If Not IMF Reveal Alternate Plan: Professionals Powwow to Eliminate the BoP Crisis
By Ishara Gamage
As concluded in our ‘The Seen and Unseen’ column last weekend (19th September), the entire nation is looking forward to a single major event scheduled to occur later next week. It is the release of the Interim Road Map by Central Bank of Sri Lanka (CBSL) Governor Nivard Cabraal scheduled for the October 2021. Many believe that the Government will lay the foundation for a well targeted, unifying and longer lasting economic confidence building process through this soon to be released Road Map. It is expected that the Road Map, along with the November Budget, will form the basis for attracting both internal and external support and Foreign Direct Investment (FDI) to the country.
Both documents i.e. the Road Map as well as the Budget are singularly important as the economy of the country, according to many experts, has reached an inflexion point. Steering the economy beyond this point will require effort beyond previous management. The expectation is that all those responsible will find an extra gear to prove themselves. Old thinking and policy setting will need to be jettisoned with a strong inflow of some new more practical thoughts and solutions thus carrying forward a policy blend that will turn the economy for the better.
Such new economic management will be necessary to take advantage of the belated but successful national vaccination drive currently underway thus maximising the result from open borders and full economic activity. According to sources at the Ministry of Finance (MoF), several senior, respected and tested professionals in the country have also highlighted the need for the Government to provide a longer lasting solution to the current foreign exchange crisis.
They have also, we understand, emphasised that at this juncture it is appropriate to move towards an International Monetary Fund- led Balance of Payments (BoP) strengthening process. If not, they have requested an alternate way forward, that is acceptable to all. Earlier in the year, the heads of the Ceylon Chambers of Commerce had met the President and the Prime Minister and submitted similar proposals. Important also to understand is the response that the MoF received for their Request for Proposal (RFP) covering Foreign Currency Borrowings that closed on 21 September 2021.
It is most likely the market response, given the circumstances, is rather unenthusiastic but an announcement by MoF is better than speculation. Secretary to the President, Dr. P.B. Jayasundera, who has so far pursued an anti-IMF policy, told a local media outlet last week that the IMF has a role to play in Sri Lanka. He had, however, specified that a policy framework should be formulated prior to engaging such assistance. The recent UN General Assembly (UNGA) speech by the President Gotabaya Rajapaksa also referred to such a process although he did not mention the IMF by name.
Given the poor state of the economy, it is the right time to formulate a multi-layered policy framework that requires the country to undergo substantial reforms that correct obsolete thinking due to a number of political and socio-economic reasons. Perhaps an unprecedented crisis in the midst of a global epidemic presents the opportunity to undertake such reforms. It is not the purpose of this article to focus on the necessary reforms but we mention a few that need real focus. It would be a worthwhile effort if through this change in the policy framework, proposals to reform the currently inefficient public sector are set in motion.
Equally to be tackled should be effective revenue generating capacity within the State, eliminating unnecessary expenditure, corruption and waste. A third policy focus should be the sustained generation of FDI now in the hands of a re-invigorated BoI. Jayasundera at the meeting with the local media pointed out that the government itself has been in the process implementing many reforms including digitalisation of tax, customs reforms as well as legal reforms in civil and criminal administrative and commercial laws. Emphasising these points, he was quoted as saying “Now these things are being done. Now people are only worried about Covid-19 delaying many reforms.”
As pointed out above, State revenue generation must take a prominent place in the reforms. Even with revenue increases, Moody’s, the credit rating agency, estimates the government fiscal deficit to remain wide at around 9.5 - 10% of GDP this year and average some 8.5% over the next two years. In turn, the debt burden of the Government is likely to rise to around 110% of GDP over 2022-23, from around 100% at the end of 2020 compared to 87% in 2019. Extremely weak debt affordability magnifies debt repayment risks.
Interest payments exceeded 70% of Government revenue in 2020 and will likely remain around 60-70% over the next few years – highest across all countries that Moody’s rates by some distance – even as revenue rebounds from very low levels. Indeed, the deficit is likely to remain around 10% of GDP over the next few years, unless efforts to enhance tax administration and impose special taxes can durably and measurably expand its revenue base. In terms of FDI, the BoI seems firmly focused on attracting FDI to Sri Lanka despite the macro challenges the country is facing due to COVID, noninvestment grade ratings and poor Doing Business Rankings.
We understand that a collective effort to improve and enhance the investment climate of Sri Lanka is underway. With a marketing and promotional budget estimated at some US $10 million in its pocket and an RFP to select a PR Agency also in play, expectations are high on the resumption of FDI without which growth will be flat. Hence, time is of the essence. It is unlikely that Sri Lanka has the luxury to get all ‘the ducks in a row’ to succeed whether in FDI or in other areas of the economy. Some visible and tangible turn should become visible to retain belief in the policies proposed and underway. Both the Interim Road Map and Budget must come with time targets and expected outcomes.
(The writer is a senior staff journalist with nearly two decades of financial journalism experience. He can be reached at ishara. [email protected])