News
Economic review shows lasting damage done and the grind ahead
View(s):By Kapila Bandara
A review of Sri Lanka’s self-inflicted economic degradation over the past year is a sharp reminder of the merry-go-round the country experiences when politicians and policymakers take turns wrecking fragile public finances.
The consequences of lame, irresponsible fiscal and monetary policy choices linger for decades. Sri Lanka has held out its hand to the IMF 17 times.
‘The Annual Economic Review 2023’, a maiden publication by the Central Bank of Sri Lanka, reveals Sri Lanka’s multibillion dollar external debt has swelled further, there is multimillion-dollar interest arrears on international sovereign debt, which, in turn, have increased national liabilities, economic activity has declined, the Central Bank of Sri Lanka itself has debt, and exports and foreign direct investment have dropped sharply.
Also, births have declined, emigration has ticked higher, there is a struggle to build forex reserves.
These are only a small part of multiple challenges explored in the review by CBSL, which itself played an outsized role in the economic collapse by living in denial. Macroeconomic issues as well as, social, fiscal, and public finance is noted for the record. It was released the past Friday.
This should be viewed in the backdrop of the economic ‘green shoots’ that the IMF reported last month, while warning of the risks of going off track with structural reforms and widespread state corruption. The IMF programme and its technical help for the handicapped Central Bank, is allowing the country to restore macroeconomic stability and sustainability of the debt mountain.
The economy shrank for nine months of 2023 and Sri Lanka’s default rating by Fitch, and S&P, remains. Outstanding public debt has risen to Rs. 30.62 trillion. The economy is expected to recover provided IMF-mandated reforms continue.
Government revenue collection has improved due to higher income tax rates, fees and charges, but it was “an underperformance’’ relative to “ambitious budget estimates for 2023’’.
What stands out in the gloom, as usual, is US$5.97bn of forex sent home by Sri Lankans.
Withered economic activity is reflected in much less spending on imports of numerous intermediate goods, lower spending on investment goods such as machinery and engineering equipment, and building material such as iron and steel, and transport equipment.
Sri Lanka has again failed to draw foreign direct investment, in contrast to Board of Investment boasts. Foreign direct investment, excluding loans, was just US$712 million in 2023, while FDI, including foreign loans (IMF, World Bank and ADB funding by the Government), was a mere US$758m. Both dropped from 2022.
Sri Lankans, whose real earnings have melted away and whose buying power has evaporated, are spending less. Consumption expenditure contracted in 2023.
Sri Lankans are also having fewer children. The population has dropped to 22.03 million, (down by 0.6%) according to the Registrar General’s Department. Hundreds of thousands leaving the country — some permanently — has contributed to this, along with more deaths.
The jobless population remains artificially at 4.7% largely the result of departures for overseas work, not because of new employment openings created.
Bank credit risks remain high, especially impaired loans. It remains a concern, CBSL’s review says.
Some national burdens have been compelled to repair balance sheets.
The Ceylon Petroleum Corporation, choked by large-scale financial corruption in everything from imports to distribution and storage, overstaffing, and colossal waste, has posted a profit of Rs. 120.3 billion in 2023, compared with a Rs. 617.6bn loss in 2022. It helped that the Government guaranteed foreign currency debt of US$2.5bn is now being shouldered by people.
As for the Ceylon Electricity Board, another state enterprise loaded with debt and financial losses, 2023 was a profitable year, raking in Rs 61.2bn. Power generation dropped, and the CPC revised tariffs by up to 66% and 18% (and reducing by 14% later), which improved cash flow.
The health services are infected by ministerial and multi-level official fraud and corruption. The CBSL describes these as “lapses’’ that raise “serious concerns’’ about the “efficacy of the sector’’. Without mentioning multiple deaths of Sri Lankans from tainted and even fake pharmaceuticals, the CBSL says casualties are “reprehensible in light of the long standing commitment to universal health care’’.
External debt increased in terms of market value in 2023 to US$ 33.1 bn at end 2023 from US$ 27.5bn at end 2022. This was mainly due to the rise in market value of international sovereign bonds. CBSL says a “modest increase’’ in foreign investments in Treasury bills and Treasury bonds added to the increase in outstanding external debt. In terms of face value, the external debt was US$ 38.4bn
Sri Lanka’s liabilities to the world have increased to US$ 64 billion from US$ 58.1 billion at end 2022.
Among the Government’s liabilities is US$ 727 million of piled up interest payments on International Sovereign Bonds. Sri Lanka suspended servicing these debts, while debt servicing of foreign loans of the Government increased. Among the liabilities is US$ 12 million accrued interest on international bonds to non-residents.
Billions of dollars sent in by Sri Lankans working overseas — mostly domestic helpers in West Asia — once again enriched the external current account into a surplus. Remittances bounced by 57.5% to US$5.97bn in 2023, compared with US$3.78bn in 2022.
The surplus was made possible also by a drop in imports, improved services exports, and tourist dollars. The surplus was US$1.55bn in 2023, compared with a deficit of US$1.44bn in 2022
Exports dropped by more than 9% to US$ 11.91 billion from US$ 13.10 billion in 2022. Imports fell to US$ 16.81 billion from US$ 182 billion. Apparel shipments fell by 18%.
There was a “significant’’ drop in bilateral trade. India and China piled up multibillion-dollar trade surpluses with Sri Lanka, as usual. China buys very little from Sri Lanka. Trade with the United States is substantial, too, about US$ 3 billion.
Agricultural shipments including coconut and rubber, dropped. Tea volumes fell, but prices improved.
Among imports, textile and textile articles were the second biggest in value, below fuel. The fuel bill was lower due to lower global crude and refined fuel and LP gas prices.
The services account surplus increased to US$ 3.40 billion from US$ 2.11 billion in 2022. But, inflows to computer services shrank significantly.
Among other encouraging signs is tourist arrivals of 1.48 million, which generated US$ 2.06 billion.
The primary income widened due to outflows for interest payments on foreign loans and arrears on debt. In the financial account of the balance of payments, net liabilities swelled. Assets increased due to IMF inflows of US 670 million, as well as US$ 500 million from the World Bank and US$ 550 million from ADB.
Livelihoods have been severely jolted, the twin deficits (budget and external current account) persist, foreign debt overhaul is unfinished business, yet Sri Lanka has no choice but to continue with IMF reforms.
| Net international reserves are negative Net international reserves, that is, gross official reserves, minus liabilities related to reserves such as Central Bank of Sri Lanka debt excluding outstanding Special Drawing Rights — are at minus US$ 404 million. Sri Lanka’s Gross official reserves are at US$ 4.39 billion. This includes US$ 875 million foreign assets of the Government and CBSL’s foreign assets of US$ 3.51 billion. CBSL’s maiden review describes the gross official reserves being at “a healthy level’’ compared to US$ 1.89 billion at end 2022. CBSL purchased US$ 1.68 billion net in 2023, while net foreign exchange swap arrangements with domestic banks was US$ 861 million. Gross official reserves also include the 10 billion yuan swap from the People’s Bank of China worth US$ 1.42 billion. Under IMF funding arrangement related targets, the net international reserves must be positive in that gross official reserve assets should exceed liabilities. | |
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