Was Ajith Nivard Cabraal an accountant, an economist or a magician?

With the rupee weakening day by day we hear an idea pushed by the current government that the Rupee was artificially held by the previous government. However this is possible only if the country’s reserves are expended to defend the rupee from de-valuing against the US Dollar. But we know that our reserves grew over the previous regime and were at over US$ 8 billion in January 2015. But now they have declined to the US$ 5 billion mark and predicted to go below the US$ 5 billion mark by the end of July. If you keep the reserves high you should not be able to keep the rupee stable. However both variables were indeed managed well by Cabraal to ensure stability of the Rupee while reserves increased. If this was an artificial manipulation it can only be done short term. Markets invariably adjust, with each variable shifting its position to accommodate any forced change in another. If this was done “artificially” for 9 long years then Cabraal must either be a magician or a genius.

Another argument by the current Government is that borrowing was very high during the previous regime with a lot of hidden debt. However the debt to GDP in the last five years from 2009 to 2014 were 71.6%, 71.1%, 68.7%, 70.8%, 70.7% respectively, with a sudden and drastic 5% jump to 76.1% in 2015 under the current Government. Again you can lie and get credit from the local retail shop owner, and tell him you’ll pay him next week for the packet of sugar you buy, without telling him you are already in debt to your land lord, on your car lease and to the gamey poli mudhalali (village loan shark). However we know that any bank in Sri Lanka will do its due diligence before disbursement of even a small personal loan to a customer. You cannot for instance apply for new credit cards after defaulting on the first. So we can imagine how difficult it must be to “hide” loans and debt from institutions such as the IMF, World Bank, ADB or the other very savvy, highly paid Harvard educated hedge fund managers around the world subscribing for Sri Lanka’s Sovereign Bonds. If Cabraal could fool them once is believable, but if he did it for 9 straight years without getting found out he must be either a genius or a magician. 

Variables such as the interest rates, foreign exchange rates, inflation, taxes, national debt and reserve levels cannot all be held “artificially” for long periods of time. And if you can keep that from happening indefinitely, then it is no longer artificial, it IS the steady state. That is what Cabraal created, a formula where there was long term stability for all variables. Unfortunately, what we have now, is utter chaos.

Rex Fernando

Retired Banker