Sri Lanka’s plight of the poor

Why can’t they work together till the country gets out of this crisis? Or is it a case of all looking for political advantage?

Sri Lanka has today the highest borrowing cost in decades and if not addressed soon, it will put pressure on pension funds, banks and other big holders of debt

Four in 10 households in Sri Lanka are going hungry, warns the World Food Program. What is happening to a country that was once called the Pearl of the Indian Ocean? It all started with the pandemic. 

The ex-President and his economic team Dr. P.B. Jayasundera and S.R. Attygalle did not listen to advice. They cut taxes to the bone at the behest of a few businesses and accountants. Then they kept the rupee at Rs. 203 to $ 1 and depleted $ 4 billion of reserves without strictly enforcing import controls on luxury items and non-essentials knowing very well tourism income had dropped from $ 5 billion to $ 100 million due to the pandemic.

To make it worse, Jayasundera said no to the IMF. Hell broke loose when the rupee was finally floated. A new Governor then was appointed with the resignation of Nivard Cabraal. First thing the new Governor did was defaulting on a payment of $ 70 million whilst the country was negotiating a Repo facility with the Chinese Government. The Chinese Government is still livid with this action. 

Some analysts say this is the reason our biggest bilateral creditor is refusing to come to the table. Some analysts say the so-called soft default was done at the behest of a Western country which openly supported Aragalaya. 

The next steps of the new Governor were to double interest rates to control inflation. Three months have gone and inflation has doubled and put hundreds out of business. Few more months of this policy will result in a default in local debt before the actual debt restructuring. People are now expecting there will be a local debt default.

Central Bank

There is also fear that given that the Government can’t print money due to IMF conditions, public servants will not get paid if this is true. That means anarchy which many have been warning of.

Analysts now expect there will be a short-term deferment of coupons on local debt immediately to use that money to pay off salaries. A massive tax hike including another one-off surcharge tax on the cards. 

The CBSL cannot be compared to the Bank of England. The CBSL is largely responsible for the debt build up and the forex crisis. Now their high interest rates policy is destroying the banks and the informal and the formal private sector. There is no debate in Parliament about this suicidal economic program. CBSL is unnecessarily defending the rupee to keep it at Rs. 365 to the dollar. 

It is best to allow it to slide and bring interest rates to manageable levels to prevent the economy contracting further. People are fully aware of the perks and benefits of CBSL staff. Austerity must start with them. 

CBSL and the political leadership is responsible for the plight of the people. The public is bursting at the seams. The economy certainly needs to become a lot more productive. But first it has to get through the crisis.

President

The big problem is the spiralling cost of living. It could get worse. The President therefore must not lose control of monetary policy. This continued volatility will pose a material risk to our financial stability. 

Sri Lanka has today the highest borrowing cost in decades and if not addressed soon, it will put pressure on pension funds, banks and other big holders of debt. This can lead to a systemic collapse. The ultimate victims of poor economic management will be the public, whilst politicians and certain Government officials will carry on with their lifestyles at the mercy of the taxpayers.