In an interview with the Sunday Observer, Transport, Highways and Mass Media Minister Dr. Bandula Gunawardena explains the significance of the three Financial Bills presented to Parliament and the future course of action that the country has to take in economic terms to achieve financial independence by 2048, the 100th anniversary of Independence
Q: Why is the Government suddenly pushing to pass three Financial Bills in Parliament when it has been announced that a Presidential Election (PE) will be held in a few months?
A: There is no immediate rush. Running a country requires international cooperation, and if we do not adhere to international agreements, leading the nation becomes challenging. Our import activities already exceed our country’s income by more than twice, highlighting the importance of international relations and financial stability.
We rely heavily on imports for essentials like fuel, LP Gas, medicine, machinery, and food, particularly staples like lentils. Opening Letters of Credit (LCs) is essential for these transactions, ensuring compliance with international agreements. The proposed bills aim to stabilise the economy, a crucial step for ensuring the acceptance of our LCs by banks and financial institutions worldwide. By enacting these measures, we establish the necessary financial discipline for sustainable economic stability.
Q: Will these bills ensure economic stability?
A: These bills are anticipated to reflect the collective consensus of the people to the global community through Parliament. Their passage could garner international recognition for our nation.
Q: What if the bills are not approved in Parliament?
A: Those opposing these bills, whether individually or collectively, may bear responsibility for any ensuing economic downturn in the country.
Q: Can you give a brief description of the proposed legislation?
A: Among the three bills presented, namely the Public Finance Management Act, the Economic Transformation Act, and the Debt Management Act, the Economic Transformation Act holds particular significance. It outlines strategic plans and economic pathways for Sri Lanka until 2048, the 100th anniversary of our Independence, shaping the country’s future economic direction.
Specifically, by 2032, the outstanding public debt should be reduced to less than 95 percent of the Gross Domestic Product (GDP). The country’s gross financial needs must not exceed 13 percent of the annual GDP, while foreign debt servicing should be capped at 4.5 percent. Moreover, maintaining the current account deficit of the Balance of Payments at 1 percent or less is imperative. Efforts should also be made to lower the interest rate to single digits and to ensure that unemployment remains at 5 percent or less.
Efforts should focus on establishing a competitive export-oriented agricultural sector. Economic growth targets should aim to sustain at least a 5 percent annual increase. The Budget Deficit, as a percentage of the GDP, should consistently be maintained above 5 percent. This ensures adequate financial resources for essential expenditures.
Likewise, financial discipline should be institutionalised through Parliamentary processes. The Public Financial Management Act enforces standards for financial discipline concerning Government expenditure projects, among other matters. Similarly, the Debt Management Act addresses the management of Sri Lanka’s debt obligations.
Q: However, some Opposition Members argue that the very individuals accountable for the country’s financial mismanagement are now seeking control of the Government once more. Your comment?
A: This marks the first instance since independence that the country has faced such a serious bankruptcy situation. Given Sri Lanka’s relatively small economy, effective governance without international cooperation is deemed nearly impossible. The absence of a robust economic structure leaves the country heavily reliant on external support. For many decades, the State Budget’s current account has consistently maintained an unsustainable deficit, further exacerbating the country’s financial woes.
The economic reality is that the Government’s income primarily covers essential expenses such as employee salaries, pensions, welfare payments, and public debt interest. This leaves little room for additional expenditures. Regardless of the ruling party, whether it’s the United National Party (UNP), the Sri Lanka Podujana Peramuna (SLPP), or any other, the Budget Deficit persists due to this fundamental constraint.
Q: Why did certain actions lead to the country’s bankruptcy, and who is responsible for it?
A: The bankruptcy of our nation cannot solely be attributed to President Gotabaya Rajapaksa’s reduction of Value Added Tax (VAT) or the Covid-19 pandemic. The responsibility for this lies with all the rulers of the country until now.
International organisations, financial experts, and economic analysts concur that for many decades, Sri Lanka’s State Budget has consistently recorded an unsustainable deficit in its current account. There has been a persistent deficit in the international Balance of Payments. This situation has developed over time and is widely acknowledged across various sectors.
Q: Countries do not just suddenly go bankrupt. This should be evident to economic and financial experts, including yourself. Your comment?
A: Indeed, the economic history of Sri Lanka offers valuable insights. Back in 2001, the country experienced a significant economic downturn, with the growth rate plummeting to minus 1.4. Interest rates soared to unprecedented levels, inflation surged, and the exchange rate spiked. There were shortages of LP Gas and fuel, posing significant challenges to the economy despite the implementation of supplementary estimates.
Hence, we transitioned from that administration and formed a United National Front (UNF) Government. During that tenure, I served as Deputy Finance Minister and later as Cabinet Minister for Rural Economy. Prof. G.L. Peiris was appointed as Minister of Foreign Affairs, S.B. Dissanayake as Minister of Agriculture and several others also held key responsibilities.
It was during this period, in an effort to address the economic downturn, that the then Prime Minister, Ranil Wickremesinghe, introduced the State Fiscal Management Responsibility Act No. 3 of 2003. This legislation aimed to enforce three crucial points pertaining to financial management, subsequently enacted into law.
Within a year, the country’s economy rebounded, with the Sri Lanka Rupee (LKR) appreciating. In accordance with this Act, from 2006 to 2013, the target was to reduce the debt to less than 65 percent of the GDP. Similarly, the Act stipulated that the Budget Deficit in 2006 should be maintained at 5 percent of the GDP, with subsequent Governments instructed to uphold this threshold consistently.
It is evident that under the law, the Government was restricted to guaranteeing only up to 4.5 percent of the GDP for foreign loans or other loans. If this law had been consistently implemented, the country may have avoided bankruptcy. This assertion holds true. Moreover, maintaining a Budget Deficit of less than 5 percent would have mitigated the need for borrowing. Similarly, reducing outstanding debt to 65 percent of the GDP would have alleviated the burden of debt payments.
An international cooperation agreement was in place to host world aid conferences and inject US$ 4 billion into Sri Lanka for reconstruction efforts. Adjusted for today’s value, this amount would equate to approximately US$ 20 to 25 billion. However, unfortunately, the Government in power at the time had to relinquish its position in 2004. Subsequently, the incoming Government altered this Act, accelerating the country’s descent into bankruptcy.
Q: But why are we accumulating debt? Is not the current level of debt sufficient? Shouldn’t we focus on bolstering the local economy instead? Continuing on this path may lead to another economic crisis in the future, potentially resulting in the collapse of the country?
A: President Wickremesinghe will ensure it does not happen. When no one stepped forward to take over the bankrupt country in 2022, he assumed the role of Prime Minister and rescued the nation. As mentioned earlier, he also played a pivotal role in saving the country in 2001. The President stands out as the sole leader who enacted measures to save the country, fully aware of the impending bankruptcy.
Q: How can you say that President Wickremesinghe is the only leader who rebuilt the country?
A: Each leader has built the country through different objectives. For example, the closed economy which was followed for a long time after Independence was changed into an open economy by President J.R. Jayewardene, President Mahinda Rajapaksa stopped the 30-year war and created a country for Sinhalese, Tamils, and Muslims to live together. President Wickremesinghe is the only leader who created an economic management vision and saved the country.
Q: Some Opposition Members claim during meetings and rallies that they will amend the Government’s agreements with the International Monetary Fund (IMF) and other entities if and when they assume power?
A: This assertion is entirely false. Either they are unaware that the Government is a party to these agreements, or they mistakenly believe that international organisations will revise these agreements with a change of Government. Institutions like the World Bank, the Asian Development Bank (ADB), and the IMF are not exclusive to us – they work with many other countries facing similar situations. They do not alter agreements simply because Governments in various countries change.
Q: Are you implying that if another party assumes power, it won’t be feasible to provide relief to the people?
A: In a similar vein, we could also pledge that upon taking office, we will raise Government employees’ salaries by Rs.50,000, increase pensions by Rs.25,000, and offer senior citizens a 25 percent interest rate. We could also envision initiatives such as providing free meals to school students throughout the day.
Where would the funding for such promises come from? If someone pledges concessions and subsidies, they must demonstrate how they intend to finance them. Simply conjuring funds out of thin air, even with a VAT increase to 30 percent or 40 percent, is akin to telling fairy tales.
If individuals like Samagi Jana Balawegaya (SJB) leader Sajith Premadasa or National People’s Power (NPP) Leader Anura Kumara Dissanayake wish to deviate from these economic realities, they should outline their alternative strategies. Merely avoiding the discussion of such details does not suffice.
Q: As of today, the country remains in debt. It raises the question of how long it will take to fulfill the agreements with the IMF?
A: As per the agreement, within the initial 5-6 years of commencing loan repayment, only 37 percent of the outstanding loan amount is scheduled for repayment. Subsequently, from the 6th year onward until another 20 years, 51 percent of the loans must be repaid. The remaining 12 percent of the loan amount is slated for repayment after 20 years.
Accordingly, by 2048, regardless of the Presidency or the governing administration, even a fraction of these agreements cannot be altered. Any attempt to do so would severely hinder the country’s progress. If such agreements were to be changed, the country would face dire consequences, potentially leading to the collapse of the Government within a mere two weeks.
Q: Even with the IMF’s Extended Fund Facility (EFF) and other such facilities, our problems cannot be entirely resolved. Your comment?
A: A comprehensive loan agreement outlines a rough plan to sustain Sri Lanka’s economy until 2027. According to this agreement, it is predicted that even by 2027, the deficit of foreign financial resources related to that year will amount to US$ 3,911 million.
The international community has agreed to bridge the gap in foreign financial resources. Under the EFF, Sri Lanka will receive US$ 329 million. A financial fund has allocated US$ 600 million to prepare the 2027 budget. Furthermore, the World Bank has pledged US$ 600 million and the ADB have committed US$ 300 million.
While US$ 1,482 million has been estimated for debt relief, there remains a deficit of US$ 1,500 million concerning 2027. Hence, Sri Lanka will be permitted to issue International Sovereign Bonds (ISBs) and raise US$ 1.5 billion. However, by that time, Sri Lanka’s foreign exchange reserves should have surged to US$ 14 billion from the current US$ 5 billion.
Q: It appears that achieving prosperity for low-income earners may remain a distant dream under these circumstances. Your comment?
A: President Wickremesinghe, during his tenure as Minister of Finance, brokered an agreement with the IMF to lower the VAT rate to 12 percent starting in 2027. This agreement entails subjecting all products, imports, and exports to VAT in both retail and wholesale transactions after 2027.
Accordingly, a list of essential goods slated for exemption from VAT in 2027, when the VAT rate will be reduced to 12 percent has been submitted for approval. This list includes vital items such as rice, wheat flour, sugar, coconut, fish, vegetables, fruits, certain medicines, books, locally produced yams, onions, chillies, turmeric, undu, and more – all essential items for our daily lives.
Translated by Maneshka Borham
Pix By Nissanka Wijeratne
