The unsurmountable task of curing a bleeding economy

Colombo (News 1st) - Sri Lanka draws nearer to the end of what has been the most tumultuous year in its history, but it does not leave behind the stains of a declining economy back in 2022.

In the new year, Sri Lanka has an IMF bailout to work towards, in addition to working towards balancing the budget as best the government knows how. With a declining reputation abroad, and drastically diminishing ratings from international rating agencies (Fitch ratings recently downgraded the economic stability of Sri Lanka) international markets and multi-lateral agencies are becoming increasingly inaccessible for Sri Lanka. As investor confidence in Sri Lankan markets and trade plummets, state-owned enterprises (SOE) bleed valuable government revenue that could be directed into restructuring internal debt.  

A lack of government stability and viable plans for economic resilience means that Sri Lanka's progress in IMF negotiations has been flailing. In September 2022, the GovSL secured a staff-level agreement with the IMF to secure a $2.9 billion loan on the condition that the economic and political conditions are met. As 2022 draws to a close, I think the pressing question is where are we in the process of securing the $2.9 billion loan that was signed 3 months ago? As we consistently miss the IMF deadlines, is the public being hoodwinked by their government? The public is told in the most confident way that Sri Lanka is able to restructure its external debt fast enough to approach the IMF and get board approval. This deceptive promise however has repeatedly been professed to the public since July this year, yet to see its fulfillment.

Just last week the Paris Club of creditors (including the US, UK, France and Switzerland) moved to grant the country a 10-year moratorium on Sri Lanka's external debt. However, there has been no response from the country's largest external creditors China and India. Until there can be debt moratoriums secured from these 2 external creditors, there cannot be sustainable debt restructuring that is required for the procurement of the IMF loan. 

Adopting a realistic approach to this, does the Central Bank of Sri Lanka have a contingency plan supposing a loan cannot be secured in the coming months? How will the treasury survive if multi-lateral organizations begin to perceive Sri Lanka as a 'pariah' state that cannot guarantee the repayment of loans? Does the government have structural plans to balance the budget and preclude the extensive leakage of government revenue and the absence of sufficient foreign exchange within the country?

Furthermore, has anyone paid attention to the very tangible possibility that if the Central Bank and the Ministry of Finance do not finalize viable solutions for debt restructuring and privatizing leaking SOEs, it could lead to a banking crisis? This is why President Ranil Wickremesinghe has stressed the importance of protecting the banking sector. A banking crisis (like the case studies on countries like Lebanon) could often result in banks blocking fund withdrawals.   

In an urgent time like this, the most accelerated method in which the government can retain revenue would be to privatize leaking SOEs (like SriLankan Airlines). However there is a subliminal reluctance to privatize. The purpose of this column is not to transmit negativity but to ensure that no one is befooled into thinking the absence of petrol queues is a sign of recovery. Don't dance on an erupting volcano. Recovery will take a minimum of 2-5 years to take effect.