An extensive discussion took place at the Government Information Department auditorium recently in which media chiefs were briefed about the International Monetary Fund’s (IMF) extended credit facility. The views of Minister of Highways, Transport and Mass Media, Dr. Bandula Gunawardana, Senior Economic Adviser to the President, Dr. R.H.S. Samaratunga and the Assistant Governor of the Central Bank of Sri Lanka Dr. Chandranath Amaraseka are published here.
Several factors contributed to the collapse of the economy over a period of time. In some cases, those in charge of economic management saved it from falling by using some kind of management methods. We have travelled on easy roads for 30-40 years but we could not prevent this crisis due to the shortcomings of recent policy decisions taken by the Government.
According to economics, there are two major imbalances in our country. This is the gap between the country’s foreign transactions and the gap between the Government’s income and expenditure. A deficit can be maintained for a short period of time but not for 20-24 years continuously. Then these countries will inevitably go into the abyss. The second is the domestic Budget Deficit. Although we talked about solving this deficit, we did not talk about it much in the past years. In 75 years, there was an excess of difference in the balance of our primary account only on six occasions. This year there was a surplus in the primary account.
Next, the final result of our country’s transactions with 196 countries, the balance of the current account was able to maintain a surplus in 75 years only in 1950, 1951, 1977 and 2023. Another issue that is a structural problem is how to cover the Budget Deficit. We covered the budget deficit easily. That is, by printing money at the Biyagama (De La Rue) factory.
Our welfare expanded beyond our control. Starting from the kerosene era, welfare spread like a river. Most welfare measures had political objectives. The last 40 years have been about controlling the way our exchange rate changes, i.e. flexibility. It was a big obstacle to encourage the export sector.
From 1956 to 1980, State enterprises began to emerge through nationalisation. There are about 450 such State-Owned Enterprises (SOEs). The problem with doing these businesses is that they incur losses. That loss has to be covered by the taxpayer. It was with this crisis that these became evident to us as big prejudices. Due to non-reformation of laws in our country, optimal results were not obtained. Structural problems in State governance are other issues that have arisen recently. The services available to the public were therefore limited. Government revenue was eight percent of GDP in 2022. Government expenditure is 20 percent. How can countries be maintained then? It went on like this for 30 years without controlling the expenditure or making an income system suitable for the expenditure.
The foreign exchange ran out by March-April 2022. By the middle of 2022, it fell into an abyss that could not be solved due to not paying attention to it. Looking at the recent issues, the Government decided to cut taxes on November 27, 2019. We have not seen a tax cut like this in 75 years. At that time, the Government’s income was 12 percent. More than Rs. 600 billion in State revenue was lost in a week. Another four percent was added to make up 12 percent. Along with this, rating agencies said that Sri Lanka is in trouble. Grades were downgraded so that commercial loans could not be taken from abroad. Because of this, orders were given to the Biyagama factory to cover the Budget Deficit. We have never seen such minting of money. Exchange rates were not allowed to change.
The CBSL did not raise interest rates. These were Government decisions. Restrictions on the use of chemical fertilisers in mid-2021 were another reason. The agricultural economy collapsed. Inflation reached its highest level due to the Easter attack and Covid-19 issues. Foreign reserves decreased by April 2022. The economy continued to shrink for six quarters from 2022.
When the economy contracted, those who made a living lost their jobs. Twenty percent of Small and Medium Enterprises (SMEs) closed down. And 50 percent of the existing 80 percent were working at half capacity. In the end, there was an unprecedented socio-political unrest all over Sri Lanka.
For the first time, we told the world that we would not pay our debts. There was no money to borrow from any country. As a result, goods and services became scarce. There was a social and political change. They did not even come to Sri Lanka for the initial IMF discussion save for the last. We were asked to talk to the creditors and get their consent to the economic reform program in Sri Lanka. From September 2022 to March 2023 we spoke to creditors. It took eight months to reach an agreement. After that, I got the opportunity to go to the IMF board and join this program. It is also impossible to explain the situation that might arise if this drags on. Finally, there was the issue of Sri Lanka’s credibility. There was no other alternative solution to this problem.
During this period, the Government carried out reforms. As a result, inflation reached single digits. Foreign exchange reserves built up. Import restrictions were removed. Policy interest rates came down. The loan interest rate is also in single digits. Government revenue has increased. The Government has embarked on many unprecedented programs. The budget deficit shows signs of decreasing from 12 percent to seven percent. For the first time it was possible to manage the cash flow of the Treasury. We need to increase revenue
The economy, which collapsed for six consecutive quarters, started to recover in 2023. One of the major challenges for us is how to maintain 8-10 percent revenue and incur 20 percent expense. Therefore, if the people do not pay taxes, they should control the expenditure in a way that matches the income. If not, income should be increased. But the time given to implement both of these is over. Decades passed with low income and high spending. Any Government should face this reality.
Compiled by Subhashini Jayaratne, translated by Jonathan Frank
