Financial crisis: Can the country survive?

Central Bank boasts it will honour all debt obligations. But it does not seem to realise that the country’s foreign exchange reserves have come down each month. What will happen next?

Parliament Ministers and MPs enjoy massively expensive financial benefits and they all need to be curtailed. First the vehicle permits issued to MPs, their staff, Provincial MPs and senior government staff need to be removed permanently. They could be allocated with only one vehicle without escorts, with a single police officer, as there is no need for security as during the LTTE days. Currently out of a total police force of 85,000, MPs security employs 45,000. The security given to MPs’ housing too could be withdrawn

Almost daily every newspaper and TV news highlights the country’s precarious financial situation, some indirectly. The commonest item is the rising cost of vegetables and food items, blaming the shortage of fertiliser and the non-suitability of organic fertiliser distributed by the Government.

In addition, the shortage of gas, blasting cookers, the quality of gas imported and distributed to consumers have created fears and concerns of safety. Each day news gives total blasts of the previous day. How did this happen?

Downgrading by Fitch Ratings

On 17 December Fitch Ratings downgraded Sri Lanka’s long-term foreign currency rating to ‘CC’ from ‘CCC’, indicating Sri Lanka’s financial situation is nearing ‘increased probability of default’. The country needs to repay International Sovereign Bonds of $ 500 million next month and $ 1 billion in July 2022. In addition, foreign currency debt service payments total $ 6.9 billion in 2022, as principal and interest. Fitch stated that the country’s foreign currency debt service, including interest and principal, would be about $ 26 billion to 2026.

Central Bank’s denials

But our Central Bank does not agree with Fitch downgrades claiming Sri Lanka has not delayed a single payment even with the COVID-19 pandemic over the past two years. Central Bank boasts it will honour all debt obligations. But it does not seem to realise that the country’s foreign exchange reserves have come down each month. What will happen next?

Help from friends

Central Bank and Government politicians claim the country could get help from friendly countries such as China, India and Russia. This raises a question, are countries such as USA, United Kingdom and Japan enemies? When 40% of Kerawalapitya was awarded to a US company, there was protests even within the Cabinet. But for the award of Colombo Port South Container Terminal, Hambantota Harbour and Colombo Port City to China, all deals went through without any protests.

When the Colombo’s East Container Terminal wished to be awarded to India resulted massive protests, finally the Government awarded the West Container Terminal to Adani, an Indian investor. In 2003 Ranil Wickremesinghe handed over the oil tanks in Trincomalee, built by the British in late 1930s, currently only 15 tanks are used by the Indian oil company. In 2015, Indian PM Narendra Modi wished to develop the oil tanks with one million tons storage as a joint venture with Japanese funding. But Sri Lanka refused to respond.

Sri Lanka enjoyed cordial relations with Japan since early 1950s when J.R. Jayewardene opposed economic sanctions against Japan for their role during Second World War. After the massacre of Tamils in 1971, the world boycotted Sri Lanka, but Japan continued normal relations. President Gotabaya Rajapaksa’s decision to terminate the Light Railway Transit (LRT) project in September 2020, the agreement signed in March 2019 with Japan International Cooperation Agency (JICA) strained long standing relations between the two countries, ending possibility of emergency funding.

Sri Lanka heading towards economic crisis

In November 2019 the country inherited $ 7.5 billion, but fell to $ 2.8 billion by July end and $ 1.58 billion by November end, the worst economic crisis since independence. Meanwhile Rupee depreciated more than 20% since 2019 against the US Dollar.

While Sri Lanka is due to repay close to $ 1 billion worth of debt in January and a total of over $ 7 billion for 2022, with no signs of recovery. In addition, the country has to pay bilateral debt from donor countries amounting to $ 947 million in January is heading towards a major economic crisis. Meanwhile, Central Bank Governor claims by end of December the country will have $ 3 billion in reserves, but he refuses to say how?

The country’s economic situation worsened over the decades, but it was the corona pandemic that broke the horse’s back. The President’s priority in coming out of corona saved the nation, but economy suffered.

Organic farming

The President wished for organic farming as per his vision, but the document informed moving over to organic fertiliser in 10 years. Without discussions over one and half years, the President suddenly decided to ban fertilise imports, possibly due to foreign exchange shortage. But the action led to a greater mess. 

With massive protests by farmers and the media, Government agreed to import fertilisers by the private sector, but without any subsidy. Although the gazette was published, the private sector fertiliser companies demand that Government should settle arrears of Rs. 26 billion for stocks previously provided under the state-subsidy scheme for farmers.

Sri Lankan Government ordered nearly 100,000 tons of organic fertiliser from Chinese Qingdao Seawin Biotech Fertilizer Company and the ship carrying fertiliser arrived. It was disclosed that prior to raising the Letter of Credit the government agency failed to test the sample of the fertiliser for acceptance. But after the ship arrived samples were tested and found to be unsuitable and were rejected. This resulted in massive protests among farmers and from opposition politicians against importing low grade fertiliser. Now the Government has agreed to pay the fertiliser company and get down balance quantity from the original order.

But the entire episode raises questions. If the original sample was found to be unsuitable, did the officials go to a ship which was nearby and collect fresh samples for testing? The sample was tested in a government testing facility; how qualified was the tester? Also once found to be unsuitable, was the test repeated under direct supervision of a qualified senior officer? Rejecting a shipload accepting test result of a junior officer is careless to say the least, why was a new sample from the ship not tested with a number of government testing organisations, also by an overseas independent testing authority as requested by the supplier? The entire happening shows inability and carelessness of our administrative system and the politicians, to the level affecting the goodwill among two friendly countries, also finances under difficult conditions.

FE shortage affecting businesses

Ceylon Petroleum Corporation is having problems getting imported crude oil, also refined oil for local consumption, fearing the entire country would come to a standstill. Meanwhile the Energy Ministry has officially informed SriLankan Airlines that it will not supply jet-fuel unless payment is not made in dollars. The airline earns part of the income in Dollars, but running at a massive loss was forced to agree.

In addition, CEB who runs massive electricity generation plants on imported oil have requested oil from CPC, in spite of the billions owed by CEB. They may have overlooked that their engineers have deliberately obstructed construction of solar and wind power plants by local investors over the past four years, resulting in the country losing over 1,500 MW power at less than Rs. 12 a unit, which could have eliminated most oil burning generators who supply between Rs. 28 to 40 a unit.

Attending to basic issues

If the country manages to get some foreign exchange from friendly countries and others, it solves the problem only for a few months. Afterwards the same issue will arise unless the basic problems are resolved. The basic issues are:

1. Extremely expensive parliamentarians

2. Security to MPs

3. Excessive staff in government

4. Poor education system

 Expensive parliamentarians

Our parliamentarians are the most pampered in the whole world. It is claimed that out of 225 members, 95 failed to pass Ordinary Level qualification in education. They are expected to declare their assets and liabilities on admission as a Member of Parliament, but the documents are kept very safe with no access to anyone, allowing them to en-masse riches by every means.

A recent article in a newspaper described how the corrupt politicians were created. Accordingly, J.R. Jayewardene during his Presidency allocated each MP with a vehicle. But during the time the vehicle capacity was limited to 2,000 CC. Over the time various governments increased the size and value limits. With the threat from LTTE, especially with attempted attacks on a number of politicians’ vehicles, they were provided with armed guards and escorts. Even their housing is protected by police.

MPs in addition to their salary are provided with duty-free vehicle permits (currently suspended), a residence close to Parliament, also a number of allowances as office allowance, salaries for staff, telephone allowance, etc. Of the MPs’ staff, most are their family members or close relatives. Two of the staff are provided with vehicle permits.

Our MPs may not be aware, the current Prime Minister of United Kingdom, Boris Johnson up to the time of being appointed PM, attended the Parliament on his bicycle. Even after the appointment as PM he wished to continue, but the Police objected on security concerns. Angela Merkel was Chancellor in Germany from 2005 to 2021 and retired recently. While being the Chancellor she with her husband lived in her former apartment without any servants. She was questioned by reporters of her wearing the same clothes every day, she replied that she is only a politician and not a model. Also in Sweden, the Prime Minister is the only politician allocated with an official car.

Senior administrators 

When the legislation was prepared for vehicle permits for MPs, the senior administrators included their own positions into the list, enabling them to get vehicle permits. The donations continued leading to vehicle permits to most senior staff, motorcycles to juniors and scootees to lady staff.

General public

Today, there are over three million motorcycles, one million three-wheelers and massive numbers of cars, for a country of 22 million population. If a family has four members the country has only 5.5 families. With nearly four million vehicles can the country claim to be poor? Then, where did we go wrong?

Coming out of the financial mess

There were a number of articles, statements in newspapers as well in discussions over the media from leading economists, but they were all going around the bush as how to overcome the tragedy. I am not an economist, only a civil engineer as such do not mind coming to the point.

Requesting IMF assistance

A number of persons have recommended approaching International Monetary Fund (IMF) for assistance. Opposition MP, Economist Dr. Harsha de Silva promoted going to IMF for a long time, now he says it may be too late. 

MP Vasudeva Nanayakkara, the former LSSP is completely opposed to requesting IMF assistance. He proposes issuing poor with ration books as during pre-JRJ era. But Tissa Attanayake former MP is fully supportive in going to IMF and says the Government needs to carry out proposals of IMF.

Depreciating the Rupee

If the country requests IMF help, the first demand would be to float the Rupee and will reach around Rs. 250 to a Dollar. Then IMF will release sufficient funds at low interest to overcome the Dollar shortage. But strange things could happen. For example: six months ago, a kilo of sugar was around Rs. 80, now with every item gone up in the world market would have reached Rs. 100. With 25% depreciation of Rupee would cost the consumer Rs. 125, much less than current market price of over Rs. 150 a kilo. But arrival of new stocks with easy customs clearance may take three months. Thus, most imported common consumer items as flour, onions, potato prices would come down surprising everyone.

The remittances by the country’s workers abroad have come down drastically and led to additional pressure on the Rupee, as they expect Rupee to Dollar increase. With the official depreciation workers abroad would send Dollars directly into banks, an additional support to Rupee.

But the depreciation of the Rupee will not solve the long-term issues unless the basic issues given above are attended.

Extremely expensive parliamentarians

Parliament Ministers and MPs enjoy massively expensive financial benefits and they all need to be curtailed. First the vehicle permits issued to MPs, their staff, Provincial MPs and senior government staff need to be removed permanently. They could be allocated with only one vehicle without escorts, with a single police officer, as there is no need for security as during the LTTE days. Currently out of a total police force of 85,000, MPs’ security employs 45,000. The security given to MPs housing too could be withdrawn.

As over 70 MPs have not accepted houses allocated to them, others could be given reasonable houses and all mansions need to be withdrawn. As for MPs’ personal office staff, they could be allocated with two clerks from the government service, where massive excessive numbers exist.

Excessive staff in government

In 2003 the government staff totalled 800,000, then PM Ranil Wickremesinghe considered numbers be excessive and reduced same to 650,000. How did numbers reach 1.9 million? Politicians claim numbers are only 1.5 million, they have conveniently dropped the numbers in state corporations.

Some government employees including corporations receive massive salaries, which needs trimming down, which could be 10% salary cut to over Rs. 50,000 a month, 15% to over Rs. 75,000, 20% to over Rs. 100,000 and 25% to over Rs. 200,000, with a maximum salary of Rs. 500,000 a month. There could be exceptions as those working in international atmosphere as airline pilots and ships captains. Also, all state workers be given the basic salary of Rs. 1,000, possible with tea price increase with more Rupees.

The pension for former governor

Former Governor of Central Bank Ajith Nivard Cabraal held the post of Governor from 1 July 2006 until his resignation on 9 January 2015 (a period less than 10 years). He was appointed national list MP in August 2020, and State Minister of Finance, Capital Markets and State Enterprise Reforms. In September 2021 he resigned from being a minister and was reappointed as the Governor of Central Bank.

He has manipulated the system and now gets 74% of the earlier salary as pension and a Rs. 400,000 monthly salary. In addition, the Central Bank has passed a total of Rs. 7 million as arrears of pension. His salary is a massive increase from Rs. 150,000 from his immediate predecessor Indrajit Coomaraswamy and Rs. 70,000 a month paid to Arjuna Mahendran, who left CBSL over bond scam allegations. Meanwhile, W.D. Lakshman, who was made to retire to make way for Cabraal, also gets a lifetime pension having served just two years at CBSL.

Poor education system

With the announcement of the Financial Minister during the Budget speech that there would be no more employment to government service, the students in universities are in a tight situation. What could they do after passing out? But President Gotabaya from the time of accepting the Presidency requested all arts graduates be trained in Information Technology. If the universities have carried out instructions, students may have a way out. It is claimed that the IT sector has nearly 50,000 vacancies.

In schools, the reversal of the Bandaranaike policy is an immediate need converting back to English medium. Also, the priority given to Buddhism and history may have to give way for IT and English.

It was reported that Bangladesh has already become the world’s second largest supplier of online labour, according to the Oxford Internet Institute (OII). With 650,000 registered freelancers in the country, generating $ 100 million annually. The prospects are enormous.

Summary

If the President requests help from IMF and allows floating the Rupee, the country would be in for a shock and consumer goods may rise. But when the President announces doing away with politicians’ extras, the country would rally around him. When things settle down, big-mouthed uneducated persons may not wish to be politicians any more, allowing room for the educated to enter the Parliament making way for a decent society and a pleasant country.