A pragmatic alternative economic model which promotes sustainable growth and ensures fair distribution of economic benefits to people should be implemented to get over the recurring debt crisis triggered by a shortfall of foreign reserves, said Senior Lecturer, Department of Accounting, University of Sri Jayawardenepura, Prof. Anil Fernando.
He said although some try to claim that our economy is on the right direction, it is facing a major external debt crisis at present.
The perennial practice of successive governments of borrowing to repay loans, wasteful and unproductive investments in the name of development projects, corruption, sluggish economic growth and insufficient foreign exchange earnings have resulted in a gradually deflating foreign reserve status.
According to Central Bank statistics, the country needs USD 8,745.4 million to settle foreign loans and interest within a year from 1.2.2021 to 31.1.2022.
Total official foreign reserve assets available at the end of February 2021 amounted to USD 4,555.7 million only. This is a high risk situation and it has led the international debt rating agencies to downgrade Sri Lanka’s foreign debt paying ability to CCC+ which is one level just above the default.
“Foreign investors pulling out their money from the Colombo Stock Exchange is another indication that Sri Lanka does not have adequate foreign reserves to manage the external sector and as a result there is a great risk that the foreign exchange rate will start flying soon when the ability to hold it on comes to its tolerable limit,” Prof. Fernando said.
Another indication of this crisis he said is the low prices quoted for Sri Lankan International Sovereign Bonds (ISBs) traded in the secondary bond market. For example, a Sri Lankan ISB with a face value of USD 100 that matures in January 2022 is traded only at USD 74.25 thus resulting in a yield of more than 50% to investors. Hence, the government cannot even think of raising dollars by issuing new ISBs at such a cost.
If the policy makers are not keen to solve the problem with the support of the people at this juncture, they will not have many options, other than either to be subservient to countries who offer bail outs for their own economic and geopolitical strategies or to sell national resources to foreigners for dollars. Even though policy makers claim that foreign investment can be attracted, a conducive environment for foreign investments to boost investor confidence and trust is not seen in Sri Lanka.
“Simple rejection of economic realities through the media and hiding the real issues will not solve the problem,” Prof. Fernando said, adding that the strategy of financialisation coupled with Modern Monetary Theory (MMT) by the policy makers is not conducive to the economy when there is no comprehensive master economic plan implemented to boost local production and aggregate demand in the country subject to other limitations of MMT. The excess money pumped to the economy could trigger inflation sooner or later and create even a financial bubble in the future.
“Therefore, It is of paramount importance for the Government to face this reality and to look for the cooperation of every citizen to fix this issue through an economic plan and a model which encourages people to engage in production, uses technology in an optimal manner and ensures a fair distribution of economic benefits instead of paving the way for crooks and rouges to rob the nation,” Prof. Fernando said.
He said implementation of standalone strategies to run the daily affairs will be counter-productive. There are no short and quick answers to the perennial problem that prevails as a result of wrong economic policies adopted by successive governments.