Successive governments’ budgetary operations caused financial instability

Ex-CBSL Governor Dr. Coomaraswamy:

‘My generation has failed the country…’

By Shmaindra Ferdinando

Former Governor of the Central Bank Dr. Indrajit Coomaraswamy says the failure on the part of successive governments to manage expenditure since the country gained Independence has caused the current economic instability.

Throughout Sri Lanka had been plagued by a toxic combination of populist politics and an entrenched entitlement culture among the people, Dr. Coomaraswamy told The Island. “Time and again, the electoral calendar has undermined fiscal discipline,” Dr. Coomaraswamy, who had served as the Governor (July 2016 to Dec. 2019) said.

Dr. Coomaraswamy said so when he was asked to explain why he had advised the electorate to be extremely cautious in exercising their franchise during the yahapalana administration at a time when the national economy was in a much better shape.

Dr. Coomaraswamy was testifying before a Presidential Commission of Inquiry (PCoI) probing rampant corruption in the public sector.

President Maithripala Sirisena brought in Dr. Coomaraswamy as the Central Bank Governor in the wake of the second Treasury bond scam. Dr. Coomaraswamy who had previously served the CBSL for a period of 15 years in its Departments of Economic Research, Statistics and Bank Supervision. He had also worked at the Finance and Planning Ministry from 1981 – 1989 during the UNP administration.

The Island

raised the issues at hand with Dr. Coomaraswamy close on the heels of one-time Auditor General Gamini Wijesinghe lashing out at the Parliament for its failure to ensure fiscal discipline. Wijesinghe, who served as the AG (2015-2019) alleged that the country was paying a huge price today for electing those who pursued destructive agenda. Wijesinghe said that he felt the electorate lacked the political sense to elect sensible people.

Dr. Coomaraswamy explained that for many decades, Sri Lankans had lived beyond their means and got away with it due to generous inflows of concessional loans and grants. However, the situation had changed though those elected seemed bent on following the same policies, he said.

Sri Lanka should not forget that the country had graduated to middle-income country status and was no longer eligible for concessional assistance, the former Central Bank Governor said. “At the same time, there has also been a reduction in the availability of long-term lending from official sources. As a result, since then there has had to be greater reliance on more expensive borrowing from international capital markets. This is an entirely different paradigm. Increased exposure to capital markets and rating agencies requires far greater discipline in macroeconomic policy-making.”

The former CB Governor emphasised that the much-needed discipline could be achieved only if politicians understood the parameters within which macroeconomic policies should be set. “They should also have sufficient understanding to provide leadership in raising the awareness of the people regarding the most urgent need for fiscal discipline. So, it is important that Sri Lankans exercise their franchise judiciously to make sure the right people are in Parliament.”

Commenting on the responsibility of those who manage the economy especially at a time the country was in turmoil, Dr. Coomaraswamy stressed that large budget deficits led to what he called excessive aggregate demand, which fuelled inflation and exerted balance of payments pressure. It would be pertinent to stress that large budget deficits ultimately undermined the value of the currency.

Those were the main negative impacts on the people as a result of politicians not exercising parliamentary oversight of public finance in a responsible manner, Dr. Coomaraswamy said.

“There are challenges on many fronts. My generation has failed the country. It is now up to the young people to chart a new course for the country. I hope a sufficient number of the talented ones remain in the country to do so,” he said.

Dr. Coomaraswamy however expressed confidence in talented youth remaining in the country amidst reports of many seeking to migrate.

Dr. Coomaraswamy and Gamini Wijesinghe demanded immediate remedial measures to restore financial discipline as President Gotabaya Rajapaksa finally confirmed negotiations with the International Monetary Fund (IMF) to overcome the financial crisis.

Former Deputy Governor of the Central Bank Dr. W.A. Wijewardena has recently said that Sri Lanka should have sought the IMF’s intervention in April 2021 during Prof. W.D. Lakshman’s tenure as the Governor of the CBSL. The government compelled Prof. Lakshman to quit in September 2021 to bring in the incumbent Governor Ajith Nivard Cabraal.