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Gotabaya Govt. got early warnings about economic crisis
View(s):From early 2020–just months after former President Gotabaya Rajapaksa’s election–Finance Ministry officials started informing the Cabinet about Sri Lanka’s dire financial situation and warned it would worsen to at least a 50 percent decline in both exports and remittances, documents obtained by the Sunday Times show.
In one Cabinet memorandum, dated May 13, 2020, the Finance Ministry predicts that, in view of the COVID-19 pandemic and predictions of an economic slowdown, Sri Lanka “will experience a significant dip in the foreign currency inflows by way of tourism, exports and remittances”.
“In fact, preliminary estimates indicate a decline in both exports and remittances by almost 50 percent,” it states. “This will certainly create a significant pressures [sic] on the foreign currency reserves which at present stands at only around USD 7.1 billion,” it states.
The paper, while prepared by the Finance Ministry’s External Resources Department (according to authoritative sources), was signed by Mahinda Rajapaksa, the then Finance Minister. The Finance Ministry suggests that the Government’s borrowing strategy should be aimed at the reduction of external commercial debt in the medium to long-term, while increasing domestic financing for development activities.
“During the period May-December 2020 alone, it is required to service and repay almost USD 3.3 billion of the foreign currency debt including the repayment of International Sovereign Bonds and official debt from multilateral agencies,” the Ministry cautions. “The repayment of International Sovereign Bonds due in October 2020 amounts to USD 1 billion. Moreover, in 2021 and 2022 approximately, USD 6 billion per annum will be required to meet the foreign currency debt servicing and repayment.”
“The project pipeline for foreign funded projects for the next 3 years stands around USD 08 billion,” it continues. “In addition, the foreign financing already committed for development projects but so far undisbursed (Committed Undisbursed Balance) amounts to around USD 09 billion.”
However, there was no plan at the time to stop further infrastructure development, the document shows. As under the previous Rajapaksa administration, such construction activity is seen as the key driver of growth. Investments in the fields of power generation, petroleum infrastructure, property development port, airports and expressway construction were to be continued but under a different plan.
“The public investment strategy of the country should be governed by a debt reduction investment approach with increase in foreign investments in commercial projects,” it states. “As the rate of domestic savings and investment supplemented with foreign direct investment will be the most pertinent determinants to achieve sustained economic growth.
“It is imperative to increase domestic savings and attract higher amounts of foreign investments in commercial infrastructure development projects such as ports, airports, refinery and power generation, etc., which can generate substantial economic value addition to the nation to achieve the desired growth rate.
“By adopting such a strategy, the national budget has the space to accommodate non-commercial financing from multilateral and bilateral sources to economic sectors such as health, education, skills development, agriculture and rural infrastructure, etc,” it proposes.
The Cabinet paper points out that, unlike in 2014, when only around USD 5 billion or 25 percent of the debt was at commercial terms, at the end of 2019, commercial borrowings increased by nearly threefold to US$ 16bn or almost 47 percent of foreign currency debt.
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