President putting economy on correct track:
IMF agreements cannot be changed at will:
Opposition should outline any alternative strategies:
In an interview with the Sunday Observer, Transport, Highways and Mass Media Minister Dr. Bandula Gunawardena, a renowned economist, said that strict adherence to the IMF pact and the debt restructuring process will be the only path for economic emancipation for Sri Lanka, which suffered its worst economic crisis in 2022.
The following article is based on this interview.
“To recover from the economic crisis, Sri Lanka was given comprehensive credit facilities of the International Monetary Fund (IMF) by signing agreements with creditor countries and financial institutions. Sri Lanka’s economic trajectory in relation to the upcoming period was also clearly outlined. Sri Lanka worked to reach agreements with countries such as Japan, China and India.
The reason for Sri Lanka’s economic downfall was continuously borrowing foreign loans over the past four decades. In the end, we were unable to prepare the financial provisions even to meet the recurring expenses.
The Government is unable to bear any other expenses when the country’s income pays the State employees’ salaries, pensions, subsidy payments such as Samurdhi-Aswesuma and public debt interest. Regardless of which party is in power or who is President, we as a country have to face this true economic situation.
It is a fact accepted by international organisations and financial experts that Sri Lanka was not able to sustain itself due to maintaining an unsustainable deficit in the current account of the State Budget and maintaining a deficit in the current account of the international Balance of Payments.
Economic turnaround
Sri Lanka faced an economic downturn in 2001. Economic growth decreased to negative 1.4 percent. While holding the position of Deputy Finance Minister and Cabinet Minister for Rural Economy, necessary directions were also made for that. To salvage the country from economic ruin, the then Prime Minister Ranil Wickremesinghe tabled the State Financial Management Responsibility Act No. 3 of 2003. It also made three main points of the Act into Law. Within a year, the country’s economy made a turnaround.
According to that Act, from 2006 to 2013, the debt should have been less than 65 percent of the GDP. In the same way, it was also seen that the Governments should maintain the 2006 Budget gap at five percent of the GDP and thereafter continuously. It also stated that the Government should only guarantee up to 4.5 percent of the GDP for foreign loans or other loans.
There was an international cooperation agreement to convene world aid conferences and provide at least US$ 4 billion to rebuild Sri Lanka. Adjusted for inflation and today’s values, this amount would equate to approximately US$ 20 to 25 billion today. But unfortunately for the country, that Government had to leave office in 2004. The country’s economy fell in 2022 because the subsequent Governments made various changes to that Act and diluted it.
Along the path of economic decline, Rs.4,700 billion was required as expenses or recurring expenses for day-to-day functions of the Government in 2023. But the revenue from all tax and non-tax channels was only Rs.3,048 billion. A deficit of Rs.1,748 billion had to be obtained for that deficit last year as well.
Thus, the main reason for the Budget deficit is the need for foreign exchange for the goods and services needed by the country. Especially for fuel, coal, fertiliser, medicine, food and drinks, we have to borrow money.
The collapse of our economy was due to taking loans from institutions such as the World Bank and selling International Sovereign Bonds (ISBs) when the money was not enough and borrowing at high interest rates and then printing money when that money was not enough.
Shortage of dollars
Due to the economic collapse, we fell down in international ratings. In the light of that situation, the shortage of dollars worsened in 2022 and more money was exchanged through unofficial methods such as Undial. The dollar rose to Rs. 420. When we reached the point where we could not service the debt, we appealed to experienced institutions as we did not have the means to carry out the work to restructure economic affairs and take appropriate measures.
We were approached by 28 agencies, out of which 20 were qualified. A Cabinet Sub-Committee was appointed by the then President Gotabaya Rajapaksa to select the most suitable. It was chaired by Prof. G.L. Peiris who is a legal scholar. The Cabinet Sub-Committee recommended France’s Lazard as the suitable agent.
Clifford Chance was selected to deal with legal proceedings on behalf of Sri Lanka. The experts prepared the negotiations around the world by agreeing to receive comprehensive credit facilities from the IMF.
We have to follow the roadmap given by the IMF with loan instalments. Also, to make loan agreements, the President went to India and discussed the same with Prime Minister Narendra Modi and Finance Minister Nirmala Sitharaman. He also went to Japan and China. The President also discussed the debt restructuring process with the Paris Club. As a result, settlement agreements were signed with creditors. Through that, we can hold off debt repayments till 2027, but we have pending work and goals to be met.
By 2025, the gross foreign reserves of the country should be US$ 8 billion. Also, by 2026, that value should be US$ 10 billion. By 2027, the value should be maintained up to US$ 14 billion.
We cannot change these agreements willy-nilly just because regimes change. The IMF, which gave us our last loan, pointed out a road map that we must follow. We will not be able to obtain loans from any country or institution until 2027. We cannot change any of these agreements when Governments change or when a new President is elected. If we manage to change it somehow, we will run out of fuel, electricity and also medicines and food. Even by 2027, we can only get US$ 1.5 billion from the market through ISBs. It is also impossible to print money.
Main conditions
Also we are given three main conditions. Accordingly; 1. By 2032, the total outstanding debt as a percentage of GDP must be reduced to 95 percent; 2. At that time, the country’s gross financial needs should not exceed 13 percent of the GDP; 3. Loan instalments and interest payments (debt servicing) should not exceed 4.5 times the GDP.
No new Government can violate these conditions. Can we ignore the agreements signed with Japan? Can we throw away the pact signed with China? Is it possible to ignore the agreements signed with India? Can we work regardless of the contracts signed with the Paris Club? 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.
The foreign debt restructuring agreements signed by the Government will be presented to Parliament next week.
It seems that many leaders in the Opposition do not have a proper knowledge about this. According to the request made by the Cabinet to make these agreements into Law, the agreements will be submitted to Parliament. Anyone who opposes them is not fit to govern Sri Lanka. If the country goes bust again, they will be responsible for the crime of betraying the country.
Accordingly, 1. The Final Agreement dated June 26, 2024 between Sri Lanka and the Official Creditors’ Committee (OCC) on Debt Restructuring of Sri Lanka and 2. The agreement to amend the final loan agreement between Sri Lanka and the Export and Import Bank of China (EXIM Bank) reached on June 26, 2024 is expected to be forwarded to Parliament for approval.
All public representatives will and should support it. The representatives who do not support it will be named and remembered by the people as traitors working against the country. In the coming week, these agreements will be approved in Parliament and the people will be able to see who really love the country.
International agreements
As a country we must comply with such international agreements, otherwise we cannot move forward. We spend more than twice the income of our exports on essential imports. After all, we must import essentials such as fuel, LP Gas, medicine, machinery, food and fertiliser.
Letters of Credit (LCs) should be opened for all that. There will be no acceptance of our LCs unless we have acceptance, otherwise imports of any kind will not be possible.
According to the agreement we have with the IMF, only 37 percent of the outstanding loan amount will be paid within the first five to six years after starting the loan repayment. From six years to another 20 years, only 51 percent of the loans have to be repaid. The remaining loan of 12 percent will be paid after 20 years.
Accordingly, till the year 2048, no matter who holds the Presidency or who governs, even a tenth of these agreements cannot be changed. If we change the agreements unilaterally like that, we will not be able to move forward as a country.
Today, inflation has reached single digits, which was 70 percent then. Attention can be paid to the statement I mentioned in my maiden Budget speech. That statement is in the Hansard report of March 22, 1989.
“…in the last 11 years and this year, you all have adopted a deficit budget policy when presenting the budget documents to this honourable council. In 1977, the deficit in our country’s budget was 3.022 lakhs. The deficit in this year’s Budget is Rs.43,995 million. During the period 1977-88, the deficit in the state Budget has increased by 1.356 percent. We have adopted the tradition of borrowing more and more from abroad when it is difficult to cover the huge deficit that has arisen in the Budget document, and when we cannot find money to cover the deficit in the budget document within this country.’’
There are two things that we must clearly understand.
One: regardless of who is in power, financial discipline is required. We cannot dodge international agreements reached with the IMF and creditor nations. And two: if we quit international agreements, we will not get loan assistance and the country will descend into anarchy again, may be worse than in 2022.
Conciliatory economic strategy
President Wickremesinghe boldly took on the challenge of rebuilding the debt-ridden country. The President’s effort has led to an agreement for an extended credit facility with the International Monetary Fund (IMF) and initiating discussions on debt restructuring. As a result, the country has adopted a conciliatory economic strategy and it is essential for everyone to acknowledge and adapt to this situation, irrespective of their preferences. 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.
We are also giving legal effect to some of the economic steps, so that these will be enshrined in our laws. Among the three Bills presented recently, 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 one 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 five percent or less.
Efforts should focus on establishing a competitive export-oriented agricultural sector. Economic growth targets should aim to sustain at least a five percent annual increase. The Budget Deficit, as a percentage of the GDP, should consistently be maintained above five percent. This ensures adequate financial resources for essential expenditure.
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.
Pivotal role
President Wickremesinghe will ensure that Sri Lanka will not experience bankruptcy again. When no one stepped forward to take over the bankrupt country in 2022, he assumed the role of Prime Minister and rescued the nation. 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. 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.
We see that Opposition parties are making various promises to lure the electorate. We could also pledge that upon taking office again at the next election, 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 Opposition political party leaders wish to deviate from these economic realities, they should outline their alternative strategies, which they have not done so far. Merely avoiding the discussion of such details and giving rosy promises does not suffice.”
Translated by Jonathan Frank
