A special discussion was held with Dr. Nandalal Weerasinghe, Governor of the Central Bank of Sri Lanka (CBSL) and Mahinda Siriwardena, Secretary of the Ministry of Finance and Treasury under the theme “2024 the way forward and the country’s economy”. The discussion was moderated by Presidential Media Director General Danushka Ramanayake.
Following are excerpts from the discussion aired on all TV and radio channels:
Q: Has there been any improvement in the economic crisis that initiated in 2022 during the year 2023, and if so, what contributed to this change? Can you share your thoughts for instilling hope and optimism for the year 2024?
Response from the Governor of the Central Bank:
The year 2022 marked a severe economic crisis in our country, witnessing an 8 percent contraction in the economy, a staggering 70 percent inflation rate, and a reserve amount of around 1.9 billion by year-end. Loan payments were suspended, and a substantial foreign exchange crisis loomed.
In 2023, we undertook crucial reforms and policies, implementing painful measures to steer the economy towards recovery. Reflecting on the past, notable achievements have emerged. Particularly from the perspective of the Central Bank, we managed to bring down the inflation rate, which had spiked to 70 percent in September 2022, and stabilised food inflation at 4 percent, with general inflation reduced to 1 percent. The reserves, which stood at 1.9 billion in 2022, have surged to 4.3 billion by the end of 2023.
In 2022, the rupee depreciated by 40 percent, but in 2023, it has transitioned from a 12 percent depreciation to overvaluation. Remarkably, despite these fluctuations, the Central Bank successfully increased reserves, generating US$ 1.9 billion through the market alone by the end of 2022. This, coupled with contributions from institutions like the Asian Development Bank and the World Bank, has boosted the total reserves to US$ 4.3 billion at present.
Simultaneously, the rupee experienced a 12 percent overvaluation, adhering to a fixed exchange rate. This was coupled with a relatively low inflation rate. Notably, economic growth underwent a positive transformation in the third quarter of 2023, marking a shift from six consecutive quarters of negative economic growth since the first quarter of 2022. The data from the third quarter of 2023 unmistakably indicates the commencement of economic recovery in that year, a trend further substantiated by fourth-quarter data.
Despite the challenging and arduous nature of the policies implemented these changes were a result of decisive actions. Anticipating a brighter future, we aspire to achieve a 3 percent economic growth throughout the entirety of 2024. This optimistic outlook is grounded in the potential to enhance people’s quality of life and increase income sources, contributing to a reduction in poverty. Our goal is to maintain inflation at a manageable 5 percent in 2024.
In managing foreign exchange, our strategy involves fixing the market-determined exchange rate at a specified level. Concurrently, we aim to ease existing restrictions, relax import constraints necessary for conducting business within the country, and facilitate activities related to foreign exchange investments. These measures collectively form a comprehensive program designed to create a conducive environment for economic activities in the year 2024.
In 2022, the banking system faced imminent danger due to the rapid devaluation of the foreign exchange rate, necessitating a swift increase in interest rates. This raised concerns of a potential collapse within the banking sector, causing widespread fear among the populace. To alleviate uncertainty, measures were taken to reduce and stabilize the interest rates of the banking system, leading to an increase in bank lending. This upward trend is expected to continue into the following year, fostering a business-friendly environment for the private sector through low-interest loans.
The positive outcomes of these recovery measures are evident, with Sri Lanka standing out as the only country to achieve such progress within a relatively short timeframe when compared to others facing similar situations.
Subsequently, the focus shifted to a debt restructuring program in 2023, where the Ministry of Finance, the Government, and the Central Bank played pivotal roles. Following the implementation of a temporary moratorium on debt in April 2022, the optimisation of domestic debt has now been successfully accomplished. Notably, countries like China, India, Japan, and the Paris Club, which had provided official loans, have agreed to extend existing loans and offer loan concessions for the next 10 years. The swift completion of this process stands as a noteworthy triumph.
Q: What level of performance was achieved during the years 2022-2023?
Response by the Secretary, Ministry of Finance:
The year 2022 presented significant challenges, marked by financial difficulties and a dire situation where salaries couldn’t be paid, and essential goods faced currency shortages. With a government revenue of around 8 percent and state expenditures at 19-20 percent, a substantial budget deficit of 12 percent emerged. The primary concern was increasing revenue, managing expenses, and sustaining a manageable budget deficit. In 2023, we implemented measures, including changes to tax policies and strict expenditure management, aiming to enhance state revenues.
Efforts were made to strengthen tax administration and establish a legal framework for robust public financial management. The unsustainable debt burden prompted debt restructuring and the formation of parliamentary committees for oversight. Despite facing financial difficulties, significant funds were allocated for relief, amounting to about 205 billion rupees. Although the journey from 2022 to 2023 was challenging, continuous implementation of activities throughout 2023 showed gradual improvement in fiscal discipline.
The goal is to increase country income, maintain a sustainable budget deficit, and uphold essential services. Despite the challenge of increased taxes, it is deemed necessary for the recovery. The foundation for this journey was laid in mid-2022, with continuous implementation in 2023. While acknowledging that full recovery has not been achieved, there is notable improvement in the public finance sector. We must take on the collective responsibility to bear some burden to ensure a better future for the country as the foundation has been established for the journey into 2024.
Q: Economic analysts predict debt repayment in 2024, with concerns about the impact on the common people living through non-payment. Will the public become even poorer if they have to repay the loans?
Response by the Governor of the Central Bank:
There’s limited understanding among the common people in this matter. In April 2022, we announced the suspension of the country’s debt payment. Some misunderstood it as a sign of national bankruptcy, which isn’t the case. By suspending and restructuring part of the debt, the country’s ability to pay off the debt in the future is enhanced. Bankrupt countries are exempt from repaying debts, making it challenging to secure loans. In such a scenario, a country relying on an 8% income would need to cut expenses, affecting salaries, health, and education. Fortunately, the country is not in that dire position today.
Q: There has been a recent controversy surrounding tax revisions, with claims that these measures aim to reduce the budget deficit. Society is discussing the potential impact on the people. How do you interpret this?
Response by the Secretary, Ministry of Finance:
The primary objective was to increase state income and stabilise the budget. Presently, 143 items are non-taxable, including vegetables, fruits, education, electricity, and health centres. Despite different interpretations circulating in society, we plan to issue a press release to clarify the new tax system. Informing the public is crucial. The country’s current situation is largely attributed to decreased income, leading to extensive borrowing. We used to borrow around 900 billion rupees for daily expenses, but that has now decreased to 70 billion rupees.
Q: Recent concerns have arisen regarding retirement gratuities, including reports of payments being halted for 18 months. What is the current status?
Response by the Secretary, Ministry of Finance:
Indeed, there were issues in the past, with pensioners’ allowances accumulating. I am pleased to announce that all gratuities have been paid. This achievement reflects the dedication and hard work of the officers involved.
Q: The rise in the VAT tax rate on goods from 15 percent to 18 percent raises the question of whether this adjustment could lead to unjustified profits within the trading community. Are there any regulations in place to address this potential issue?
Response by the Secretary, Ministry of Finance:
I urge the trading community to refrain from exploiting this increment opportunistically. It is essential that they avoid taking improper advantage, particularly considering the challenging circumstances people are facing at this time. I appeal to the trading community not to escalate the prices of goods exempt from taxes, given the current hardships. The Inland Revenue Department and the Ministry of Finance are actively disseminating information to all concerned parties. Additionally, various regulatory bodies within the government are undertaking essential regulatory measures in this matter. Patience during these difficult times can empower our country to prosper in the future.
Q: Historical records indicate instances where individuals have evaded taxation and not fulfilled their tax obligations. The question now arises: is it feasible to systematically collect the taxes imposed during this period?
Response by the Secretary, Ministry of Finance:
We aim to enhance effectiveness by bolstering our audit procedures. The Auditor General’s Department and the Inland Revenue Department (IRD) have established a modern networking system to facilitate this process. The updating of taxpayers’ data is currently underway, with active contributions from various Ministries and related institutions.
Response from the Governor of the Central Bank:
Critics often argue that the taxes they pay are excessively troublesome. However, it is crucial for citizens to recognise their role in addressing this concern. One key responsibility is to share information about tax evaders while fulfilling their own tax obligations, or to encourage others to comply with tax regulations. By actively participating in reporting tax evasion during the earning and payment processes, individuals contribute to the potential reduction of their personal tax burden in the future.
This collective effort could lead to a decrease in Value Added Tax (VAT), possibly reaching a rate as low as 15 percent in the near future. It is incumbent upon the public to actively engage in bringing tax evaders into compliance with this system, thereby fostering a fair and transparent taxation environment.
Response by the Secretary, Ministry of Finance:
To address the economic crisis, it requires individual contributions. As a saying goes, when a person changes, the village changes, and when the village changes, the country changes. It is imperative for individuals to play an active role in this transformative process to overcome the economic challenges we face. While it may seem daunting, it is fundamentally a matter of individual attitude.
Drawing inspiration from the discipline observed by our people when abroad, we can easily adopt similar principles at home. The commitment to personal responsibility and contributing positively to the community can collectively bring about the necessary changes.
Q: Describe the economic strategies and initiatives set for the year 2024 that aim to benefit the public?
Response by the Secretary, Ministry of Finance:
In our discussion, we delved into the profound nature of Sri Lanka’s economic crisis. The public has been apprised of the economic measures implemented to navigate through these challenging times. The country is currently charting a course towards a more favourable economic trajectory, acknowledging that this journey is neither swift nor straightforward. Under the leadership of the President, the current Government is actively executing a program aimed at responsible fiscal management. There is potential for reducing the debt burden and offering relief to the public in the future through these efforts. The on-going economic reforms have the capacity to establish a robust economic state, but achieving this requires the attention and dedication of all citizens.
The economy, akin to a patient on the brink of collapse, has undergone a reviving surgery. The next crucial step is to transition this economic patient to a general ward, a task feasible within the current year. What remains is guiding the economic recovery in the direction of healing, a process that may span a year or two. The commitment and trust of the people play a pivotal role in achieving this goal.
Response from the Governor of the Central Bank:
Our projections indicate the potential for inflation reduction in 2024. If the on-going economic reforms continue as planned, there is a likelihood of achieving a moderate increase in the economic growth rate. As an independent institution, the Central Bank plays a crucial role in bolstering Sri Lanka’s economic resilience.
Q: With 2024 being an election year, there arises a question of potential inconsistencies between political promises and on-going economic reforms.
Response from the Governor of the Central Bank:
Historically, election promises have exerted significant influence on the economy. It is essential for the public to attentively consider these promises and inquire about the funding mechanisms to fulfil them. Clear communication is imperative, especially if any political party plans to reduce taxes; the public should be informed about how the necessary funds will be generated. Making decisions without proper consultation may lead to a more precarious economic situation for the country. Managing the economy solely based on popular political promises is not a viable approach. Therefore, it is crucial for the public to act prudently and intelligently in such matters.
