Colliding policies?

Economic policy making is often fragmented in Sri Lanka with different Government decisions being made with little or no coordination. This has been a long-term complaint of the administration and the concern here is that the Government may take a slew of decisions putting political considerations first and economic realities on the backburner.  

Much has been written about Sri Lanka’s sensitive reserve situation as Sri Lanka grapples with repaying $5.9 billion in loans this year while preventing the rupee from depreciating in a disorderly manner. Plans made by the Central Bank to raise funds to bolster reserves were detailed by the constitutional crisis that was triggered on 26 October by President Maithripala Sirisena sacking sitting Prime Minister Ranil Wickremesinghe and appointing Opposition Leader Mahinda Rajapaksa as Prime Minister. The ensuing 52-day battle to protect Sri Lanka’s democracy saw several hits to Sri Lanka’s economy.

Sri Lanka’s sovereign rating was downgraded, tourist cancellations increased, the International Monetary Fund (IMF) program was put on hold, currency depreciation accelerated and investors pulled out of capital markets. The Central Bank’s plans fell apart as interest rates spiked and State banks that were entrusted with raising lines of credit found they would have to pay higher interest for shorter tenure. The fallout resulted in the Central Bank having to repay over $1 billion due in January from its reserves and pushed the country to the cusp of a balance of payments crisis. 

Since January the Central Bank has been working to pick up the threads and get its reserves up to acceptable levels. Concerned by possible future political instability the Central Bank is not rushing to raise all the money it needs to debt repayment in the first quarter of 2019. It has already received a $400 million swap from the Reserve Bank of India and plans to increase this by another $ 1 billion. The State Bank of China has also lent Sri Lanka $ 300 million, which will be scaled up to $ 1 billion and the China Development Bank loan of $ 1 billion received in October will also be increased by $ 500 million. 

The inflows are aimed at slowing the depreciation of the rupee and keeping the economy ticking ahead of an IMF staff level agreement expected in March. The precariousness of the situation has received much attention but the Finance Ministry recently decided to expand the Enterprise Sri Lanka program to give low interest loans to the public to purchase three-wheelers and is considering loans up to Rs. 10 million to build houses. The expansion, clearly directed at upcoming elections, is problematic because the government used macroprudential measures last year to limit the import of small cars precisely because they were putting a strain on reserves. Construction materials are also largely imported. 

Three-wheelers and an uptick in construction alone may not exert severe pressure but they come in the background of crop destruction by the sena caterpillar and drought worries. The Government has already said it will have to import maize and has postponed planting for the Yala season. A drought could mean that thermal power generation would have to increase, which would mean a rise in oil imports as well as possible emergency power purchases at higher prices. Additional election-targeted decisions could also provide more pressure. 

The Government needs to concentrate on ways to grow exports and investment to earn more foreign exchange to bolster reserves. It is the best way to tackle debt, put Sri Lanka on a sustainable growth path and win elections.