President Ranil needs to resurrect economy fast

Ranil Wickremesinghe who took oaths as the eighth President faces the daunting task of leading the country out of its economic collapse and restoring order after three months of mass protests. He overwhelmingly defeated his main rival for the job, Dullas Alahapperuma, with 134 votes to 82 in a parliamentary secret vote. 

Violent protesters last week burnt down his private home and also stormed his prime ministerial office in Colombo in demonstrations against his leadership. But yesterday, after sweeping the vote, he called for unity and bipartisanship moving forward. He told Parliament the nation was “in a very difficult situation” and there were “big challenges ahead”. Sri Lanka has been wracked with protests for months because the country is effectively bankrupt and facing acute shortages of food, fuel and other basics. 

In fact former Deputy Governor of the Central Bank W.A. Wijewardena, in an interview with a newspaper said recently, “In every respect, Sri Lanka is a bankrupt country,” adding that the challenge of the new interim Government was to make it solvent. “If Wickremesinghe fails, Sri Lanka will also fail, not in the next few years but for the rest of the period Sri Lanka will be a non-entity as a nation,” he warned.

Crisis

The economic crisis is largely manmade. Starting with the huge cuts in tax revenues, suspending the IMF program and the squander of the forex, given the pandemic. As a result, money printing has been Rs. 4+ trillion. Overall inflation is now at 30% and food inflation over 70%. Sri Lanka’s forex sector is the worst affected. Foreign reserves have fallen from $ 7.6 billion in December 2019 to a usable foreign reserve level of less than $ 200 million at end June. The net foreign assets of the Central Bank is negative at $ 4.4 billion at the end March 2022. The rupee is under immense pressure, there is limited forex in the formal banking system and a lucrative black market is thriving. 

The CBSL has officially suspended foreign debt servicing, which amounts to a default, taking the crisis to another level. Sri Lanka is now an insolvent country. Making Sri Lanka a credit worthy country will be an enormous task and cannot be done without the assistance of Sri Lanka’s longstanding friends like India, Japan, China, UK, USA and South Korea.

Miracle

Ranil Wickremesinghe getting appointed as the eighth executive president is nothing short of a miracle. No one in their wildest dreams would have thought it possible. But it has now happened. The appointment of Ranil Wickremesinghe is timely, given his vast experience. This is his opportunity to create a legacy, given all what has happened in the past. The new President knows at present that the Sri Lankan economy is positioned in an extremely precarious position. A misstep or a miscalculation would send it spiralling to being a failed state and a pariah in the international financial ecosystem. 

Although the Government’s budget projected a revenue of Rs. 2.3 trillion, Rs. 1.6 trillion is the realistic projection of this year’s revenue. There is a $ 700 million credit line from India and the Government will need to make available this credit line when importing essential goods. Even taking the bold step of what India did of allowing rupees to settle foreign trades is a good move. It can have long-term benefits. We need a big repo rate cut, however there’s little light on the action in the forex market. The banks need to be stabilised with good regulations. He also needs to close the negotiations with the International Monetary Fund for a bailout package worth up to $ 3 billion soon.

Way forward

The expectations of the Prime Minister are very clear, fix the oil and gas queues ASAP. Bring back the 19th Amendment, prosecute those who have plundered and mismanaged the economy and fix the forex liquidity in the economy. The first two can be done with the support of Sri Lanka’s friends. The 19th will require the political will of the 225 in Parliament. The people will not stop protesting until this is accomplished. Fixing the economy will require time, skilled and dedicated people and objective action. Unfortunately people have lost patience. CBSL cannot say they are independent and do what they think is best for the country. They need to synchronise with the Government. 

The high interest regime must change before it kills the businesses and the banks. Forex management needs innovation, the financial system needs a fresh injection of capital. The foreign ministry and the BOI must be restructured fast. They have failed to deliver. They must no longer be allowed to gobble up our foreign exchange. We can no longer rely on bureaucrats to take the lead. They have failed us and failed us miserably. 

We need leadership and inspiration to come out of this crisis. President Ranil has the maturity of a Statesman. What he does in the next three months will either make Sri Lanka or will reignite the genuine “aragalaya types” to make their presence painfully felt once again.