The economic-political crisis feedback loop

At this week’s parliamentary sessions, after more than 40 Members of Parliament, many cabinet ministers and the Governor of the Sri Lanka Central Bank had stepped down, the blame game continues in full force. With the opposition and chief government whip alike, adamant to discover the reason behind last weekend’s snap regulations and whether it was in fact the actions of a political party or an unnamed group, much was left to the imagination on how the Sri Lankan economy will steer clear the pertinent dollar payments on the horizon.  

While the Indian credit line stands at 270,000 MT of total fuel supplies, and offers some short-term relief to everyday consumers, this temporary plug in its best case buys time and in its worst case, distorts the urgency to act. Fuel supply coming to normal would in fact mean the end to long waiting queues and power cuts. With other lines of credit materialising, more items are to be made available in time for the Sinhalese Tamil Avurudu season. It is therefore speculated to be a ‘ceasefire’ of the protests seen, owing longer time off with two additional public holidays granted. While this plaster to a festering wound is a commendable tactic, the economic woes continue to compound.

The US state department issued a level 3 travel advisory for American citizens, urging them to reconsider traveling to Sri Lanka. Among other things the fuel and medicine shortages were disclosed as reasons for this negative assessment. This only reinforces a negative notion about the Sri Lankan economy and country situation worldwide leading to an inevitable self-fulfilling prophecy. 

Therefore, while the world watches and notes the lack of political guidance and the current leadership’s tactics and stubbornness to address relevant issues, potential foreign currency that can be brought in through tourism and investment channels gets further delayed. This lack of confidence mixed with uncertainty has even caused many local businesses and banks to adopt a “wait-and-see” approach that makes business sense, but is not desirable on a macroeconomic scale in these conditions. 

With the appointment of the new Central Bank Governor, some uncertainty has been alleviated. The anticipated rate hike that was due Tuesday and postponed to 5:30 p.m. today is likely to follow Dr. Nandalal Weerasinghe’s appointment in line with the plan in motion. While economists predict an increase of around 200 bps to 500 bps or 2 to 5%, the greater the hike, the firmer the message on commitment to stability at the expense of monetary growth is. This is likely to be reinforced with disciplined money printing, as the counter move goes against any sound policy rule book. Coupled with news of a Tax Surcharge bill being passed and tax increases to follow, this indicates the required monetary and fiscal tightening in the current climate. 

On Wednesday another select committee was appointed to look into debt restructuring. With ex-CBSL governor Dr. Indrajit Coomaraswamy at its helm, the third economic committee to be formed this month to present solutions for the debt crisis and examine sustainable and inclusive recovery, will hopefully present a case that politicians would at the very least hear out.

Reporters around the world liken the unfolding government situation in Sri Lanka to the 2011 Arab Spring revolutions that saw many political regimes come to a violent end, with its economy following close behind. All stakeholders, regardless of their intentions, would undoubtedly be worse off in the event of defaults, more shortages and possibly the worst economic recession to come. Only time will tell if in this case too, history will repeat itself or merely seem to closely rhyme.