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Wednesday, May 22, 2024

Govt. mismanaged balance of payments crisis, now remedies more painful

*Central Bank needs to be modest enough to accept criticism *How Cabraal debunked concerns raised last year
Reiterating what has been said in these pages over the past few days, Dr. Harsha De Silva MP, economic spokesman for the UNP, said mismanagement of the balance of payments crisis has resulted in the prescribed remedies being more costlier to the economy.

“In complete contrast to the picture painted by Governor Nivard Cabraal and subsequently showcased by politicians, the sad reality of the economy of Sri Lanka has been revealed, the opposition lawmaker said.

“The mismanagement of the problem; particularly ignoring the ballooning trade deficit and under-pricing energy in an artificially controlled exchange rate and interest rate regime, had no other possible ending other than the one that is unfolding right before our eyes.

The domino effect of the erroneous decision making by the miserably politicized Central Bank resulting in a massive depreciation and an unprecedented increase in energy prices will be widespread and be felt by all.  The enormity of the fallout will become clear in the coming days with people unable to meet their daily requirements resulting in worker agitations for salary increases which could even spin out of control. 

“The government has no one to blame but themselves for this predicament and the public would now realize the vituperative attacks made on their critics were of bad taste and unprofessional.  Going forward we hope for the sake of the millions of innocent people of this country that persons knowledgeable in the subject of economics and modest enough to take criticism from others would be handed over the responsibility to manage this nations complex economy,” Dr. De Silva said. 

As highlighted in the pages yesterday, several leading economists in the country were ostracized for highlighting the structural deficiencies in the country’s balance of payments. Had authorities headed the warnings last year, the rupee would not have had to be depreciated as much as it is today, interest rates would not be so tight and fuel price increases could have been gradual and less of a shock to the economy.

“The overnight adjustment to fuel prices is pretty significant,” a young economist attached to the Institute of Policy Studies, Anushka Wijesinha told The Island Financial Review.

“While the transport, agriculture and fishery sectors will get government subsidies and the impact on them will be dampened, the manufacturing sector will feel the full brunt. More generally, though, Sri Lanka needs to rethink its domestic oil pricing mechanism, and move towards a market-reflective pricing that follows world Brent crude prices, so we don’t have sudden hikes like this,” he said.

Central Bank Governor Ajith Nivard Cabraal had strongly criticised those economists sounding off the alarm over the impending balance of payments crisis. Last October, in an article published in The Island, Cabraal swept aside concerns that a balance of payments crisis was looming large and that the reserves position was not very comfortable. We reproduce some of his statements below.

Cabraal framed the following response to the question ‘Aren’t we heading for a balance of payment crisis?’: “Certainly not! We expected this growth in imports to take place this year as a result of lower duties, higher fuel prices, greater quantum of intermediate goods imported, and the overall improvement of per capita incomes of the people. Therefore, the increase in imports which has resulted in the widening trade deficit has been factored into our estimates.

What is important is for us to have a clear picture in relation to our current account balance, and the capital and financial account balance which finally leads to the balance of payments. Although we have a trade deficit, the other inflows have more than adequately compensated for this shortfall, and therefore we expect the balance of payments to record a comfortable surplus by the end of the year. On that basis, we see no reason to react to monthly changes in inflows and outflows. Reacting to daily and monthly changes is what speculators and hedge funds do, but, we as a Central Bank need to behave and act differently. We take a long-term view of economic trends. Our current trends clearly indicate that there will be very definite inflows. That is why we are confident about our stance.”

Around that time, economists had also warned against falling reserves, and this is what Cabraal had to say:

“Sri Lanka’s international reserves are calculated in exactly the same manner that it is done all over the world. Whether it is a developed country or a developing country, they all follow the same basis of reserve computation. Every country has borrowed and non-borrowed reserves. So, there is no difference from our situation. What is important is to understand is as to how stable such reserves are. Sometimes, reserves that are built up with FDI or portfolio investments could be even more vulnerable to quick flight in a difficult situation, than long-term debt capital which is obtained on a fixed term basis. Very often, sweeping statements and vague generalizations are made by persons who do not see the long-term trends or the big picture. Managing an economy is not an exercise which ends at a year end, or at the end of a quarter. On the contrary, it is an ongoing process. For some people who are only looking at programmes, year-end targets or theories, the quarter end targets, and numbers may be highly important and relevant, and that could be their only focus. But, for those who manage economies of countries on a long-term basis, what is most important is the direction of the economy.

“We cannot de-stabilise a country or an economy just to satisfy some temporary theoretical concept. I can confidently assert that our reserve consolidation path is a well-balanced and well-executed process which includes many components which function under different paths. Certain components may be more visible and more active at certain times. At other times, different components may be more active. Some theoreticians do not understand this “total” approach and that is why some of them make such statements. Of course, some others with ulterior agendas and motives understand this, but try to cause panic in the minds of people by making twisted statements based on some temporary phenomenon. Once again, I must reiterate that we are confident of the path we have chartered, and we will diligently follow such path, which we know will realize the desired long-term results,” Cabraal said.

Nearly four months since this interview was published, the Central Bank has had to reverse all its policy stances as it became too obvious to ignore that a balance of payments crisis was indeed looming and that the reserves position was fast deteriorating. Had


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