Economic crisis, public outcry, foreign reserves and remittances

Preamble

The recent announcements by the Government to resolve the economic crisis were mainly targeted to boost the foreign income by promoting tourism, granting five-year no-pay leave for public servants to work abroad, and creating skilled employment through the foreign employment bureau. Furthermore, as an incentive for remittance over $ 100,000, Government is to provide a duty-free allowance for importation of cars. 

These initiatives are irrational, lack direction, ad-hoc, hard to believe that the economic crisis will end in a short pace of time as they are associated with high inertia, hard to kick start and doubtful to bring quick returns under these current circumstances. Promotion of tourism was one of the post-COVID key initiatives of the former Governor’s road map presented eight months ago but has never materialised as forecasted.  

Background

The prime cause of the foreign exchange crisis began with the heavy borrowing under the guise of stimulating the economy aftermath of defeating LTTE militarily. The rapid growth in GDP resulted in investment on “white elephant projects”, with lack of foresight and vision. The assets built on borrowing have not made substantial return on investment, not sufficient to payback the loans, year on year. The loans were taken at commercial rates, above par, violating and departing from the best practices, no transparency thus opening room for exploitations, such as bargaining for commissions at various levels of the Government. These practices became the norm of day and continued to-date despite the Yahapalana Government coming to power to reverse the trend, promising to build and strengthen government machinery to find the crooks, recover stolen money. 

In spite of the current crisis and people’s uprising, the craving for finished foreign goods has never stopped; one could see the items displayed in the leading supermarket shelves. Replenishment of such non-essential goods, require foreign exchange and will further deplete the foreign reserves. Sri Lanka requires imports which maximise the local content in construction, manufacturing and supply chain industry. Are the luxury goods for 10% of the people who consume 85% of the GDP? This imbalance needs urgent correction.

Lack of vision

The successive governments over many decades proved they had no clear vision for the long term but interestingly exploited every situation to fulfil the political gains, build personal wealth, treat henchmen and akin. In the past two decades in the aftermath of [a] Tsunami in Dec. 2004, [b] 30-year civil war, [c] Central Bank robbery during Feb. to April 2015, and [d] COVID-19 in 2020, Sri Lanka failed economically to capitalise from lessons learnt and act upon timely to rebuild the economy for the benefit of public. These are the chains of unfortunate events that have been overlooked, neglected and instead transformed to personal wellbeing.  

To progress as a nation there should be a clear vision, not be subjected to changes with the change of governments. Vision is a long-term set of objectives in moving forward economically, socially, culturally and environmentally, followed by strategies in achieving the said objectives. Strategies may change depending upon the external and internal circumstances; for example, COVID-19 was an instance where countries sought different ways of delivery of services, thanks mainly to the ICT industry. Work from Home, online learning, conducting online meeting thus curtailing travelling, etc., are a few service delivery models despite having issues of availability of internet connections. 

The roadmap, the tranches of programs/projects are then to be carefully worked out considering the dependencies, both external and internal supported by detailed business cases, environmental assessments for achieving objectives. We have witnessed in the recent past government showcasing initiatives with no tangible progress thereafter and not taking off the ground. The six months roadmap of then CBSL governor to redress foreign debts crisis and prevent becoming a defaulter finally proved as a blind shot missing the firing target. 

The assassins who destroyed the economy to the current level are still denying to accept their responsibilities but enjoying life. In support of these decisions, the economic pundits of the Government have created fears among the public of negative consequences of going to IMF for assistance. One who authored a book titled “Handcuffs on Sri Lanka by IMF”, presented at one of the TV debates, nearly a year ago to attempt to discourage, frighten and paint bleak outcomes, now the same person is shedding crocodile tears about the financial crisis and inclination towards IMF path of resurrection. The strategies that have been adopted, and the policies pursued have driven the country to both political and economic turmoil resulting in suffering, hardships to common man and have fallen to deaf ears of the Government leaders. 

Consequences of curtailing importations indiscriminately

The main issues that had major impacts on the economy were stopping imports on fertiliser, purchasing refined fuel, petrol and diesel instead of crude oil and the decision to shut down the petroleum refinery indefinitely. As a result of these policy actions and failed strategies, the food security of Sri Lankans was hindered, which necessitated to import food stuff and refined fuels at premium prices through selected dealers; the result of these actions impacted badly on the daily lives of citizens, wasting their time in long queues thus affecting productivity of the nation.

Each one had multiple devastating effects leading to depletion of foreign reserves, [a] with respect to enforcing organic fertiliser, farming lands have been ruined, loss of production, increases in price. [b] Decision to close down refinery for considerable length of time surely had caused high maintenance cost in bringing it back to operational level, importing of refined fuel, petrol and diesel, at high prices and also the production of by-products through the refining process which are essential for other activities viz: fertiliser, insecticides petroleum jelly, asphalt, etc. These by-products amount to approx. 20% in volume [Courtesy of Wikipedia]

It is extraordinary and difficult to gage the reasons for such policy decisions without assessing far-reaching consequences. Let’s assume that moving to organic fertiliser was to save some foreign reserves; however, shutting down the refinery and importing refined fuel at premium price created suspicion as to how Sri Lanka could preserve foreign reserves. To a common man, these two processes react in opposite directions. Is this for favouritism and for underhand deals of selected? 

On the contrary, in April 2022, settlements were made at the maturity of some ISBs indicating that there is no foreign exchange crisis and defaulting of payments. This is another act of economic assassins having taken improper decisions with no fear despite the state of bankruptcy. 

Taxation and interest rates

Taxing citizens is one of the revenue raising instruments, governments have to fulfil the demands of the nation through public service from tax revenue. However, the money collected should be spent wisely, intelligently, not favouring friends and supporters. In Sri Lanka, taxes were not equitable but skewed to the people most vulnerable in the society, favourites to amass wealth disproportionally. I wish to bring the following quote – In 1899 US supreme court stated in Nicol c Ames 173 US 509: “The power to tax is one great power upon which the whole national fabric is based. It is necessary to the existence of prosperity of a nation as is the air he breathes to a natural man. It is not only the power to destroy, but the power to keep alive.”  

Extrapolating the above statement to the present Sri Lankan context, the ill-timed and illogical move to increase the tax to 12% which was brought down to 8% as soon as the current President was installed have aggravated the hardships to the battered community, adding to the spiralling cost of living. Nevertheless, economic pundits argue in favour saying, it is to balance the primary account; however, they were negligent of the fact that cumulative effect of such moves creates explosive repercussions in the current climate.  

Another decision was to increase the interest rate to limit the money circulation to stop the spiralling inflation and again the intention of Government to print trillion rupees to pay Government salaries, pensions and the like. This is a dichotomy; the two initiatives will never work in sync but has opposite direction. Furthermore, the rise in interest rates will destroy the SME sector which is the key of driving the economy. The timings of these moves as previously iterated were illogical and irrational.

The Interest Rate Parity (IRP) is the fundamental in determining and governing the relationship between two currencies. Adding to this, is the sovereign rating of a country which determines the health of the State in political, social and economic terms. The differential in rates regulate the demand subjected to “all things are equal”. In an unhealthy environment such as in Sri Lanka, fixing and holding the parity of Rs. against the market forces and subsequently dropping abruptly created room for manipulations of the foreign exchange market, such as; illegal transfers, growth of black marketers, etc. It is regrettable to note that the Government kept a blind eye, allowing for illegal practices to grow. 

Capital Inflows (CI) and Free Trade Agreements (FTA)

CI and FTAs are two key instruments that should be rightly exercised to the advantage of national interest and not for the purpose of building capital reserves alone. Each of them has capital outflows too; therefore, the agreements need to be structured with a balance, not to misuse tax owed to the host country but prevent hiding in tax havens. The capital inflows for businesses are also targeted to optimise the cost of production, also taking the advantage of low operating costs of the host country thus increasing the revenues. Similarly, FTAs are bilateral agreements for equitable sharing of benefits between governments; furthermore, to be ensured whilst formulation and negotiations of agreements to prevent skewing of benefits to either party. The recent controversial case of granting to an Indian company for building a carbon neutral power plant in Trincomalee is a gross violation of best practices thus giving disproportionate advantage of the benefactor. 

Conclusion

Over the past 30 months we have witnessed the inability and repeated failures of the Government in conducting and managing business. It reshuffled the cabinet of ministers a few times and recently appointed a cabinet with young members which lasted less than a month and then in May appointment of another new cabinet of ministers under the leadership of a new Prime Minister under the guise of multi-party coalition. 

However, its composition failed to demonstrate such governance structure but handpicked favourites from the Opposition and the “independent” group, thus deceiving the public by popular and patriotic slogans saying that the need of the hour is not to be divided but to resurrect the country with joint efforts. The behaviours and attitudes of the majority of the 225 MPs have played the same card of patriotism; may I quote a popular phrase: “My First, Second and the Third is my Homeland”. 

We have also seen several instances where Government top officials tendered resignations, suspected to be a result of political interferences. The cumulative effect caused Sri Lanka to become bankrupt which had never occurred in the history of the country. 

Despite seeing the early signs of economic crisis back a year ago, the pundits have never had the humility to accept the reality, assess the ground conditions but vehemently opposed to reach out to IMF for relief.

The honeymoon period of the new cabinet is now over, it has not achieved any good but has seen growth of lengthy queues for food stuff, petrol, diesel and gas. People are dying while in the queue for long hours, over 24 hours and Government has not shown any sympathy but providing band-aid solutions; no empathy to the suffering of the people. The leaders have continuously shown their complacency and the group-think attitudes ignoring the public outcry but to find solutions with aberrant practices not through accepted norms. 

Although the new cabinet promised to bring the 21A immediately, still nothing has moved in the right direction to address the unheeded public discontent and restore people’s inalienable sovereignty. At this hour of urgency, the most important requirement is to form a stable government thus restoring the acceptance, faith and trust among the international community and organisations, damaged, due to the violation of human rights, violation of fundamental rights, state and political interferences, and no concerns to the public demands; instead of carrying on with ad-hoc arrangements expecting that there will be natural cessation of protests. 

The patchwork currently being pursued to bring more high-paying tourists, and concessions to Sri Lankans working abroad to boost foreign exchange remittance, will likely fail as there is no healthy sustainable environment prevailing in Sri Lanka. It appears such initiatives and propaganda are targeted to dissolve the public momentum against the Government preventing another day like 9 May 2022. The writer is of the opinion that the new generation is not that stupid to digest the sweeteners as the old folks did in the past. 

The migration of the new Prime Minister, the night watchman who walks with the baggage of all wrongdoings in the midst of a hurricane and has so far failed to address the short-term needs of citizens, people sufferings are growing uneasiness but instead chasing a mirage in the desert storm, an illusion. 

Finally, the writer believes that those who govern and lead will soon come to their senses, will leave their offices gracefully without causing further inflicting sufferings, pain and hardships to 22 million citizens. As per my belief, the sins the leaders accumulate by neglecting and not fulfilling the basic needs will never be pardoned without a complete self-contrite. May the God Almighty save this nation from the ongoing debacle and soon provide an escape route similar to when Moses saved the Israelites from Egyptian slavery by parting the Red Sea. Do not consider this as a superstitious belief!