A crisis of incompetence

The Rupee saw an unprecedented depreciation this week after the Central Bank was forced to float the currency at the brink of a sovereign default. After months of maintaining an artificial exchange rate which saw remittances plummet to a 10-year low and causing enormous harm to the economy, the CB has now faced reality and allowed the currency to reach its true value. Yet even while the depreciation is happening the CB has not increased interest rates that would otherwise attract some investments into the currency. 

Rather than allowing a managed and gradual devaluation which could have started at least from September 2021, Sri Lanka this week is waking up to a shock of the currency being severely weakened overnight. The immediate increase in oil prices, by up to Rs. 75 per litre of diesel by the LIOC on Friday, is just a sign of things to come with inflation that will surely surge in the coming weeks and months.

It may take some time for the Sri Lankan expatriate workers, numbering over 2 million to find confidence in the official banking system to remit their hard-earned currency. However, at least the float of the currency will bring the official rate closer to what is offered in the informal market. The Central Bank’s efforts to limit such informal channels for remittances and threats of legal consequences have been dismissed for the bluff it was. All that was achieved through those misguided and ill-conceived policies were that workers’ remittances, a major source of foreign exchange, dropped to a 10-year low at $ 5.49 billion in 2021.

Sri Lanka is now looking at the real possibility of a sovereign default, a first in its history. The country’s foreign-exchange reserves dwindled after a few days of imports. Though the official reserves were in the range of $ 2.3 billion by end-February, much of it was in the form of currency swaps and cannot be freely used for repayment of debt. Sri Lanka’s Long-Term Foreign-Currency Issuer Default Rating (IDR) has also been severely downgraded by rating agencies which has made the rupee nearly ‘junk’ as an investment.

The Government has failed not only to address the crisis but even to accept the cross party support it was offered to address this national crisis. In February several key opposition parties issued a joint statement highlighting the immediate action that is required to address the crisis and offering support to the Government. 

The statement was endorsed by several lawmakers representing the main Opposition Samagi Jana Balawegaya, the Tamil National Alliance, Sri Lanka Muslim Congress, and former Speaker Karu Jayasuriya’s National Movement for a Just Society, among others. The Opposition parties’ recognition that Parliament has full control of public finance, and that each Member of Parliament has a fiduciary responsibility to ensure the proper management of public finances in Sri Lanka should have been welcomed by the Government as an opportunity to engage all political parties to come up with solutions that would win the confidence of investors and external actors. Sadly, such offers of cooperation have been ignored.

There is no doubt that the economic woes of the country are a result of incompetence and sheer lack of basic understating of economics among the policymakers. If there is to be a way out of this mess, the Government must seek the advice of the best economics minds in the country, or even from abroad, irrespective of party affiliation or thinking. Only a well thought out recovery plan, based on the fundamental principles of economics, implemented with discipline can save Sri Lanka from its current predicament. Hoping that those who brought us here are going to save us from the problems of their own making, however, is wishful thinking.