A defining week

Monday, 27 April 2020 00:25 - - {{hitsCtrl.values.hits}}

In the midst of the COVID-19 pandemic Sri Lanka is moving towards a potential constitutional crisis this week as the Vote on Account (VoA) lapses on 30 April, which could also have significant impact on the economy.

Already there have been grave concerns raised by different parties given that Parliamentary Elections will not be held before the constitutionally mandated 2 June deadline. However, with President Gotabaya Rajapaksa steadfastly insisted he will not reconvene Parliament and also dismissed the Election Commission appeal to seek clarification from the Supreme Court.

Even though the public may be largely dismissive of the constitutional requirements, it places additional strain on the country’s economy. Fitch Ratings last week downgraded Sri Lanka’s sovereign rating, citing, among other reasons, the debt sustainability of Sri Lanka.

The international rating agency pointed out that with postponed elections and no policy clarity available due to the non-existence of a Budget for 2020, it would be harder for the Government to negotiate assistance from multilateral organisations including the International Monetary Fund (IMF) or indeed even to conclude the existing $1.5 billion Extended Fund Facility (EFF) that was extended by one year following the constitutional crisis in 2018 that also led to a sovereign ratings downgrade.

With the Vote on Account (VoA) lapsing the Government may lose the legal right to raise debt on behalf of the State. From May to December Sri Lanka has to repay $3.2 billion with about $7.2 billion in reserves, which will almost certainly precipitate a balance of payments crisis. With public revenue worsened by ill-timed tax cuts announced last December, and subsequently exacerbated by COVID-19, Sri Lanka’s Budget deficit is estimated to be above 9% for this year and its debt to GDP ratio to rise substantially to 94% of GDP and 96% of GDP in 2021.

Once the VoA lapses the legal authority of the Government to raise funds will be under question. In such an instance the Finance Ministry ordering the Central Bank to raise funds could raise alarms in international markets. This pushes the country into a high level of uncertainty it can ill afford at this point.

In addition there are almost daily calls from different sectors for Government support but other than putting a Task Force for Economic Revival in place there has been no announcement of a cohesive policy framework and strategy to get the economy out of the doldrums. The banking industry has already called for the Government to widen its COVID-19 economic response and cautioned against placing too much responsibility on banks and finance companies. But the Government’s options are few.

Much damage was done to Sri Lanka’s reputation and credibility during the last Constitutional crisis in 2018. The same should not be allowed to happen again, with or without COVID-19, especially when there are alternatives within the Constitution to address the situation.

So far the Government appears to be attempting to muddy the waters by trotting out dangerous legal precedents and sending out press statements that their actions have the approval of Buddhist religious leaders but this will not mitigate the dangers the country is facing. The steps taken by the Government in the coming days will be defining ones.