Headstrong and misguided leadership have brought Sri Lanka to a sorry pass. The Fitch Rating agency has downgraded Sri Lanka to a rank of CC. This reflects its view of an increased probability of a default event in coming months in light of Sri Lanka’s worsening external liquidity position and drop in foreign exchange reserves.
The government has responded by finding fault with the ratings agency for being biased and not looking at the entirety of the country’s financial situation and likely sources of foreign exchange inflows. The governor of the Central Bank had stated that the fast-depleting foreign reserves will receive a boost before the end of the year.
On the other hand, the grim reality is that with every passing month the country’s foreign reserves have been shrinking and positive predictions to the contrary have not materialised. A similar situation obtained for over six months in the case of the ban on chemical fertiliser. The government stubbornly stuck to the position of a total ban on the import of chemical fertiliser for use in agriculture and its replacement by organic fertiliser.
The fact that there is no country in the world that relies solely on organic fertiliser for farming was disregarded. Instead, the government-held to the ideal that organic agriculture was the best practice, from both a health perspective and in terms of protecting the environment. There was no instant solution. In practical terms, this meant a drastic reduction in the country’s agricultural production as hybrid crops that respond best to chemical fertilisers did not receive adequate quantities of nutrients.
A similar phenomenon can be seen in the bid to keep the price of dollars low by artificially restricting demand for them. A basic feature of economic theory is that if the price of a commodity is kept artificially low by means of price control, its supply will shrink.
On the other hand, if the price of a commodity is allowed to rise, based on the demand for it, the supply of that commodity in the market will also increase. This is an economic reality that applies in the case of dollars as much as it will apply in the cases of any other commodity traded in the market. Due to the price control imposed on dollars, there is a shortage of dollars in the market.
We are nearing the parameters of a failed state, when the state is unable to restrain companies from selling gas cylinders that explode, killing and maiming dozens, and ships are berthed in the harbour awaiting payment to be made in dollars for the goods they have transported. Today the prices of fruits, vegetables and grain are at an all-time high due to short supply. Adding to the woes of citizens is the shortage of essential commodities such as milk powder and kerosene oil. There is a need for rational thinking at the present time.
The government demonstrated rational thinking when it ended the ban on chemical fertilisers in the face of farmer protests and expert agricultural advice emanating from Sri Lanka’s academia and practitioners. It reaffirmed that its longer-term policy was one of pursuing organic fertiliser but agreed that the ending of the ban on chemical fertilisers was the rational thing to do in the prevailing circumstances.
In a similar manner, the government needs to deal with the foreign exchange crisis. Instead of denying the fact that a serious problem exists and hoping that hoped for future flows of foreign exchange would ease the situation, the government needs to take concrete steps to rectify the situation immediately. In a rationally argued position paper, the Pathfinder Foundation has recommended that the government goes to the IMF to secure financial
So far, the government has refused to go to the IMF on the grounds that it imposes its own conditions on the loans it grants which are costly to the people of the country. According to this analysis, an IMF programme could include strengthening the government’s revenue base (widening the tax base and improving tax administration); improving the primary balance in the budget (revenue-expenditure-interest payments)); proactive, data-driven and non-interventionist monetary policy and a flexible and realistic exchange rate policy to assist in building up external reserves.
The analysis also makes the point that other countries might be more willing to support Sri Lanka if they were confident that the country would come out of the economic doldrums. It says: “The package of assistance offered by India is an encouraging start and needs to be finalised as soon as possible. It has to be supplemented by financing from other friendly countries, like Japan. There is scope for India and Japan to work together to support Sri Lanka at this critical juncture. Their willingness to step forward is likely to be greater if it is known that Sri Lanka has taken a decision to approach the IMF.
While our development partners will be wary of having to make an open-ended commitment, they are likely to find bridging finance more palatable.” The appointment of Foreign Minister Prof G L Peiris as acting Finance Minister increases the possibility of rationality in the decision-making process. As Foreign Minister, he has been tasked with winning more international support for the government. This would include ensuring that foreign policy and human rights pressures on the government do not lead to an adverse outcome.
The international community, especially Western countries, are looking for signs that the government will pursue some reforms. Among the initiatives that Minister Peiris has been leading is the amendment of the Prevention of Terrorism Act. In recent weeks, as chairman of the ministerial subcommittee on amending the PTA, he has invited both sections of civil society and the Bar Association for discussions where the proposed amendments have been presented and responses to them obtained. Several PTA detainees, whose cases had received international visibility, have been released on bail.
There are other indications of rationality emerging in choices being made in different areas. One would be the reinstatement of Dr Shihabdeen Mohamed Shafi and pay his salary arrears after it was suspended in 2019. The surgeon was falsely accused of sterilising thousands of Sinhalese women without their knowledge in the operating theatre during a time of nationalist frenzy that had been whipped up for political reasons. This is not the time for nationalist politics.
The new appointments made to independent institutions that are expected to play a watchdog role are also likely to send a message that the government is getting serious about charting a new path. If the current changes are shown to be sustainable, the government will be able to generate greater confidence both locally and in the international community which is crucial for economic development.