ECONOMYNEXT – Sri Lanka’s ex-Prime Minister Ranil Wickremesinghe who entered parliament after his party was reduced to a single seat in the last elections and he lost his own district said the government should go the International Monetary Fund or come up with an alternative plan.
“I do not know about other people but I feel the only alternative is to go to the IMF,” Wickremesinghe said in his first speech after his party stayed out of parliament for months after the elections as he entered the assembly despite losing his seat in Colombo district.
“If you are not agreeable, tell us what the alternative is. Without an alternative there is no point in sprouting statistics.”
His speech came shortly after Trade Minister Bandula Gunewardene brought a 200 billion rupee supplementary estimated that will increase state spending by 1.2 percent and the deficit by a similar amount unless asset sales bring revenues.
He said farmers were in a crisis in fertilizer and there was also a fuel crisis.
Sri Lanka’s soft or impossible peg had depreciated to 200 to the US dollar since Wickremesinghe left office with the peg at 182.50 levels under fiscal and monetary stimulus.
During Wickremesinghe’s tenure the currency collapsed from 131 to 182 to the US dollar in two separate currency crises as money was printed in a Keynesian stimulus despite having a pegged exchange rate regime.
“In 2015, when we built the government, there was a collapse in aggregate demand,” he claimed in March 2016, though private credit was rocketing in 2015.
“In that situation in April we raised (state worker) pensioners’ payments by 1000 rupees, we raised state workers’ salaries, private sector salaries were raised.
“In this way we put more money in the hands of consumers to increase aggregate demand.”
“But I would like to say that we would not go to a situation where aggregate demand will collapse again.”
Aggregate demand however collapsed twice during his time as rate cuts and liquidity injections to target an output gap (so-called ‘go’ policies) pushed the rupee over the edge and corrective policies were made (stop policies).
The public paid a series of new taxes as value added and income taxes were also hiked, but the Wickremesinghe’s administration did nothing to restrain the central bank which printed money in 2018 to target an output gap and busted the rupee again.
The agency also targeted a real effective exchange rate index at below 100 by depreciating the currency to destroy real wages of workers to give unjust profits to export businesses, and it is not clear whether there was any cabinet sanction for the move.
State Minister for Money and Capital Markets Nivard Cabraal said the opposition wanted the government to go to IMF so that it could score political points.
Wickremesinghe entered into a 1.5 billion US dollar IMF program which was aborted after 1.3 billion US dollars was disbursed as program targets fell short and the government also changed.
When Cabraal was Governor of Central Bank, the agency went to the IMF though money printing mid-way pushed the currency down to 131 to the US dollar. However the program was concluded, in a rare occurrence for Sri Lanka.
In 2015 he collapsed the currency as domestic credit recovered fast from an earlier impossible peg crisis in 2012/2013 when the rupee fell from around 113 to 131 to the US dollar.
The IMF program itself had contradictory anchors including a ‘flexible exchange rate’ or discretionary external anchor and a flexible inflation targeting, which is a discretionary domestic anchor.
Sri Lanka’s central bank is a top client of the IMF which has failed to end contradictory policies involving the impossible or non-credible peg. Such central banks become recidivist or repeat clients of the IMF.
Analysts have called for the reform of the open market operations of the central bank to prevent frequent trips to the IMF.
However Sri Lanka is now in deeper trouble as the country has been locked out of capital markets, which cannot be solved with a rate hike. (Colombo/June22/2021)