The Wick’s Fix

“My planning is not for my own betterment, but for the young generation of today. I clearly know that I would not eat the fruit of the tree that I plant. But tomorrow, our children of the future generations will enjoy the fruit.” Bold words by the newly appointed President Wickremesinghe, who recently enjoyed the fruits of his laborious political career. 

According to President Ranil Wickremesinghe Sri Lanka is on the recovery track, having entered the last stages of drawing out debt re-structuring plans. These are to be presented to the International Monetary Fund (IMF) as early as next week with discussions to commence right after. While these plans have been made by consulting foreign legal and financial experts, the execution of said plans depend on the creditors agreement to go ahead. “When I draw long-term plans in this manner some ridicule me. Yes, I am not like other politicians. I have long term plans.”

To Wickremesinghe’s credit Sri Lanka has a stable, albeit contentious Head of Government to continue negotiations with the IMF. Sri Lanka is expected to successfully conclude negotiations, according to the statement by the President’s office. This is evident from the strong leadership quelling protests and stifling dissent seen and the response in administration, which stabilised the recovery process.

Lazard and Clifford Chance, the legal advisors for the debt restructuring are to negotiate with the countries or state level lenders who provided loan assistance, after which private creditors negotiations would also begin. Subsequently all parties are to arrive at a consensus. The interim and 2023 budgets would follow the necessary economic planning framework in which the technicalities of addressing Sri Lanka’s current predicament are mentioned. This is unlikely to divert strongly from the emergency budget previously announced by Wickremesinghe himself, where he announced scathing spending cuts and vigorous belt tightening.

Foreign trade, which is considered a largely neglected sector, which amount to 43% of the size of the economy in 2021, is to be brought to the forefront. By strengthening ties to China, Sri Lanka is to position itself as in the Silk route project. This would be favourable to the Chinese as the deep running ties set by the pervious ruling party would not be abandoned.

According to the media office, Sri Lanka however lost the ability engage in international trade after a Central Bank was set up in 1950 which printed money to suppress rates, created forex shortages and broke the currency peg and triggered trade and economic controls. Much is to be determined about the Central Bank path which Wickremesinghe will need to help guide from a far.

As domestic credit surged with liquidity injections and sterilised interventions the country lost reserves and ended up at the door of the IMF. Sri Lanka in the past, went to the international bond markets with bullet repayments in 2005 and sovereign bond holdings ratcheted up sharply from 2015.

In 2022 with the default for the first time ever the plight of the soft-pegged Latin American nations is looked on as to avoid default repeatedly. Sri Lanka is now in the worst currency crises in the history and amongst the worst performers in the world.  After the rupee went down to 360 to the US dollar from 200 at the beginning of the year. Sri Lanka now has a budget deficit over 10% of GDP with taxes cut in 2019 for stimulus on top of money printing. 

Much of the policy decisions made now, would decisively alter the trajectory of the Island nation. After the ego of one family dynasty has left, only time would tell what other egos would succeed the throne. Although the economic policy and political decisions would be examined along with the history books many personalities. One thing is certain: Ranil Wickremesinghe has some big shoes to fill. Only time will tell us if the shoe fits.