If IMF reforms not implemented, Sri Lanka goes back to square one - CBSL Chief

COLOMBO (News 1st); The Governor of the Central Bank of Sri Lanka, Dr. Nandalal Weerasinghe emphasized the importance of protecting the low-income population at the bottom of the pyramid, as they are most likely to start protesting next. 

When people have no means of income they will resort to anything, and such a wave of protests did not happen in our country yet, the CBSL Governer stated, participating in a seminar for Parliamentarians at the Parliamentary complex.

Speaking further, the CBSL Governor stated that there is a difference in loans that were taken in the past and loans taken recently, as loans given by the IMF, World Bank, ADB, and Japan at interest rates of about 0.2%, were not a heavy burden, yet, as of late, instead of concessionary loans more non-concessionary loans including commercial borrowings have increased up to 50%.
 
But once the creditors stop giving loans at some point, we became bankrupt. The Government and the treasury becomes bankrupt along with the country, at the point they stop giving loans, the Governor said, adding that it does not matter if the Government is spending, as long as the country earns enough foreign revenue to settle the loans, which is not the case, even if both public and private sector revenue is combined.

"We go to the IMF asking for a loan for the coming two years, promising that we will rectify our mistakes. But we can't go back to our old ways of having expenses greater than the income, government lending out concessions, and government corporations making losses as soon as this period is over, we will have to go the IMF again. This has happened 16 times. But fortunately, we never had to approach the IMF when we were facing a debt crisis. We always went to the IMF before the crisis hit but after getting assistance from the IMF we went back to making the same old mistakes. " he said. 

Citing 2016 and 2017 as examples for when Sri Lanka approached IMF, after which the country increased taxes and revenue, in 2019, Dr. Weerasinghe said, the administration reversed the decisions and lost revenue and access to the market.

He emphasized that Sri Lanka may be able to obtain funds from the IMF and recover next year, however, if the program which have been implemented so far is reversed, after the economy is recovered, Sri Lanka will come back to square one in three years. 

"You have the full responsibility to continue implementing a set of policies for the country, regardless of which Government comes into power. But what has happened is when you go to the people during elections, you make promises such as reducing taxes, giving out concessions, and providing fuel at lower prices. The people also prefer that and elect you. After getting elected to deliver those promises is your responsibility. Being unaware of the consequences, the people do not know, that by doing these things the situation will only get worse. You will get their mandate if you promise to give kerosene oil for a lower price. You must tell them, that such things cannot be delivered and if it is delivered they themselves will suffer from the end result," the CBSL Governor told the Parliamentarians.

With foreign loans not being given in 2020 and 2021 along with a budget deficit like present, there is no other option to finance debt obligations besides defaulting, the CBSL Governor said, adding that the Central Bank has to print money and issue them, which is how Sri Lanka survived during 2020 and 2021. 

Therefore, as a result of this money printing, inflation has risen to 60% and 70%, Dr. Weerasinghe said, adding that the consequences of inflation will come after some time.

He also mentioned that the country needs a breathing space for the economy to recover after getting a certain amount of assistance temporarily for a time period from the IMF by entering into an agreement with them and restructuring debt.

Dr. Weerasinghe added that Sri Lanka had imposed an import restriction with the hope of getting relief for three months. Those three-four months will not be easy to get by, he said, expressing that apart from the economy contracting, Sri Lanka will have to raised fuel prices, electricity fares, and water prices. 

"By not implementing those price changes previously, we have come to a desperate point now. Therefore, the suffering which we have to endure is more," he said.

He also stressed on protecting the most vulnerable of the population during such a crisis, which is the population that is at the bottom of the pyramid; low-income earners. 

The CBSL Governor said that the low-income earners may start protesting next, as when people have no means of income, they will resort to anything. 

He pointed out that such a wave of protests did not happen in Sri Lanka as of yet, and said that the Aragalaya that took place recently, was different, as it was against governance issues and other matters, and was not a movement against hunger and poverty. 

"That was a result of the change in the mindset of the middle class. If the low-income earners take matters to the streets, that will end in bloodshed. No one will be able to control it. Therefore what's most important is controlling inflation and empowering the people to increase their income according to inflation. That is the biggest challenge moving forward," the CBSL Governor said.