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A country’s sovereignty is as strong as its currency. The stronger the currency, the more influential that country would be internationally and secure domestically. Unfortunately, we are experiencing what it is like to be when the currency is a weakling.
Presently, the developing economic crisis in our country is putting immense pressure on the Sri Lankan Rupee (LKR). The Central Bank is intervening currently and keeping the LKR at a ‘crawling peg’. However, this is amidst advice from international experts to let the LKR float freely and allow market forces to determine its true worth.
This would however only result in the further weakening our currency for two main reasons. The first, is the fact that our avenues to earn forex is still shaky and yet to return to the pre-pandemic state. For instance, while December 2022 showed a sudden growth spurt in the tourism industry, it is still less than one fourth of the income earned in 2018. Secondly, our economy is contracting.
This crisis, stemming from lack of forex, is forcing us to confront our extremely vulnerable position of our economy and sovereignty. Yet, recovery seems illusive at this juncture as we find that our forex crisis is putting us in a classic catch-22 situation.
To preserve the dwindling reserves for essentials as petroleum products, food and medicines, business activities are forcefully clamped by increasing interest rates. Businesses are thus unable to import raw materials and other investment tools as machinery. However, the economic contraction is pushing us further into a downward spiral, and endangering especially the Small and Medium Enterprises (SME), which is the backbone of our economy. This is making it harder to bolster our forex reserves.
Consequently, we would continue to need international support in the form of currency SWAP and other credit facilities to meet our recurring expenditure. How this would translate with the debt moratorium under discussions with our two key bilateral creditors remains to be seen. Instead of the “haircut” we requested, China is proposing a “grace period” of two years.
This is not unreasonable. Both India and China rose from the ashes from one of the most challenging periods of their long history. These two countries spent the entire last century rebuilding their country from the destruction they suffered during the sunset of the last millennium. Today, these countries are well on their path to regaining their rightful place in the world. It is from this toil of sweat and sacrifice, we have obtained loans - most at concessionary rates.
Therefore, we have a moral obligation to pay these countries in full. We cannot leave our friends with a hole in their pockets because we mismanaged our own affairs. It is time we wear big-boy pants and take responsibility for our own economy.
This means, as indicated by our bilateral creditors, after the grace period, we will have to recommence fulfilling our financial commitments as originally agreed at the point of taking the facility. We need to also stop making decisions in the heat of the moment. We have a bad habit of implementing policies to address the immediate concern without taking into consideration the opportunity costs.
Fulfilling our financial commitments after the grace period would not be an easy task. The very reason we are pursuing IMF’s Extended Fund Facility (EFF) is to gain our creditors’ confidence, so they may continue to lend. Given that our economy is contracting, we would continue to take more loans.
Curtailing expenditure might be suicidal for the sitting Government. It might precipitate another wave of anti-Government protests as was seen in the first half of 2022. The then President Gotabaya Rajapaksa’s unceremonious departure has left fertile grounds to throw out future democratically elected Governments in similar mob style fashion.
In the end, this means that our bulging debt burden will continue to burgeon. Looking at the situation as it is, at this point, the vicious cycle we are trapped in is undeniable. Therefore, we must look at this problem afresh with the determination to resolve it once and for all.
The current catch-22 situation we find ourselves presently is similar to the economic catastrophe of 1970-77. The long queues due to shortages of essentials and imports of 2022, reminiscent to the days of the Sirima Bandaranaike’s 1970s Government, indicates that we are repeating history.
First and foremost, we need to put to rest the blame game that has been the hallmark of our politics. While the present day woes did not manifest after 1948, since then we are guilty of running between extreme ends of policies and changing Governments as one would change out of his shirt at the first hint of a sweat stain. If all one does is change his shirt without first taking a body wash, then he would be condemned to keep on changing his shirt in rapid succession.
Likewise, if we are to arrest this developing crisis from exploding into a full-blown catastrophe, we need to understand the root causes and the points where ‘osteoporosis’ set in, weakening our economy. This understanding will give us the much needed clarity to map our way forward.
While the causes of the crisis then in 1977 and now in 2022-23 are very different, it was the same trajectory that hurled us towards the precipice. However, just as the origin of the present economic crisis was not the making of the Gotabaya Rajapaksa Administration, the Sirima Bandaranaike’s closed economy was not the root of the severe economic contraction during her day. At the same time though, both Governments exacerbated the deteriorating situation into a crisis through their own actions.
Sirima Bandaranaike was guilty of enacting myopic policies, fueled with raging emotions than rationality. Gotabaya Rajapaksa failed because he did not “read the room” and tried to be more “westernized” than the west to prove himself as an advocate of democracy.
The Sirima Bandaranaike Government was always heavily influenced with socialist principles and anti-West sentiments. The scars of the historic wrongs committed against the people of the land by the European forced occupiers were still fresh and raw in the 1960-70s.
Today, we blame all Governments and especially the two main political parties, the UNP and the SLFP, as the culprits for the current political, social and economic maladies. During Sirima’s day, the blame was squarely laid at the feet of the capitalists and the West. Ironically, most of those who denounced capitalism and promoted socialism, were also capitalists, enjoying the fruits of capitalism.
Sirima Bandaranaike is hailed to date as Sri Lanka’s most nationalist leader, even though her governance was disastrous. Even J. R. Jayewardene’s Government, that accelerated the 30-year Mahaweli Project to complete it within six years or the Mahinda Rajapaksa Administration that eradicated terrorism and added strategic assets to the country’s wealth cannot compete with Sirima Bandaranaike’s legacy.
After her Government was formed in 1960, oil companies were nationalized. This naturally strained relations with the West. The thinking was to save forex by importing crude from sources such as Russia and refining it in Sri Lanka.
However, according to eminent Chartered Accountant, Deshamanya Charitha Prasanna de Silva, the Sirima Government by “trying to save about Rs. 14 million per annum by expropriating Oil Company assets and nationalizing the Oil Industry the Government was running the risk of enraging America thereby jeopardizing a Rs.140 million tea market to the US”.
Simultaneously, the then Government also adapted a restrictive trade policy, subjecting all imports to licenses except the essentials as food, petroleum products, medicine and fertilizer. Tariffs ranged from 10 to 500 percent. This was as a response to the difficulties in balance of payment, which was exacerbated by the commitments made towards consumer welfare.
Whether restricting trade, especially snubbing the West and thereby losing established markets at this juncture was the best decision is questionable. Concurrently, the East with notably Hong Kong, Singapore, Taiwan and South Korea followed a liberal trade regime in pursuit of their economic goals. Naturally, the West with its established larger markets turned Eastward and as one would say, the rest is history.
The cost of alienating the West can be calculated with the gains the succeeding Dudley Senanayaka Government of 1965-70 was able to recover by reestablishing ties with the West. The UK and US re-emerged as major trading partners and accounted for over 45 percent of the exports and over 40 percent of imports.
Furthermore, trade was liberalized. Central Bank paper on Sri Lanka’s External Trade Relations by Mrs MK Jayawardena notes that the Dudley Senanayaka’s trade liberalization policies too did not work. Following UK and India, Sri Lanka too devalued the currency by 20 percent and adapted a dual exchange rate system to discourage ‘non-essentials’ imports.
Initially, under an Open General License system, a Rs.44 per Rs 100 premium was charged for non-essentials. Later this was increased to Rs.55 per Rs.100. While ‘essentials’ were tax free, commodities deemed ‘luxuries’ had a 300 percent tax. This two-tire exchange rate system, observes Jayawardena, distorted prices of a ‘larger proportion of exports’.
Failure to improve balance of payments negatively affected the trade liberalization programme. The country was thus unable to accrue the benefits hoped from trade liberalization.
This paved the way for Sirima Bandaranaike and her trade restrictions to make a comeback in 1960. Jayewardena recounts the 1973 ‘oil price shock’ increased petroleum products and fertilizer prices. Earnings from the agricultural exports were insufficient to offset the increased costs of rice, wheat and sugar imports.
West was yet again snubbed as plantation companies were also nationalized as the oil companies and trading and agency houses were taken over by the Government. Instead, firmer relations were established with China, Pakistan, Middle East, Japan, Australia, France.
The Sirima Bandaranaike Government seems to have realized that the crux of Sri Lanka’s problem is the country’s lethargy in the manufacturing sector. When we regained our independence in 1948, our trade account carried a surplus. The agricultural exports as created by the European forced occupiers as tea, rubber and coconut fetched a handsome income. With the Korean War, the demand for rubber surged. However, when it ended, so did the rubber prices and demand. Imports as rice became costlier. The famous Rice-Rubber Pact with China was a direct result of this crisis.
However, discouraged by our small domestic markets and fierce competition from established manufacturing countries, we hesitated entering the manufacturing sector. Instead, we opted to exchange tea for industrial products. However, these countries resold the world renowned Ceylon brand tea to other markets and them to other buyers.
We not only lost these markets and its revenue. Those who sold our teas often did not sell it in its purest form. Instead, cheaper quality tea leaves were mixed. This brought down the brand value of Ceylon Tea.
Therefore, the Sirima Government entering the manufacturing sector was long overdue. That Government’s cardinal error was its attempt to and own and manage these enterprises.
To allow private enterprises was frowned upon by socialists. In fact, that Government through its failure to prevent the 1971 JVP insurrection and by adapting utterly callous policies as a ceiling of only 50 acres for private ownership, killed the private sector spirit. This was the real reason for the downfall of that Government.
By the time the Gotabaya Administration came to power, people were used to living in an economy with a liberalized trade. Furthermore, none of the Governments wished to repeat Sirima Bandaranaike’s mistakes. J.R. Jayewardene Government’s open economy is subject to much criticism and blamed for our over consumption and lack of productivity. Yet, not a single Government had dared meddle with the open economy.
Consequently, the policies of the two major parties are no longer stark. In fact, it is difficult to the policies apart. This lack of vision has resulted in a very weak balance sheet. Each succeeding Government is left to should the debts of its predecessor.
The reason the Gotabaya Administration could not absolve the sins of the past Governments was due to two reasons. The first was because of the global COVID-19 pandemic that forced the entire world’s economy into a recession. These factors were largely beyond the control of the Gotabaya Administration.
The second factor was President Gotabaya’s failing to counter and control the subversive elements that were circling him like vulture from the day he assumed Office. The drama surrounding the Swiss Embassy - from the decamping of CID Inspector Nishantha Silva into Switzerland and the fabricated abduction of embassy employee - within days he was elected as Sri Lanka’s Executive President was an important clue of the determination of the anti-national forces.
Despite coming on the pledge to strengthen national security, his administration could not identify a pattern in the protests that spewed forth in various disguises-again from the onset of his tenure. Instead of understanding the motive, President Gotabaya was advised by his new circle of advisers to treat these protestors as a ‘strong arm’ of democracy.
Hence, the protesters were treated with tea and biscuits instead of batons, tear gas canisters and water cannons from the anti-riot police as done by previous Governments. A protest ground of their own was established just outside the President’s Office and contentiously in front of the Colombo Port City-Sri Lanka’s biggest investment project. The police was in effect ‘confined to barracks’ as it were and prevented from taking action to bring order.
These protests were the main reason for the third lockdown to drag on, delaying the country from returning to work. The pandemic and the protests had a debilitating effect on the economy. Thus the Gotabaya Administration was unable to reap the benefits from the generous tax breaks introduced during the onset of his tenure.
The intention then was to reignite the economy. The tax breaks and the debt moratorium were to allow entrepreneurs to invest aggressively in their businesses and thereby push for economic growth.
The International Sovereign Bonds issued during the Mahinda Rajapaksa Administration and the Yahapalana Government were also maturing in quick succession. This was a double whammy for the Gotabaya Administration.
As the economy continued to weaken, the Central Bank was forced to ‘peg’ the LKR at Rs.200 per USD. This has been severely criticized by numerous financial experts. However, if the LKR was allowed to depreciate, then the debt burden will also increase.
‘Fixing’ the LKR was not the problem actually. It was Central Bank’s failure to arrest parallel but unofficial exchange rate systems as Undial and Hawala from establishing in the country. Those depending on foreign remittances favoured these systems as it fetched more LKR per USD than from banks.
Soon the banks began to run out of forex. Consequently, essentials could not be brought into the country.
Under the Ranil Wickremesinghe Government, the LKR is pegged at a higher rate. That however has not stopped the parallel exchange rates, but not to the degree that the manufactures are held hostage by these systems.
The main reason that has enabled the country to return to a sense of normalcy is President Wickremesinghe’s stance on protests. This leaves the Wickremesinghe Government with the next crucial step, which is to strengthen the Sri Lanka currency.
Source: https://www.dailynews.lk/2023/01/31/features/296306/determining-true-worth-sri-lankan-rupee
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