A time to put off times of trouble

As economy watchers warned only recently, Sri Lanka by dint of its Central Bank’s defence of the latest rate cut is skating on thin ice vis-à-vis a second default

Time is a funny thing that way. To a sad and lonely old man, sitting on a park bench next to a pretty energetic girl is but a few achingly fleeting moments. But to the lass it may seem like an unbearable lifetime. No less a savant than lateral thinker and theoretical physicist Albert Einstein discovered the truth about this for himself.

One doesn’t have to be a genius such as the genial giant of quantum physics to figure out the chemistry of such attraction and attrition. But the object lesson here is more about the flexibility of time as it seems to pass that is the point. 

For Sri Lanka, that time between now and the end of 2028 will pass more swiftly than it takes to say ‘Ach, is ein seat occupied von anyone else, Fräulein?’ But the beginning of the time of reckoning – re-starting repayment of sovereign debt – may well convince the pretty lass that she could have better invested her time and energy in the interim than summertime flirtations.

That the Govt. – newbie at governance, tyro at fiscal management, untried and untested in many an arena, fresh to and on the ropes of finance-driven internationalism – has a plan we’ve all taken on faith and taken for granted.

But does the action run to racking up exports-funded forex reserves sufficient to start honouring our borrowings in international capital markets owed back and servicing the interest components thereof?

And how does all this square with the government’s announcement this week that letters of credit (LOCs) to the tune of US$ 1.2 billion have been opened with a view to importing vehicles?

Six billion dollar nation

This in a milieu where the only recently beleaguered island nation’s gross official reserves (GOR) – including a swap facility with the People’s Bank of China (PBOC) – fluctuated around the US$ 6 billion mark over the past three to six months.

In fact, GOR dropped by 206 million dollars from US$ 6.286 bn. in May to 6.080 billion dollars in June amid warnings being sounded by concerned economic analysts that the last rate cut was compromising the country’s critical ability to accumulate much-needed foreign exchange reserves and service Sri Lanka’s debt.

And worryingly for elderly gentlemen not sitting pretty in the sun, the fact that our once bankrupted island-nation’s gross official reserves have not grown in any significant way since October 2024 suggests we’re not ideally positioned for a romantic idyll or walk in the park.

If the analysts’ critical commentary is to be taken at face value, concerns are being raised since the last quarter that stagflationary conditions could emerge to overshadow fears of even US debt.

This despite the Central Bank of Sri Lanka demonstrating exceptionally deflationary policy, since September or so of 2022 and now, with technical advice from the IMF, formalising the mid-corridor rate as a single policy rate.

Serial currency crisis

But have we all forgotten – as EconomyNext evidently hasn’t – the times when “Sri Lanka was driven to serial currency crisis purely with aggressive macro-economic policy (rate cuts/sterilized forex sales), a frenzy of foreign borrowings and eventual Latin America style of default by targeting a mid-corridor rate and potential output under flexible or discretionary inflation targeting”?

Also, that under the present dispensation, the Central Bank may end up spending reserves for private imports instead of prudently accumulating the same?

I am no economist, God and Einstein know; but isn’t it elementary, Gnädiges Fräulein, not to throw good money after bad? This seems especially to run counter – like time for the girl and the geek, respectively – to all that good stuff which is being done in the name of economic reform, financial recovery, fiscal stability and prudent management of matters macroeconomic. 

Scuttlebutt vs. Secretariat

So what of those LoCs? The parlour scuttlebutt has it that AKD has to scratch backs that scratched his in the run-up to the presidency. The presidential secretariat has it that since the USD remains stable, that characteristic of the big picture at present should save all our butts.

Seriously, folks: every month Sri Lanka earns between US$ 2.1 and 2.4 billion in exports, service exports, tourism and remittances. These earnings are handy for imports, overseas travel, dividend, interest payments and service imports. 

However trifling this may seem in any given time – for instance, in May 2025 the net outflow of the primary investment account (mostly on dividends and interest) was US$ 146 million and on personal vehicles only US$ 126 million – the times when even such minutiae may seem excessive is not too many years away if Sri Lanka abandons its fiscal prudence and turns profligate again.

As economy watchers warned only recently, Sri Lanka by dint of its Central Bank’s defence of the latest rate cut is skating on thin ice vis-à-vis a second default.

A few non-Einsteinian theoreticians have even proposed that the Treasury of Sri Lanka should consider accumulating dollar reserves of its own to pre-empt a potential, putative or perhaps even possibly inevitable second default.

It comes as a warning shot across the bows in a milieu where central banks of once-bankrupted economies cannot be depended on to be bankers to the government, especially if it runs and defends inflationary policy to target a single policy rate.

Cars that crowd out

In the meantime: “Any car loan has to crowd out some other investment credit (and imports) in the absence of printing money through open market operations.” [EconomyNext, 31 Jul 2025]

Since the embargo imposed on vehicle imports was lifted, over US$ 360 mn. has been spent on importing personal vehicles and 144 million dollars on commercial vehicles.

These LoCs could be the beginning of the opening of the floodgates, courtesy political favours being paid back to keep the big boys in biz and the burlier bourgeoisie happy.

On the one hand, Gnädiges Fräulein, the time to do that is now when the day of reckoning seems an eternity away. On the other, as Professor Einstein suspected only too correctly, that time will fly.           

(Editor-at-large of LMD | How time flies)