That is why this happened. There is 60% hyperinflation, $5 billion to pay in 5 years. It can’t be done, the last thing is done first.
Dr. Nandalal Weerasinghe, one of the most senior officers of the Central Bank of Sri Lanka, was appointed to the position of Governor by former President Gotabhaya Rajapaksa. Mr. Nandalal Weerasinghe, who retired in 2020 after more than 29 years of service, took over the post of Central Bank Governor as per a request received from the former President while he was in Australia.
He, who also held the position of Senior Deputy Governor of the Central Bank, had reacted optimistically to the appointment of him as its Governor, with the belief that he has a plan to recover the country from the acute economic crisis that Sri Lanka is currently facing. In a background where those expectations are no longer blurred, the new Governor fearlessly revealed the true facts about the economic crisis in Sri Lanka in several press conferences and speeches. Another very important lecture organized in this way was held on the 24th at the Parliament premises of Sri Lanka.
Dr. Nandalal Weerasinghe spoke as the main speaker of the conversational discussion which was held on the topic of ‘Current Economic Situation and Way Forward’, and it was special that many representatives of the people including the Deputy Speaker of the Parliament and the Leader of the Opposition Sajith Premadasa were also present. The speech, which contained many unique revelations of the Governor of the Central Bank about the challenges of rebuilding the country, this is extracted from the Sri Lanka business TV YouTube channel and we present it for you, the readers of ‘Mawrata’, because it contains many things that all of us should be aware of.
I would like to continue this lecture as a discussion. Before that I will give a brief introduction about the current situation. First of all, I am looking at what is the reason for this kind of crisis in the country. The growth rate of a country’s economy is a very important indicator. When the economy of this country was opened in 1977 until around 2012, we have been able to maintain a relatively high economic growth rate (4.5% – 5%) compared to other countries in the region.
At that time, there was no big problem with the economic growth rate. But from 2013 until now, it can be seen how the growth rate has moved to a very low value. Also, the per capita income was around 4000 US dollars in 2005 and has started to decrease again in 2017. By the end of this year, it will be dropped up to USD. 3,200 level . One thing that is clear from this is that there is a problem with the economic plan and methodology.
The next point is inflation. These days, among the people, one thing they talk is that these goods are too expensive. From 1977 to 2009, inflation in our country has been around 12%. That percentage has been there for a long time. From 2009 to 2020, it has been possible to make it to an average value of 5%. But now we are getting into a hyperinflation situation of 60%. This is a very dangerous situation. Countries like Zimbabwe and Lebanon have faced this unfortunate situation of hyperinflation.
If a country gets into such a hyperinflationary situation, even the Central Bank of that country will not be able to handle the country’s economy after that. All businesses in the country are collapsing. The value of the rupee is falling to the extreme. Therefore, the first thing we need to do is to increase the economic growth rate, and the other thing is to control inflation. Only in the 1950s, the income of our country has increased more than the expenditure. During that time, the foreign exchange earnings have also increased more than the expenditure. After that , there has been a big budget gap.
Economically the government is only one part. Between 20%-30% of government functions. About 70% is the private sector . Economically, we see the fact that the government’s budget deficit has been in a negative value for a long time as the main reason for the creation of a deficit between the foreign exchange earnings and expenditure of the entire country. This is a theoretically confirmed situation. If there is a budget deficit like this in any country for a long time, then there is a long-term deficit in the foreign exchange of that country.
It is clearly visible in our country. How does this become a foreign exchange deficit in the country? It is said that government expenditure is high and that government has to borrow heavily, domestically or foreign. The interest rate is high when borrowing locally. The other is that the government borrows the resources of the private sector. Then when the government borrows the savings to be used by the private sector, they will not have anything to invest . Then the interest rate increases. To pay the increased interest, the government has to borrow more. Then again, the same affects the increase in the budget deficit.
On the other hand, the increase in the country’s demand for imports is due to the government spending more than its income. For example, when the government does big projects, it has to increase imports. Then the cost of import increases. That is what causes the foreign exchange deficit. When such a deficit occurs, we as a country need to get investments or loans to cover it.
If you get investment, it is not a problem. Because investments stop in the country. But when taking loans, the country’s debt burden increases. Similarly, when imports increase, the value of the rupee decreases and the value of the dollar increases. When the rupee falls, inflation rises. Through that, the cost of government projects increases again. This is what we need to understand. This is like a cycle. The only way to solve this is to break this cycle somewhere. It needs to be broken and fixed.
It is the government’s responsibility to provide subsidies and spend on things like education and health. But the government should have income for to meet those expenses. When that is not the case, they demand more for education, but they say there is no way to give it. They ask to build roads but there is no way to give them. Because there is no income. When that kind of pressure comes from you, the Treasury will borrow a little more. We request the parliament to increase our credit limit.
Then the debt will increase. When a deficit is maintained in that way annually, the debt accumulates becomes unsustainable. This debt burden can be measured by the index called gross domestic product. It has increased to 108% in the 1980s. In 2001, it has gone to 105%. But now 99% are there. Accordingly, there is no way that there is a credit crisis now. Because the highest percentage in history on this is not now. But there is a difference in these loans.
Between the loans taken at that time and the loans taken now. In the 1980s and 1990s, concessional loans were obtained. From institutions like the Monetary Fund, Asian Development Bank, World Bank. They were 0.2%, 0% interest loans so I didn’t feel it a big burden. At that time, although the debt percentage increased, it did not lead to a credit crisis. But now we are in a debt crisis.
When the government takes such loans and spends those loans, they should be spent in such a way that the country’s foreign exchange earnings increase through it. Through that, the ability to pay the debt increases. Then there will be no credit crisis. In the 1980s, our country borrowed heavily because of the Mahaweli movement. Two things happened in terms of earning foreign exchange.
One is agriculture and food production increased. Through that, the country got some relief. The other thing is that the country got electricity due to the construction of power plants. Even today, about 60% of the country’s electricity comes from hydropower plants. Because of that investment made then, the country has saved 2 billion per year even today.
If we look at how we took commercial loans and spent them in the past, more was spent on things like paying salaries of government employees, paying pensions, subsidizing fertilizers, subsidizing gasoline, and giving money to institutions that are losing money due to such subsidies. When foreign loans are spent on such things, no foreign exchange will be earned. That is the crisis that has happened to our country since history
Taking loans, paying loans, this is what has continued. The country’s income will not increase to pay the debt, so they take a loan again and pay the debt early. But because our inflation has been controlled in a normal way, foreign countries are ready to give us loans. Every time that loan was given, we took the loan.
But once they stopped lending, we went bankrupt. Then we couldn’t even pay off the previous loans. In that way, the government and the country become bankrupt when the ability to borrow is stopped.
But fortunately or unfortunately, we have never been in a debt crisis before. Before that, the IMF They went to get them and took some money and got out of this. The best example is the 2016-2017 IMF. The one that went together and increased the country’s taxes and income. After that, the government changed in 2019 and it turned the other way. Lost income. Went back again to the old position. Therefore, if we don’t do this now, we will not have the IMF again. This time the IMF We can go together and get some money. If the program that we are doing and things goes the other way again, we will be back to where we were after three years. That is why it is important to understand this.
A series of policies to be implemented correctly as a country. Whatever the government’s policy, if it is the right policy, the full responsibility of implementing it lies in the hands of you who are the people’s representatives. But that’s not what happens. You go to the people and say that what the previous government did is wrong, and promise that we will reduce taxes, give more subsidies, and give less petrol and diesel. Then the people will appoint you. I don’t think it’s your fault. People don’t understand that if they do that without knowing, they will get into trouble.
I will briefly show the status of corporations. In the past, the loss of state corporations is one trillion. Who pays for these? Minister Kanchana is well aware of this. He also takes a lot of effort to correct this. But when elections come again, you yourself go and say that there is no problem with the corporation, when we come power, we will reduce the price of petrol and give less lamp oil. Then you will get votes. But that is not what you should go and say. Can’t give at that low price. If you give them, you will have to pay them yourself.
Let’s see how the country got into such a big debt crisis within the last two years. The first reason is the 2019 tax cut. The second is the budget deficit and how that budget deficit was financed by foreign loans. In 2020, the existing loans have been paid and not a single penny has been given. The 2021 budget deficit has increased greatly. It is financed locally. There is not much money in the local market. Because, at that time, the government decided to mint money.
That’s how 2020-2021 has gone. Something like this can be done temporarily during Covid. The central banks of many countries of the world eased the financial crisis by minting money for a short period of time. But after returning it should be turned the other way. But we did that money molding in 2021 as well. As a result, inflation has increased to 60% to 70% today. The effects of inflation have been coming for some time. We saw the dangers of it. We warned about it. But no one cared about them.
The other thing is that we mint rupees and pay the foreign debt with the little reserves we have. How to pay after reserves are exhausted? No new loans are given. When I took office, there were only 20 million reserves that could be used in April. Before that, People’s Bank, Bank of Ceylon and their L.C. had been neglected. Minister Kanchana knows that when we run out of reserves to bring oil, the Central Bank tells the Bank of Ceylon and the People’s Bank to open L.Cs .and give it. They ask to open one, but they don’t have money, and we don’t have money either.
When I took over on April 8th, I had about 20 million dollars in hand. On the next 18th, 200 billion dollars have to be paid in installments to two banks. 12 billion to be paid within the next 12 months. But only 20 million is in hand. Six months before that, the former governor announced a ‘Six Mantra Road Map’. He said that 10 billion will come in the next six months. It was 0 when I arrived in April. Not even a cent has come in, and the available reserves have gone to zero.
Accordingly, we talked to the new finance secretary and got the approval of the cabinet to say that there is no way to pay the debt from now on. You can pay, but you can’t. Because there is no money to pay. Accordingly, we spoke to those who gave loans and said that we are not able to pay the loan at this time. Rating agencies predicted this situation and downgraded us.
In addition, one of the reasons for economic growth and food shortage is the sudden cessation of fertilizer subsidy. It was more of a domestic impact than the foreign exchange crisis. In the time of Covid, like every country in the world, the IMF They prepared to give 800 billion dollars without any conditions. When we went and asked for this around March 2020, they labeled our debt as ‘unsustainable’. They said that if they want to take a loan, they should first restructure their loans. Accordingly, the government said that we do not need their loans, we have a ‘home grown’ model that we can recover from. But in the meantime, they asked China and India to give us time to restructure our debt. But if they want to do that, they need to present an independently approved program for that.
So we lost that too. In the meantime, we took other short-term loans and dragged them until January 2020. Rupees are molded on one side. On the other hand, the dollar is lost. Before I came, in March, the central bank also realized that this cannot be continued, that we have no reserves. Then abandoned. After abandoning the dollar, which was 203, went to 380. When doing these things, there is a certain program. The exchange rate is the result of the policies of the country.
So what we are experiencing now is the result of doing the last thing first. Inflation, which was around 20%, has now risen to 60%-70%. You probably know better than I what happened after that. There were oil queues, gas queues, long power cuts. Through that, a social revolution has come and the people have overthrown the government. It is a result of the economic crisis and its mismanagement.
Now we have to pay about 6 to 7 billion in the next five years. That is never possible. What do we have to do next? Now they said we can’t pay the debt. But we have a plan to move forward. IMF After discussing with them, the arrangements are now being made for them to come to this country. I have great confidence that we will be able to reach an agreement with them soon.
Compiled by Chanaka Liyanage