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Sri Lanka has approached many for help including IMF to overcome crisis created largely by bad governance.
The unprecedented economic and political crisis in the face of rising public debt that has escalated to unsustainable levels coupled with low foreign currency reserves, insufficient to pay for immediate essentials, including medicines, food, fuel and cooking gas. The crisis triggered countrywide protests demanding the ouster of President Gotabaya Rajapaksa, his brother Prime Minister Mahinda Rajapaksa and the government, for mishandling the country’s economy.
The primary cause for the current economic crisis has been attributed to President Gotabaya Rajapaksa’s shortsighted promise to introduce deep tax cuts during his 2019 Presidential election campaign, months before the COVID-19 pandemic that wiped out vital parts of Sri Lanka’s economy.
Former Deputy Governor of the Central Bank of Sri Lanka (CBSL), W A Wijewardena says, “Sri Lanka’s tax system was corrupted by the Gotabaya administration in December 2019, by committing a serious economic folly in offering unsolicited highly attractive tax concession to both income tax and VAT payers”.
These tax cuts affected government revenue and fiscal policies, causing budget deficits to soar. Tax cuts included increased tax-free thresholds resulting in a 33.5% decline in registered taxpayers, reducing VAT to 8%, reducing corporate tax from 28% to 24%, abolishing the Pay-As-You Earn (PAYE) tax and the 2% Nation-Building tax which financed infrastructure development. The massive loss of tax revenue resulted in rating agencies downgrading Sri Lanka’s sovereign credit rating, making it harder for the country to borrow.
Former Deputy Governor of the Central Bank of Sri Lanka (CBSL), W A Wijewardena says, “Sri Lanka’s tax system was corrupted by the Gotabaya administration in December 2019, by committing a serious economic folly in offering unsolicited highly attractive tax concession to both income tax and VAT payers”.
To cover government spending, the Central Bank began printing money in record amounts, despite the International Monetary Fund (IMF) advising against it. Instead of printing more money, the IMF advised the government to increase interest rates, raise taxes and cut down on public spending. The IMF warned that continued money printing would lead to an economic implosion. And as predicted, it did!
This, coupled with yet another drastic decision by President Rajapaksa to ban all chemical fertilisers in 2021 – recently reversed but too late – also severely hit the country’s agriculture sector, and triggered a drastic drop in the critical rice and tea crops. The drop in tea production resulted in economic losses of approximately $ 425 million and created a 20% drop in rice production, within the first six months alone, reversing previously achieved self-sufficiency in rice production. Thereafter the government was forced to import rice at a cost of $ 450 million. The situation faced by the tea industry became critical, with farming under the organic programme becoming tenfold more expensive and production yielding fifty percent less.
The ban on chemical fertilisers was a bid to make the country’s agriculture industry fully organic, despite warnings from the scientific and farming communities of the possible collapse of the agriculture sector. Thus, the banning of chemical fertilisers and pesticides contributed significantly to the current economic crisis.
Economists have also attributed the economic collapse, to white-elephant projects built with mainly Chinese loans – by former President Mahinda Rajapaksa – that have failed to produce any revenue to date.
The pandemic also sapped up revenue from Sri Lanka’s lucrative tourism industry and an inflexible exchange rate drastically reduced expatriate workers’ remittance.
Despite a rapidly deteriorating economic environment, the Rajapaksa government stubbornly refused to seek help from the IMF ignoring opposition leaders and senior economists’ call, urging the government to seek an IMF bailout package.
Despite growing inflationary pressure, former Governor of the Central Bank of Sri Lanka (CBSL) Nivard Cabraal – a politician and an accountant by profession – stated in January 2022, that Sri Lanka does not need IMF relief, as he was optimistic that Sri Lanka can settle its mandatory outstanding debt, including its international sovereign debts. As of February 2022, the foreign reserves of Sri Lanka dropped to a paltry $2.36 billion.
In March 2022, President Rajapaksa declared that his government was ready to work with the IMF, though too late in the day. On 4 April 2022, Nivard Cabraal and Finance Minister Basil Rajapaksa – widely blamed for the current economic crisis – resigned, much to the relief of many, who regarded Cabraal as a Rajapaksa henchman.
On 7 April, President Rajapaksa appointed an expert Presidential advisory group comprising eminent economists to assist with proceedings with the IMF. The group included former Governor of the Central Bank of Sri Lanka, Indrajit Coomaraswamy, Shanta Devarajan, Senior Director for Development Economics and a former Acting Chief Economist of the World Bank, and Sharmini Cooray, former Director of the Institute for Capacity Development (ICD) of the IMF.
With Finance Minister Basil Rajapaksa resigning, Justice Minister Ali Sabry was appointed as the new Finance Minister.
Sabry is a Sri Lankan lawyer – with no prior political experience – appointed as a Member of Parliament by Gotabaya Rajapaksa through the National List (a nominated member of parliament appointed by a political party or an independent group to the Parliament of Sri Lanka) and thus made the Minister of Justice and now the Finance Minister as well.
Ali Sabry served as Gotabaya Rajapaksa’s Defense Counsel when he was accused of corruption during his tenure as Defense Secretary under Mahinda Rajapaksa’s Presidency. Subsequently he supported Gotabaya Rajapaksa when the latter was faced with issues regarding his American citizenship pre-2019 Presidential election, and thereafter campaigned for his election as well.
Dr. Nandalal Weerasinghe – the incumbent Governor of the Central Bank of Sri Lanka – an Economist and a Career Officer at the Central Bank of Sri Lanka, who served as its Chief Economist and Senior Deputy Governor, was appointed as the new Governor of the Central Bank of Sri Lanka, replacing politician and accountant, NivardCabraal.
As the economic crisis and widespread protests against the President and the government grew, a Sri Lankan delegation comprising Finance Minister Ali Sabry, Governor of the Central Bank Nandalal Weerasinghe and Finance Ministry Secretary Mahinda Siriwardena left for Washington on April 17 for initial discussions with the IMF and the World Bank, seeking a possible bailout.
China’s envoy to Sri Lanka, Qi Zhenhong stated, “Sri Lanka going to IMF with short notice has unavoidably impacted the discussion on the $1.5 billion credit line, and debt restructuring definitely will have an impact on future bilateral loans.”
The World Bank has agreed to provide Sri Lanka with $ 600m in financial assistance to help meet payment requirements for essential imports such as fuel, medicines, cooking gas and food. According to a statement issued by the Sri Lanka President’s media division, the World Bank will release $ 400 million “shortly”.
Before the IMF finalises a programme for Sri Lanka, the country needs at least $ 4 bn in bridge financing to help meet its essential expenses. Hence the government has also appealed to multiple countries and multilateral organisations for assistance until the IMF comes up with its bailout package.
Sri Lanka’s immediate neighbour India has helped out with $1.9bn, and Colombo is in talks with New Delhi for an extra $1.5bn to fund urgently needed imports. Sri Lanka is also negotiating with China for up to $1bn syndicated loan.
Former Central Bank Deputy Governor, W A Wijewardena says that many seem to believe, if Sri Lanka gets a bailout from IMF now, all its economic woes will be settled. “That is not the case because IMF will help Sri Lanka to resolve its financial sector issues and that resolution is necessary, but not sufficient for the country to get back to a high growth path”, he adds. Wijewardena goes on to say that for Sri Lanka to get back on to a high growth path, conditions conducive to growth must be established and a proper real sector plan, introduced. “It is the responsibility of the Government and not of the Central Bank or IMF to establish these conditions and introduce such a plan”, he adds.
Meanwhile, Sri Lanka’s meeting with the IMF for a bailout appears to have irked Beijing. Commenting on Sri Lanka’s ongoing talks with Beijing, China’s envoy to Sri Lanka, Qi Zhenhong stated, “Sri Lanka going to IMF with short notice has unavoidably impacted the discussion on the $1.5 billion credit line, and debt restructuring definitely will have an impact on future bilateral loans.” Qi Zhenhong added that China is closely monitoring talks between Sri Lanka and the multilateral lender, IMF.
When asked to elaborate on what “impact on the discussions” he foresees, the envoy said China is awaiting more information on the IMF discussions and the debt restructuring.
Sri Lanka’s total debt due this year is as high as $7 billion.
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