No second chance to save Sri Lanka: bank chief warns

by Amal Jayasinghe

Sri Lanka’s Central Bank chief has disclosed for the first time how warnings of an impending calamity were ignored by the then president Gotabaya Rajapaksa.Nandalal Weerasinghe said he had predicted the impending economic catastrophe three years ago due to the so called Modern Monetary Theory and the “homegrown solution” of the previous administration of the Central Bank of Sri Lanka.

“I saw this crisis was coming,” he said adding that he had serious concerns about the monetary policy of the central bank at the time.

In a wide-ranging interview with AFP in Colombo, Weerasinghe said he was side-lined for warning of the dangers of the path the central bank was taking at the time and for his troubles, he was forced to take early retirement in September 2021.

“As the head of the Monetary Policy Committee at the time, as the senior deputy governor, I always raised concerns. And there were differences.

“But we as central bankers never came out with those internal disagreements with the management and also with the government in terms of policies.”

“In fact, I should say, not only me, the staff of the central bank, the professional staff, always raised this concern even after I left. … but those were not heard, not accepted, there was a kind of a different ideology coming from the Central Bank top as well as from outside, what we called a ‘home grown solution.’

“And as I remember, there was a six-month roadmap announced by the Central Bank. Completely unrealistic with false assumption, false expectations, and that ended up with reserves being ended up as almost nothing in April.

“Central bankers obviously knew what was going on. They expressed concern, but you know, the fear culture, and the rules and regulation is that although you can internally raise all issues and discuss, but no one can go out. And obviously, it’s difficult for a central banker to have the courage and go out and speak out outside the framework.”

He said it was “obvious” that if the government continued with its policies of “excessive monetary financing, suppressing interest rates, bad exchange rate policy, fixing at one rate for a long period, running down our reserves,” the country would head for disaster.

He said he privately voiced his concerns and noted that what happened between May and July last year was exactly as he had feared.As the country was gripped with an unprecedented shortage of foreign exchange, angry street protests over economic mismanagement, Rajapaksa turned to Weerasinghe to salvage the situation.

Pulled from comfortable retirement

“I never had an intention to come back to the central bank or public service…I thought I would have a good retirement life,” he said. He was spending time with his children in Brisbane, Australia and playing golf five days of the week when he got the invitation to return as the head of the Central Bank.

He said there would have been many others too who could have taken the job, but he decided to accept the challenge when he was invited but set his conditions demanding independence and a finance secretary (Mahinda Siriwardena) he could work with.

When Rajapaksa took over in November 2019, the country had over seven billion dollars in reserves, but when Weerasinghe took over the Central Bank the useable reserves were just 25 million. Days later, Sri Lanka defaulted on its $46 billion foreign debt.

Biggest challenge

Weerasinghe said the more difficult part of salvaging Sri Lanka economy will be the restructure of domestic debt while navigating a political minefield.

“This is the most challenging part of debt restructuring. It is very politically sensitive, socially sensitive and also there is some impact on domestic (bond) holders,” he told AFP.

He urged all members of parliament to exercise their duty to safeguard public finances by supporting the debt restructure efforts as the alternative would be catastrophic for the entire nation.He stressed that the country must vigorously pursue the reforms such as ensuring accountability, stability of policy and good governance without falling off the wagon again at the first sign of stability.

The country could get back to economic normality within two to four years if it stuck to the IMF program.The new government has doubled taxes and removed subsidies — both highly unpopular moves — to be in line with revenue targets set by the IMF.

He notes that Sri Lanka’s track record with the International Monetary Fund was “not good” because the island had gone to the Washington-based lender 16 times before, but failed to stick with agreed reforms.

“But this time, the 17th time with the IMF is different. It is not only a balance of payment crisis, but a debt crisis coming together at once,” he said. “If you are trying to go back to another (IMF) program, that will be most difficult, and I think that will be the end of the story.

“So basically, there’s no excuse this time, no second chance, you have to get it right this time.”

China onboard-

Last week, Weerasinghe unveiled Sri Lanka’s debt restructuring plan offering a 30 percent haircut to international sovereign bond holders, a nine year moratorium on repayments to bilateral lenders.More than half of Sri Lanka’s bilateral debt is owed to China. Weerasinghe rejects allegations that Beijing was holding up a debt restructure deal crucial to continuing with the $2.9 billion IMF bailout.

“The way China is dealing with this process is different because they are a new kind of creditor in the global sense. We expect some delays because China is a new player. So China will take its time, but China is fully on board, and agreed to support Sri Lanka and help Sri Lanka to come out of this crisis.”

China has not joined a “common platform” initiated by Japan and which involves India and the Paris Club of creditors. However, Colombo insists it will have bilateral talks with Beijing but in the end all creditors will be offered comparable terms with no one getting a better deal than what is offered to others.