President delivers sovereign default

This week embattled president Gotabaya Rajapaksa made a rare public appearance to mark the 13th anniversary of the war victory. As the country marked this milestone it was faced with a far more inglorious moment in history. For the first time in its history as an independent nation Sri Lanka this week defaulted on its debt. 

This was not an unexpected situation after the Central Bank announced in April that it would suspend all debt repayment until a negotiated restructuring with its creditors. After a 30-day grace period to pay $ 78 million expired this week with the Government unable to repay its lenders the country is now officially in default, literally bankrupt in the eyes of the world. Sri Lanka is set to default on $ 12.6 billion of overseas bonds as the economy faces its worst crisis fuelled by a lack of foreign currency and surging inflation.

Sovereign default is the failure by a government to repay its national debts. Countries are typically hesitant to default on their national debt since doing so will make borrowing funds in the future more difficult and more expensive. The responsibility for this pathetic moment in history should squarely fall at the feet of President Gotabaya Rajapaksa for the colossal mismanagement of the economy.

The ill-advised tax cuts to the rich implemented by President Rajapaksa as soon as he assumed office in 2019, the mishandling of the COVID-19 pandemic and a series of archaic policies towards import substitution and currency manipulation were the primary factors for the current situation. The appointment of grossly incompetent, unqualified and corrupt individuals to key decision-making positions was also a factor in this tragedy. The power grab orchestrated through the 20th Amendment to the Constitution that concentrated executive power with the presidency while eroding the oversight role of the Parliament into the State’s finances and the erosion of the independent public service and the judiciary have contributed in no small measure to the current predicament.

Prime Minister Ranil Wickremesinghe and the Governor of the Central Bank are finally telling the truth about the state of the economy to the people of the country, creditors, international partners and potential investors. This is the bare minimum that can be expected but considering the abysmal lies that were spread for the last two years it is indeed a welcome development. However bad the situation may be, the acceptance and honest sharing of the true state of the economy will help all concerned to brace for the coming shocks and take necessary corrective measures.

Yet, those responsible for this economic calamity should not be allowed to escape responsibility. At a bare minimum they should be held accountable for the criminal negligence of duty. Dr. P.B. Jayasundera who made economic policies in the first two years of the administration, going beyond his mandate as the Secretary to the President, those he appointed to positions of Governor of the Central Bank and the Secretary to the Ministry of Finance have a particular responsibility in setting the stage for this economic disaster. The former Finance Minister Basil Rajapaksa and former Governor of the Central Bank Ajith Cabraal should be held accountable for not taking the necessary corrective measures in the face of the pending disaster. 

The irrational decision to peg the currency to an artificial exchange rate that burnt out much of the foreign reserves while at the same time resulting in the plummeting of remittances by Sri Lankans living and working abroad is one of the main reasons for this sovereign default. Both these individuals have been marred in allegations of corruption for years and their actions while holding recent office should be investigated since some of the decisions they made including a repayment of a $ 500 million bond in January this year raises serious concerns of vested interests and corruption as the country was at the brink of a sovereign default.

As President Rajapaksa celebrates the 13th anniversary of the ending of the war, even without the Army commander who was mostly responsible for that victory, he must not be allowed to forget that he is the leader who delivered the most inglorious defeat to the Sri Lankan economy in its post-independence history.