ECONOMYNEXT – Sri Lanka should table in parliament an International Monetary Fund country economic report which is going to the Washington-based lenders Executive Board on February 25, and come up with a program to save the economy, opposition legislator Harsha de Silva said.
The IMF has a prepared a country report under annual Article IV consultations which also contains a debt sustainability analysis (DSA) which shows whether the debt can be repaid without re-structuring after tightening monetary and fiscal policies.
Debt Unsustainable?
“We are firmly calling on the government to table the Article IV report in parliament,” de Silva told reporters on February 01.
“The report will tell whether the debt is sustainable. From the information available to us it does not look like the debt is sustainable (can be repaid on an on going basis).”
“The debt is most likely unsustainable. The problem cannot be solved simply by going to the IMF. At least now the government should come up with an apolitical economic program to save the country.”
Sri Lanka usually goes to the IMF after the central bank prints money to control interest rates triggering a currency crisis with some forex reserves intact and without a lot of commercial debt.
It can solved by raising rates, floating the currency (to stop sterilized interventions) and narrowing the deficit (to reduce the corrective interest rate). The country however keeps going back the country as activist policy is not curbed through central bank reform.
However from 2014 to 2019, commercial debt racheted up through two currency crises and in 2020 the country lost access to capital markets losing the ability to roll-over debt as credit was downgraded.
The Ceylon Petroleum Corporation was also similarly made to borrow dollars as forex shortages emerged from interest rate manipulations.
The practices have continued for decades with no questions asked from the Mercantilist perpetrators, who blames the general public, who are net savers who do not finances a deficit but has also helped build forex reserves when inflationary policy is not run by the central bank.
Central Bank Discretionary Independence
Sri Lanka’s legislators through a sweeping monetary law has given central bank powers to print money as it wished, depreciate the currency as it wished (parliamentary approval was needed like in the UK in the original central bank law to suspend convertibility or float).
Legislators have also given the central bank draconian power through exchange control laws to cover its policy errors and continue to print money and manipulate interest rates to further depreciate the currency or lose forex reserves or both.
Legislators have also not brought a law to prevent the central bank or Treasury from blocking the publication of IMF reports from the public. The IMF allows countries to block publication of a report in part of in full. Market sensitive data is sometimes redacted.
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The central bank during the time de Silva was a minister in the last administration also blocked publication of IMF reports. One report was published more than 18 months after it was considered by the IMFs Executive Board.
Ministers were helpless to stop the activity or even stop the central bank from printing money and busting the rupee.
From 2015 to 2019, the central bank printed money to create two currency crises by manipulating rates through a variety of means as public opposition to outright purchases of Treasury bills through auctions grew.
During the time De Silva was minister in the last government the central bank printed money through term repo auctions, term reverse repo auctions and outright purchases of bonds which have been sold to finance past deficit to target an ‘output gap’ despite taxes being raised to lower the deficit.
Money was also printed in 2018, despite taxes being raised through rupee/dollar swaps using fiscal dollar reserves accumulated from the sale of lease of Hambantota port to target.
Though multiple liquidity injections, by October 2021 when a so-called ‘coup’ happened, the rupee was busted from 153 to 173 to the US dollars. After the ‘coup’ the rupee fell a further 10 rupees as large volumes of reserve sales were sterilized like now.
Legislators however have the lawmaking powers to curb central open market operations, market price interest rates and completely eliminate currency troubles anytime they wish, as other countries without external troubles have done and Sri Lanka did before 1950 keeping the country safe two through World Wars and a Great Depression.
In addition to East Asian nations and the GCC nations, countries like Bhutan and Nepal have maintained fixed exchange rates for more than half a century, through with a bad anchor currency (Indian rupee).
Analysts have called for strict laws to prevent activist policy by the Monetary Board to stop inflation, currency depreciation, economic volatility (stop-go policies), output gap targeting, REER targeting social unrest and otherwise curb the agency’s ability to impoverish the general public through monetary expropriation.
Debt Re-structuring
If debt is unsustainable, Sri Lanka will have to re-structure debt, de Silva said.
In that case ‘senior creditors’ like the World Bank, Asian Development Bank and IMF will have to be repaid (the loans are instalments and not bullet repayments.
If the DSA shows the problem is small, a light restructuring of some debt could be done, he said.
However if the problem is acute a bigger restructuring would be needed, he said.
“Bi-lateral lenders of the Paris Club would have to be also brought in,” de Silva said. “However without IMF involvement they will also not participate.”
Analysts have warned that with or without re-structuring the practice of giving reserves for imports will have to be halted through a rate hike and a float.
If not, the re-structured debt will default. IMF programs however involve a monetary program, as well as a fiscal program. There will also be structural reforms to boost growth after the currency is stabilized.
IMF programs usually fail however and countries go back to the agency due to lack of central bank reform, which is what triggers, trade and other controls. (Colombo/Feb22/2022)
