Former Central Bank Governor says SL’s hardest work lies ahead

• Former CBSL Governor Dr. Indrajith Coomaraswamy highlights unsustainable fiscal policies, election-driven overspending and protectionism for economic stagnation 
• Urges to protect economic stability and avoid past mistakes
• Opines Sri Lanka has turned to IMF 17 times due to poor financial management and pre-election spending sprees
• Slams past administrations for defending overvalued exchange rate, leading to currency crashes
• Alleges delaying external assistance worsened 2022 crisis, which could have mitigated with proactive action
• Praises recent fiscal reforms, including Public Finance Management Act, the Central Bank Act, and Public Debt Management Act
• Stresses need for at least 5% GDP growth to reduce poverty, ensure debt sustainability and revive exports
• Criticises protectionist policies discouraged FDI and weakened Sri Lanka’s position in global supply chains
• Warns of short political cycles and resistance from businesses and unions as key obstacles to reforms
• Acknowledges rare policy continuity across three administrations post-crisis

By Charumini de Silva 

Former Central Bank (CBSL) Governor Dr. Indrajith Coomaraswamy last week delivered a critical assessment of the country’s economic past, present, and future, reminding that even as Sri Lanka took steps in the right direction, the hardest work is in the future. 

Delivering the first public lecture to mark the CBSL’s 75th Anniversary titled ‘A New Paradigm in Macroeconomic Management’, he praised the stabilisation efforts already taken whilst warning that, unless the country embarks on structural reforms and disciplined governance, it is repeating the mistakes of the past.

As the country still recovers from its worst economic crisis post-independence, Dr. Coomaraswamy’s address was not only a reflection on Sri Lanka’s repeated failures, but also a roadmap for ensuring long-term stability and growth. 

His speech touched upon three crucial aspects: the root causes of economic stagnation, the recent policy reforms that have brought about macroeconomic stability, and the urgent need for sustained structural transformation.

He outlined a sobering picture of Sri Lanka’s economic trajectory and recalled that in the 1960s, the country’s per capita GDP was ahead of Singapore and South Korea — two nations that are now economic powerhouses with per capita at $ 80,000 and $ 30,000, respectively, while Sri Lanka remains at $ 4,000, trapped in a cycle of low growth, repeated macroeconomic crises, and poor fiscal management.

“Repeating bouts of macroeconomic stress have arguably been the key economic cause of Sri Lanka’s relative lack of progress compared to the successful countries in Asia,” he stated. 

The primary driver of this instability, he said, was unsustainable fiscal policies – a combination of populist hand-outs, election-driven spending sprees, and an entrenched entitlement culture. Sri Lanka’s tendency to overspend before elections, he noted, had led to 17 International Monetary Fund (IMF) programs over the years.

“Elections in Sri Lanka are an auction of non-existent resources,” he remarked, quoting Singapore’s former Prime Minister Lee Kuan Yew.

Dr. Coomaraswamy explained that this reckless approach, compounded by fiscal dominance in monetary policy, created excess demand in the economy, leading to inflation, balance of payments crises, and currency devaluation.

“The instinct of policymakers for a long time was to deplete our reserves and try to defend the indefensible,” he claimed, referring to repeated attempts to artificially maintain an overvalued exchange rate, only to suffer crashes later. 

He pointed to Sri Lanka’s mismanagement of debt as another major factor. “After graduating from concessional loans to commercial borrowings like International Sovereign Bonds (ISBs) in the 2000s, the country failed to adapt,” he said.

The former CBSL Chief said, instead of using these funds for productive investments, they were funnelled into unproductive expenditures such as an expansion of the public sector from 600,000 employees in 2005 to 1.5 million at its peak.

“Whether that would have happened if these ISBs were not there is a question worth asking,” he noted. 

Dr. Coomaraswamy was clear that Sri Lanka must not repeat the mistakes that led to the 2022 economic collapse. He criticised the past delays in seeking external help, particularly from the IMF, which exacerbated the crisis.

“In November 2019, the IMF deemed our debt was seen as sustainable and we had about $ 5 billion in reserves. However, tax cuts and the COVID-19 pandemic quickly deteriorated the country’s fiscal position. By mid-2020, the IMF no longer considered Sri Lanka’s debt sustainable, preventing access to emergency funding under the Rapid Financing initiative. By April 2022, we had just $ 25 million in usable reserves. If we had acted earlier, the pain would have been far less,” he pointed out.

He recalled that efforts to secure external financing from countries such as China and the Middle East ultimately failed due to concerns over creditworthiness. 

“Once a country’s debt sustainability is questioned, international financing dries up,” Dr. Coomaraswamy noted, adding that Sri Lanka could have mitigated the economic hardship by initiating restructuring efforts earlier rather than waiting till reserves dwindled to just $ 25 million by April 2022.

The former CBSL Governor also highlighted the false hope that external powers would step in to rescue Sri Lanka – particularly China. 

“The People’s Bank of China (PBOC) swap agreement was a clear signal that they were not going to increase their exposure to us by even a single cent,” he observed. 

He opined that these miscalculations, coupled with an unrealistic belief that Sri Lanka could secure funding through diplomatic channels rather than sound economic policies, led to a devastating default on external debt in 2022.

“We could have avoided much of the pain the country experienced had we addressed the issue at the right time. Even if we had acted slightly later, when reserves were around $ 5 billion – if I recall correctly, the situation would have been more manageable.”

“A year later, with reserves at around $ 3 billion, the impact would still have been significantly less severe.”

“However, we chose to rely on the hope that external assistance would come and as a result we ended up with just $ 25 million in usable reserves by April 2022.”

“I remember the six-month roadmap, covering from 1 November 2021 to 31 March 2022, was in place and efforts were made to mobilise funds.”

“People worked hard and it would not be fair to fault them for that, but ultimately the money never came,” he added.

He said that when doubt arises about a country’s creditworthiness, financial assistance does not come easily.

“There were signals that we perhaps failed to interpret correctly. For instance, when the PBOC provided us with a swap that was essentially unusable, it should have been a clear warning that they were unwilling to increase their financial exposure to us,” he said. 

Although Sri Lanka may have expected the external support till the very end, he said the reality was different.

Despite the grim history, Dr. Coomaraswamy expresses optimism about recent policy shifts, which he believes could serve as a turning point for Sri Lanka.

He highlighted the Public Finance Management Act, the Central Bank Act, and the Public Debt Management Act as three major legislative reforms to keep the economy in check. 

“These measures form a new paradigm of macroeconomic management, reducing the likelihood of reckless fiscal policies destabilising the economy again. This is not just another stabilisation effort; it is a fundamental shift in how we manage our economy,” he stressed. 

Dr. Coomaraswamy opined that while stabilisation is crucial, the country now faces an even bigger challenge of generating a sustained economic growth. 

He outlined three compelling reasons to achieve at least 5% growth. First, poverty reduction, as income poverty has doubled in just two years and more than half of the population is considered multi-dimensionally vulnerable. Second, ensuring debt sustainability is essential as the country will need to fully resume external debt repayments by 2028. Lastly, economic transformation is imperative, given the severe decline of exports. Exports, which accounted for 35% of GDP in the 2000s, have now fallen to below 20%, highlighting the urgent need for revitalisation. 

“We have been talking about export-led growth since 1978, but we have failed to execute it,” he noted.

Dr. Coomaraswamy acknowledged that while Sri Lanka has no shortage of knowledge and policy recommendations, implementation remains the key obstacle. 

He identified the short nature of political cycles and the influence of powerful interest groups as two key hindrances.

“Many reforms take longer than the election cycle to yield results, reducing political will. Another is that structural reforms create many winners, but also a few powerful losers such as businesses benefitting from protectionism and State sector unions opposing change,” he said. 

Despite these challenges, he praised the policy continuity seen under three successive administrations – Gotabaya Rajapaksa to Ranil Wickremesinghe and now President Anura Kumara Dissanayake. 

“For the first time in decades, we have had macroeconomic policy continuity across three Governments. The best thing former President Gotabaya Rajapaksa did was to appoint CBSL Governor Dr. Nandalal Weerasinghe and Treasury Secretary Mahinda Siriwardana and reach out to the IMF. Then, former President Ranil Wickremesinghe negotiated the Extended Fund Facility (EFF) and now President Anura Kumara Dissanayake is continuing the program without deviating from it despite the differences in ideology,” he said, asserting that it is rare in Sri Lanka and essential for long-term stability. 

Dr. Coomaraswamy said the country has a real chance to break free from its cycle of economic mismanagement, but only if it commits to reforms and avoids politically motivated reversals. 

“We have done stabilisation before, only to squander it. This time we must secure it. Growth and stability must be continuously safeguarded, not taken for granted,” he said, emphasising that the hardest work still lies ahead.