Not to the UN or Bologna, the Govt should go to IMF to avoid a full-blown economic collapse

29 September 2021

President Gotabaya Rajapaksa enplaned to New York to address the UN General Assembly. His brother, Prime Minister Mahinda with a 17 member delegation travelled to Italy to speak at an interfaith dialogue of G20 nations held in Bologna. In normal times, those visits would have been customary and, also, tolerable to the local taxpayers. If visits were eventful, it would have been a consolation. However, they weren’t: the host, Italian Prime Minister Mario Draghi did not even afford a meeting with his visiting Sri Lankan counterpart. Equally uneventful was President’s UN visit. Other than a customary brief meeting with the UN Secretary-General, his only significant engagement was with the Prime Minister of Kuwait, Sheikh Sabah Al-Hamad Al-Sabah. The lack of engagement may not have a direct correlation with the country’s foreign profile.  Earlier, the United States urged the member states not to send their leaders and instead give a video address, to prevent the annual high-level week from becoming “a super-spreader event”. But they came in droves and Mr Rajapaksa cannot be blamed for  following suit.

Instead of these wasteful foreign junkets for sake of ego boost, the government should swallow up false pride and go for an IMF programme.  As the two leaders were in their foreign sojourn, the public back home were facing an unprecedented food crisis, a throwback to another period of megalomaniac economic policies in 1970-77. 
The government’s spin doctors may deny the existence of such. But milk powder is now rarer and rare earths. Buying a gas canister is an uphill battle. A shortage of rice is worsening as the producers are complaining of an economically unviable control price. To further complicate matters, the shortage could spread to medical supplies at some point. A fuel shortage is a looming possibility, though the lockdown might have spared the country from a full-blown fuel crisis for the time being. Lebanon, another country that is faced with an identical economic crisis earlier limited schools to be opened for only three days to save fuel, and Hizbullah, an Iranian backed militant group that has a stake in the government imported  Iranian fuel in breach of the US economic sanctions against Iran. 

In Lebanon, political instability and the absence of a functioning government, until the formation of a new one early this month, had exacerbated the economic crisis, fixing which needs deep structural reforms. The political context in Sri Lanka is worlds apart from Lebanon. 

Here, an all-powerful president, who had indulged in a wholesale concentration of state power at the expense of other pillars of the government and a ruling party headed by his elder brother who commands a two-third majority in Parliament are scheming to postpone a full-blown crisis through piecemeal politically convenient solutions. That is a crime. Because , they know all too well, these solutions are not solutions at all. They indeed are worsening Sri Lanka’s economic standing in the long term. Without the right economic intervention and painful and politically unpalatable structural reforms and debt restructuring,  the crisis-hit economy would explode at some point, leaving 21 million people hapless and their savings worthless. 

"If Covid is brought under control and tourist numbers pick up to pre-covid levels, the country might manage to avoid the worst of the economic complications."

Sri Lanka’s foreign reserves have fallen to an estimated US $ 2.30 billion at present from  US$ 4.8  billion at the beginning of the year. This is the lowest ebb of the country’s foreign reserves since July 2009. Reserves are depleting rapidly as the cash strapped government is using them to repay foreign loans, including a US$ 1 billion bond repayment in August. Meanwhile, the trade deficit for the first seven months of 2021 has widened to US$ 4.7 billion. The government has already restricted much of what it termed as non essential items, the lion share of the trade deficit is due to the import of intermediate goods for value addition and capital goods.  
Tourism revenue had dried up and remittance from migrant labour is taking a hit from the Covid-19 pandemic, both due to factors beyond the control of the government. However, they would further complicate the bridging of the trade deficit.

To make matters worse, a dimwitted ban on chemical fertilizer is expected to result in a substantial loss in the yield of the cash crop. The tea industry is bracing for the eventuality. Other cash crops are similarly affected. The vegetable and rice harvest suffers from the same fate. The fertilizer/pesticide ban would likely result in a 20 per cent drop in production under the most conservative estimates.

In the meanwhile, Sri Lanka has to repay US$ 3.6 billion in foreign loans and interest in 2022. That is more than the country’s foreign reserves at present.  The oil import bill is also soaring again. Oil alone accounted for 20 per cent of the import bill, or US$ 3.9 billion in 2019. The decline in the oil prices last year helped the country save an estimated US $  1.3 billion. However, with the oil price increase in the global market,  Sri Lanka’s oil imports increased by 43.7 per cent year on year to US$ 1,.78 billion in the first half of this year, according to Central Bank of Sri Lanka data. The government is reportedly lobbying to buy oil on a credit line from the UAE. 

There is no quick fixes, nor piecemeal solutions to the country’s economic crisis. If Covid is brought under control and tourists numbers pick up to pre-Covid levels, the country might manage to avoid the worst of the economic complications. However, the underline rot will remain unattended.
The worst-case scenario is still a possibility. If the economy and the country is crippled by long Covid, or tourists do not come in expected numbers and migrant remittances remains lower than expected, Sri Lanka might head for a disorderly default of its foreign loans. 

"The painful but essential path for the long term recovery for Sri Lanka is to opt for an IMF programme, which of course would come with strings, but also expedite the country’s much needed structural reforms on a priority and mandatory basis."

Foreign exchange control of the government has already created a parallel underground market for the dollar, a fate reminiscent of Venezuela or Mugabe’s Zimbabwe. It is the egoistic and self-destructive policies of their leaders that resulted in the collapse of those countries.  As for Sri Lanka, the artificial rupee peg can not be sustained without causing a major shortage of imported essential supplies, medicine, electronics and fuel.
The government’s piecemeal economic solutions are intended to save not so much the economy, but the political calculations of the political leadership. It appears as if they are planning to postpone a full-blown economic crisis by 2- 3 years so that it could pass the buck to a future government. 
In the meanwhile, it had tried on short term import restrictions and an unsustainable rupee peg. These policies have done more harm, with no long term gains, to the economy than going to IMF for a debt restricting programme.

 Another modus operandi of the government, seeking bilateral help from China, India, Bangladesh etc, have thrown a lifeline momentarily, but, fundamental economic problems remain unanswered. To be fair by Sri Lanka’s like-minded friends, none of these countries has an appetite and with the exception of China, the wherewithal to salvage Sri Lanka from its current foreign exchange crisis.
The painful but essential path for the long term recovery for Sri Lanka is to opt for an IMF programme, which of course would come with strings, but also expedite the country’s much needed structural reforms on a priority and mandatory basis. 

It is these conditions that this government is loathing. Rajapaksas have dolled out the government jobs and expanded the public sector workforce as if their salaries are paid from an endowment in Medamulana. Gotabaya Rajapaksa kicked off in his new office by recruiting another 100,000 to the lower rungs of the government sector. Such largess at the expense of public tax money is the bane of the country’s economy. Cronyism and backdoor tenders and contracts might also have to be eschewed under the oversight of an IMF led debt restructuring. Ajit Nivard Cabraal, the new Central Bank governor asks what the government would tell the country’s youth if it enters into an IMF programme. He was referring to the fact that the government would not be able to doll out public sector jobs.
A vicious cycle of political calculations that created a culture of dependency, low attainment and low output keeps going on. 

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