News
Dollar flow dries up; political instability worsens crisis
A staff-level agreement with the International Monetary Fund (IMF) is still at least three months away, there are no more credit lines–except for ongoing Indian assistance–and even the “small financial flows” that were being mobilised are now delayed because of this week’s unrest and deep political instability, the Sunday Times learns from authoritative sources.
“Nothing,” they said on Friday, when asked if there were short-term funds in the pipeline.
The Government is struggling to find US$ 70mn to release a fuel shipment idling outside of the port of Colombo. Meanwhile, talks to restructure foreign debt have not yet started. Financial and legal advisors were due to be approved by the Cabinet–but haggling over ministries was continuing.
On Wednesday, Central Bank Governor Nandalal Weerasinghe threatened to quit in the face of political volatility saying nobody could rescue the country economically without stability.
“We had been making good progress in getting results,” an official source said. He did not wish to be named. “Now everything is delayed. Even the small financial flows that we were planning to get are delayed. That is why there are no dollars now.”
A staff-level deal–a key milestone that sets out targets and commitments–is only the first step in IMF negotiations. Once that is signed, institutions like the World Bank (WB) and the Asian Development Bank (ADB) are expected to lend Sri Lanka money to supplement whatever is agreed upon with the IMF. This will provide some financial respite.
“But in the next three months, the sources are zero,” the source said. “And the reserves Sri Lanka has are almost zero.”
While the shortages, particularly in electricity supply, were dire in March, things had eased “a little bit”. Shortages were not as severe. “But it’s spinning around again,” he warned, expressing fear that there could be a return to long power interruptions.
“That means people will get onto the roads again and it will be a never-ending process,” he said. Social unrest, political instability and economic crises are all three coming together.”
Sri Lanka urgently needs an infusion of at least US$ 1-2bn, officials said. The cost of petroleum imports alone is US$ 500mn a month, not counting other essentials. While debt repayments were unilaterally suspended in April, part of the dues to the WB and the ADB must continue to be settled as the government intends to tap them for more funding.
“Only India has been helping a lot,” the source admitted. “If there’s no India, the country is basically closed.”
Japan and China have been approached but both want debt restructuring to be negotiated first before a consensus is reached on lending more money. Negotiations with creditors, once they start, will take another six months.
Meanwhile, China was “applying a lot of pressure” on Sri Lanka to grant it “different treatment” where debt restructuring was concerned. This was publicly disclosed by Mr Weerasinghe at a previous news conference. The Government has responded that all creditors will be treated equally “or others will complain”.
“And these issues came on top of this political instability,” the source said.
There’s now fear of further unrest because shortages, including power cuts, will continue. However, political instability poses a larger threat to efforts to secure IMF assistance. Whilst the Central Bank Governor is authorised to take decisions within his mandate, fiscal policies–such as increasing taxes and utility prices –require a Cabinet and must also be approved by Parliament. Difficult reforms require a stable government, a Prime Minister and a Cabinet.
The public must be warned that the next three months will be “very difficult,” the official source insisted. Things will get worse before they get better “especially as it took a different turn this week”. The economy will have to contract and industries, except the export sector, will have to go slow.
“My concern now is how long people can tolerate this,” he said. “We have to communicate it properly and tell people that, there will be hardships, but to please be patient.”
The Central Bank has urged the public not to buy non-essential items such as fridges, phones or other electronic goods till the balance of crisis payment is sorted out as it encourages further imports. Measures such as using cheaper modes of travel and vehicle pooling are encouraged.
“Wait for six months,” he urged. “What are essential now are medicines, electricity to work and fuel to travel. Everything else is low priority.”
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