No second chance for Sri Lanka, says CB Governor

Turn this crisis into an opportunity – ADB

By Sanath Nanayakkare

Sri Lanka will have no second chance if this time it forgets why it took the Extended Fund Facility from the IMF and goes back to doing things that create fiscal imbalances, like in the past 16 programs with the IMF, Central Bank Governor Dr. Nandalal Weerasinghe warned on Tuesday.

The Governor conveyed this well-informed message to all stakeholders in Sri Lanka at the Asian Development Bank’s “Serendipity Knowledge Program” (SKOP) event, at the Cinnamon Grand Colombo. ADB’s SKOP also saw the launch of the Asian Development Outlook for 2023.

Inviting the CBSL Governor as keynote speaker of the event, Chen Chen, Country Director, Sri Lanka Resident mission ADB, urged Sri Lanka to turn the current economic crisis into an opportunity and go for deep, comprehensive reforms to address the long standing issues inflicting the economy, assuring that the ADB will remain steadfast in its support to Sri Lanka.

“In 2022, ADB provided emergency support to sustain Sri Lanka’s basic services and livelihood and to mitigate the impacts of the economic crisis on the people, particularly on the poor and vulnerable groups. We also supported the essential trade facilitating the importation of medicine and fertilizers. ADB worked very closely with the private sector, the civil society and development partners to maximize the impact of its emergency assistance. We will continue this collaborative approach in ADB’s future assistance to Sri Lanka. One year on, since the unprecedented crisis, we hope the worst is already behind us. However, there are lessons to learn from the crisis. Moving beyond the near term outlook, the main question remains on tackling the long standing challenges of Sri Lanka. Although the country has come a long way since last year, there is a long road ahead for economic recovery. I hope this discussion and insights into ADB’s outlook for 2023 will help understand and navigate the uncertainties that lie ahead.”

Later on Dr. Nandalal Weerasinghe in his keynote speech said:

“The root cause of the economic crisis was the long standing fiscal imbalance we have carried forward over a long period of time. There is empirical evidence to show that structural fiscal imbalances and the current account balance had a strong association to the economic crisis. Sri Lanka is a classic case of a twin-deficit country over several decades. As a result, we have been experiencing recurring Balance of Payment (BOP) issues. This is the reason why we have sought IMF bailout packages for 16 times and the latest rescue package is Sri Lanka’s 17th IMF programme. This time it is different from the past because we are not only in a BOP crisis, we are also in a sovereign debt crisis–both occurring together. That’s why it is much more difficult and complex this time. We had to continuously seek bailout packages because we have never been able to address the fiscal imbalance on a permanent basis. The key theme of any IMF programme was revenue-based fiscal consolidation and some structural reforms related to fiscal imbalances. We agreed with certain policy packages with the IMF, got some money and focused on stabilization in the beginning and we even completed two three programmes successfully; for example from 2009- 2012 after the end of the war.

“But soon after completing the programme or in between , after achieving stability, we had forgotten why we took those loans; why we agreed with those bailout packages and took two steps backward without going forward. It made us go back to the same crisis creating current account imbalances, depletion of our reserves, depreciating our currency and thereby resulting in a repetition of the vicious cycle. As a result, the country came to a point of unsustainable sovereign debt situation. If we had sought an IMF bailout when we saw the balance of payment crisis coming, we could have stabilized the economy without landing on an economic crisis. In the past, people didn’t feel the pain of the crisis as a lot of people hadn’t known there was a looming BOP crisis. If we had taken timely action, we could have at least stabilized the situation without addressing long term structural issues.

“The lesson learned from this was to seek assistance without being too late so that people wouldn’t have felt so much pain arising from a crisis that led to hyper-inflation. All what the Central Bank did was aimed at avoiding the collapse of the economy and preventing the social and political unrest. Certain analysts claim that the Central Bank contracted the economy with its tight monetary policy and other policies. My argument is; due to the BOP crisis, the economy was going to collapse and we were able to limit the contraction to 7.8% last year. This is not a happy situation, but still the contraction was minimized and hyper- inflation was reversed despite many had thought it would go spiral over 100%. It is the fiscal policy that has to implement cost reflective utility prices and address revenue and expenditure, and also address expansive monetary financing which was the root cause of the hyper-inflation experience d last year.”

“The key lesson I learned from this crisis was; for Sri Lanka, I don’t think we have a second chance this time. We can’t afford to what we did with our past IMF programmes- take one step forward and stabilize and then take two steps backward and cause fiscal imbalances. This time we have no chance. This is why we need strong commitment from all stakeholders of the country to take forward the 4-year IMF extended facility and implement the targets of the IMF which are also the benchmarks of the government.

“This time we need to be able to not just meet those targets, but outperform them and get out of the crisis for good.”