ECONOMYNEXT – Sri Lanka’s officials who handled the economic policy misled President Gotabaya Rajapaksa by painting a “rosy picture” and that led to the current economic crisis, Media Minister and Government Spokesman Nalaka Godahewa said on Thursday.
The island nation on April 12 announced it was suspending all foreign debt repayment as it did not have adequate foreign currencies which also has resulted in shortage for fuel, medicines, cooking gas, and milk powder amid extended power cuts.
Since President Rajapaksa was elected in November 2019, the key economic decisions were taken by former presidential secretary P.B. Jayasundera, former Treasury Secretary Sajith Attygala recently resigned central bank governor Ajith Nivard Cabraal and his predecessor W D Lakshman.
“I think what happened was for whatever the reason, ignorance or deliberate, they didn’t pass that information to the president. He was comfortable with his advisors who were painting a rosy picture,” Godahewa told a meeting with Foreign Correspondents Association (FCA).
“Because he is not an economist, he has to be advised. When you keep telling the President nothing to worry, things will get sorted out, probably in the initial days when his focus was elsewhere, he was excited about implementing the manifesto.”
The President slashed value added tax to 8 percent from 15 percent in one month after he was elected to provide some relief to the public citing they had been under pressure of higher taxes imposed by the previous government.
Disaster Recipe
Godahewa, a management accountant and a telecom engineer by profession, said he was against the sharp tax cut as he anticipated the current economic crisis when President Rajapaksa took office.
“I saw this crisis, even before the President came to power. I told the President that the tax reductions proposed by Dr. Jayasundara is going to put us in trouble. I told this many times openly,” he said at his new office at the Media Ministry.
“I didn’t agree with the tax reductions. That was proposed by Dr Jayasundara who was going to come in as Treasury secretary. At that time, the President was convinced by him.”
“I always recommended tax reductions because the previous government has increased taxes significantly. Double virtually, from 9 percent of the GDP to 13-14 percent of the GDP within one year.
“So I said we must reduce taxes, and we must simplify.”
“But when Dr. Jayasundara came up with that list, I immediately thought it was not going to work. I didn’t calculate at the time, but I told the President looking at it, it’s going to be a disaster.”
The tax cut was followed by a double digit fiscal deficit in 2020.
To prevent the extra money in the hands of private players coming back to the budget through bond auctions, ceiling rates were place on them to prevent their sale to the public under the powers available to the central bank creating new money as they were bought by the central bank.
Though the price controls were lifted after a change in the leadership of the central bank and bond rates started to go up, policy rates were kept low with overnight injections.
Reserves lost as the peg was defended against the new money and growing domestic credit with economic activity recovering, putting more pressure on the balance of payments with growing imports.
“Not Telling the Truth”
“So those officers are very much responsible for not telling the truth to the people in the public, and not taking proper action,” Godahewa, who was appointed as the cabinet minister on April 18 said.
However, Godahewa claimed crisis had been brewing since 2009 as the country started to borrow annually around 2 billion US dollar commercial loans at a higher rate.
“Nobody can say they (officials) only created this crisis. They aggravated and they couldn’t prevent it. They’re responsible for that. But the crisis is history,” he said.
“We did not put in place a system to generate adequate money to pay back. They built infrastructure which is necessary.”
The crisis has already hit the road with thousands of people having been protesting for nearly three weeks near the Presidential Secretariat demanding the resignation of President Rajapaksa.
Under heavy criticism, Cabraal, Attygala, and his own finance minister brother Basil Rajapaksa resigned.
They were replaced with – retired senior deputy central bank deputy governor Nandalal Weerasinghe as the new Governor, another deputy governor Mahinda Siriwardena as the Treasury Secretary, and Justice Minister Ali Sabry, a lawyer as the new Finance Minister.
A delegation including the three top officials had initial discussion with the International Monetary Fund (IMF) for a loan. Since Weerasinghe’s appointment, the central bank has almost doubled the key policy rates and raised the risk-free treasury bill yields to over 24 percent, more than inflation.
Godahewa said now the President is well informed on economic policy matters.
“Today he is involved in economics. That is why he’s changing the system and he is bringing new people, he is asking the questions now. He knows details. If you ask now, today, he knows exact details,” Godahewa said.
Officials have said they were carrying out government policy.
One of them asking not to be named said the government was now looking for scapegoats to wash their hands off from the failure.
“This is not true. But this blame game is unproductive. It was a government policy and we worked as per the guidance and direction of the president and the government,” the official said. (Colombo/April 29/2022)
