Getting Foreign Policy Right

CEYLON TODAY | Published: 2:00 AM Nov 18 2021

This newspaper remembers when then President Mahinda Rajapaksa, now Prime Minister, launched his unsuccessful re-election bid at the January 2015 Presidential Election; during his polls campaign, he reaffirmed to the electorate that there will be no return to the era of queues, shortages and rationing that dominated the economy from 1970 to 77. 

Rajapaksa was a young SLFP MP in the then ruling SLFP-led United Front Government of 1970-77. That Government however, was resoundingly trounced at the 1977 Parliamentary Poll due to the economic policies it followed that led to, as described above, shortages, queues, rationing, a black market, bribery and corruption. 

Rajapaksa himself was soundly trounced at the 1977 Poll, losing his Beliatta Seat to Dr. Ranjith Atapattu who contested from the UNP ticket, which party ultimately won the 1977 Parliamentary Poll by a record five-sixths majority. The UNP Government that was ushered into power in 1977 opened up the economy and made goods and services freely available to all. 

These economic policies saw an end to queues, rationing, shortages and a black market. The strength of the open economy of 1977 was a ‘liberalised’ US dollar underpinned by external assistance led by the West and Japan. This assistance more often than not was in the form of grants and soft loans and not heavy debt incurring foreign commercial loans. Consequently, the Government, together with the Central Bank of Sri Lanka (CBSL) imposed stringent exchange controls on 28 April, which as at yesterday was on its 136th day, to protect the country’s Spartan foreign reserves.

 But despite these best efforts, Sri Lanka’s foreign reserves at US$ 2,267.5 million as at last month end, has fallen to a 151-month low, where a figure lower than this was last seen in March 2009, when the country’s foreign reserves plummeted to $ 1,082 million. March 2009 was the height of Sri Lanka’s 26-yearold LTTE terrorist war which was won on 18 May 2009 with the killing of LTTE leader Velupillai Prabhakaran. 

It may therefore be construed that Sri Lanka’s current economy is at a perilous state, similar to what it was at the height of the LTTE war. CBSL’s 2009 Annual Report said that the positive outlook and the increased investor confidence in the domestic economy brought about by the end to the conflict helped Sri Lanka’s external sector to recover during the second half of 2009. Accordingly, gross official reserves excluding Asian Clearing Union (ACU) receipts which declined to $ 1,082 million by end March 2009, increased almost five-fold to a record level of $ 5,097 million within the last three quarters of 2009, it said.

 A significant improvement in investor confidence following the ending of the conflict which was further strengthened by the approval of the IMF-SBA facility in July 2009 helped the entire country to turn into a new dimension with enhanced foreign inflows, especially to the Government securities market. The impact of these positive developments was manifested through the highly successful issuance of the second international sovereign bond (ISB) of $ 500 million in October 2009 and the revision of the sovereign rating outlook from negative to stable and then, positive. 

The positive outlook and substantial inflows led to an unprecedented surplus in the BOP, amounting to $ 2,725 million in 2009, the CBSL Report said. Nonetheless, the issuances of controversial ISBs, a form of foreign commercial borrowings, are the primary source of Sri Lanka’s economic ills. The 2009 Report further said, ‘the exchange rate policy in 2009 was focused on maintaining the stability in the domestic foreign exchange (fx) market in the face of significant fx outflows during the first few months followed by substantial inflows.

 The first four months of the year experienced significant outflows from the domestic fx market and CBSL supplied fx on a net basis to meet excessive demand for fx liquidity. The favourable developments in the external environment brought about by the dawn of peace in the country since May 2009 prompted large inflows into the country and exerted pressure on the exchange rate to appreciate sharply. 

CBSL’s intervention in the fx market by way of net absorption helped reduce the excess supply of liquidity in the domestic fx market and build up official reserves. The intervention strategy adopted by CBSL helped to maintain a stable exchange rate to a greater extent during 2009. If the economic debacle of 2009 was caused by a military war and its subsequent recovery due to the end of that war, the current war that Sri Lanka’s economy is fighting is a foreign policy war. If Sri Lanka can get its foreign policy right, like what it did in 1977, that will open the doors to an economic recovery

CEYLON TODAY | Published: 2:00 AM Nov 18 2021

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