst said.
Finance Minister, Ali Sabri slated to hold discussions with the IMF tomorrow seeking a US$3-4 billion package to tide over the economic crisis is a start to end the economic woes. Bridging finance is another important aspect which will help Sri Lanka stay afloat till funding from the donor agencies reach its shores.
Sri Lanka seeking India’s assistance in garnering at least $3 billion in “bridging finance” from the international community after High Commissioner Milinda Moragoda and Indian Finance Minister Nirmala Sitharaman’s recent discussions are also a welcome move, economists pointed out.
Both these will alter the country’s economic future for the better in the shorter term.
IMF will discuss with a legitimate government and it’s important to have some semblance of stability in government right now, political analysts say.
A senior banker said that how effectively the government will negotiate with the donor agency will tip the balance in Sri Lanka’s favour.
CB has done a fair amount of debt restructure stress testing and the recent announcement by Dr. Weerasinghe saying that these tests will be carried on the CB website in the future shows the commitment to transparency, he added.
A second economist said that with continued tourist arrivals and building confidence so that migrants will restart using formal channels to send dollars will bring down the exchange rate.
He welcomed the changes saying that these should have been made long ago. He pointed out that at the time the pandemic hit certain businesses it stressed the importance of some of the recently introduced measures by the banking regulator. “It is better late than never. Going ahead the priority is to keep the country ticking. It is important, in the coming six weeks to focus on importing very essential food items, gas, oil, petrol, and diesel. Then it is important to launch a programme addressing loss-making entities in the government etc and gradually building up the reserves.” He predicted that going forward it will be a tough road ahead. The interest rates may further increase, and taxes will be very high up to a tipping point, he added. ‘We will have to go through this pain as a country and come out of it somehow.”
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