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Sri Lanka central bank urged to take pre-emptive action on debt

ECONOMYNEXT – Sri Lanka’s central bank has been urged to take pre-emptive action on impending debt risks in the country, by a former financial sector executive and business leader.

“It is essential that you and the Central Bank of Sri Lanka take the leadership, in urgently making the leaders in governance and connected key executives, aware of the true nature of any potential debt sustainability challenge or crisis that Sri Lanka may face in the medium term,” Chandra Jayaratne, a former head Sri Lanka’s Ceylon Chamber of Commerce said a letter to central bank Governor W D Lakshman.

“This awareness effort must be sustained and be continuous, in order that the leaders in governance are endowed with the critical knowledge as to whether the likely risks facing the nation will be in the nature of a cash flow / liquidity challenge or a crisis involving a solvency based risks leading to a possible future default.

“If leaders in governance continue to fail or postpone taking strategic action steps required now in order to mitigate any impending challenges and possible consequential risks or treat such risks with low priority, due to inadequate awareness of the true nature of the challenge or crisis, the nation and its stakeholders may face drastic repercussions, as evidenced by other case study examples, from other nations of the world.”

The full communication is reproduced below:

Prof. W D Lakshman,
Governor, Central Bank of Sri Lanka,
Central Bank Building,
30, Janadhipathi Mawatha,
Colombo 01.

Dear Sir,

Urgent Need to Make Leaders Aware of the Nature of the Debt Sustainability Challenge or Crisis by Computing the Fiscal Gap alongside the Niche Research Contributions of the Advocata Institute

The Advocata Institute has recently made several scholarly niche contributions to enhance the public awareness on issues connected with Sri Lanka’s Debt Sustainability.

The leadership and researchers of Advocata and all the renowned presenters, both local and foreign, that enriched the “Deep Dive” Series of presentations (https://www.advocata.org/media-archives/2020/09/30/-online-discussion-how-can-we-improve-sri-lankas-debt-sustainability, https://www.youtube.com/watch?v=v4ugr3C1fwI, https://www.advocata.org/media-archives/2020/09/29/deep-dive-ep-1-3-how-can-we-improve-debt-sustainability-in-sri-lanka-a-primer-on-economic-growth-kga88, https://www.advocata.org/media-archives/2020/10/04/deep-dive-ep-1-how-can-we-improve-debt-sustainability-in-sri-lanka-a-primer-on-fiscal-performance,) must be commended and highly recognized for their unique contribution to bring out in the open the critical issues connected with debt sustainability.

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These research initiatives largely filled the awareness vacuum on a topic which must receive the attention of all in Sri Lankans, especially the leaders in governance, the key members of the executive, the legislators and academics.

It is essential that you and the Central Bank of Sri Lanka take the leadership, in urgently making the leaders in governance and connected key executives, aware of the true nature of any potential debt sustainability challenge or crisis that Sri Lanka may face in the medium term.

This awareness effort must be sustained and be continuous, in order that the leaders in governance are endowed with the critical knowledge as to whether the likely risks facing the nation will be in the nature of a cash flow / liquidity challenge or a crisis involving a solvency based risks leading to a possible future default.

If leaders in governance continue to fail or postpone taking strategic action steps required now in order to mitigate any impending challenges and possible consequential risks or treat such risks with low priority, due to inadequate awareness of the true nature of the challenge or crisis, the nation and its stakeholders may face drastic repercussions, as evidenced by other case study examples from other nations of the world.

This strategic action step must be given equal priority alongside priority issues currently focused on by you and the Central Bank top team connected with Covid 19 related loans schemes and renaissance facilities, budget 2021, negotiations with the IMF and bi-lateral agencies, debt management connected issues, tax reforms, fiscal consolidation and economic growth and inflation control.

In addition to the traditional assessments based on debt to GDP, total debt service flows to state revenue, the IMF/World Bank adopted Debt Sustainability Analysis shown in Advocata presentations, projections run by Verite Research, Interest burden to Tax Revenue advocated to by Ricardo Hausman, and Sustainable Development Goal indicator of debt service costs as a proportion of exports of goods and services , it is recommended that the Central Bank compute the fiscal gap, using the model used in Analyzing the US government fiscal gap, prepared for Peterson Foundation by Ernst & Young (https://www.pgpf.org/sites/default/files/EY-Analyzing-Fiscal-Gap.pdf) ( copy attached).

The above suggestion is not a new request to the Central Bank as the undersigned has advocated this option well over a decade. In fact, when Dr. Sarath Amunugama was Deputy Minister of Finance and Planning, based on a submission and follow up formal discussion with Dr. Amunugama, the Central Bank was requested by him to present to the Ministry of Finance with such a computation.

The Senior Deputy Governor then, who represented the Central Bank in the discussions, explained that the Central Bank had not attempted such an exercise. He however, agreed with Dr. Amunugama to undertake the following steps in meeting the critical information vacuum, despite the Research Team of CBSL being engaged at that time in the preliminary preparations of the Central Bank Annual Report:

Assign a research team to develop the fiscal gap computation as a research project and to have it peer reviewed, further refined and internally approved and published as a research paper
Repeat the exercise in the following year using the experience and review critique
In year two to publish the fiscal gap as a part of the Box Articles of the Annual Report, along with strategic management actions taken to mitigate any risks and enhance the effectiveness of debt sustainability going forward
Continue to publish the fiscal gap annually thereafter, thus making the those in governance, legislators and public aware of the position and potential risks and mitigation action

In fact he essential need for the computation and due review of the fiscal gap has been brought up before your predecessor in office, as well as the Financial Systems Stability Consultative Committee (FSSCC) with the attention of the Macro Prudential Surveillance Department drawn to this priority action step on several occasions in the recent years.

I am sure you and the Central Bank Top Team will agree that the leadership in governance and the legislators continuing to engage in national resource allocations, approval and management of national budgets, asset liability management and debt management without full awareness of the nature of the debt sustainability challenge/crisis and potential risks and taking essential, timely, and priority strategic action needed, could seriously negatively impact of the nation and its stakeholders in the medium term. In that context I trust that this submission receives your and the CBSL top teams priority attention and it will lead to committed action steps in the interests of the nation and its stakeholders.

Yours Sincerely,

Chandra Jayaratne
cc. President
Prime Minister
Minister of Finance
Secretary to the President
Secretary to the Treasury
Secretary, National Economic Council
Secretary, Public Finance Committee of Parliament
Monetary Board
Dr. Sarath Amunugama

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