ECONOMYNEXT – Sri Lanka President Ranil Wickremesinghe said his attempts to reverse the inward-looking protectionist policies and fix state finances during his last term as Prime Minister was opposed both by politicians and business interests.
“In the 4.5 years as prime minister it was an effort to take this economy out in a different direction,” President Wickremesinghe told an economic forum organized by Sri Lanka’s Ceylon Chamber of Commerce.
“We were able to get a surplus in the primary budget. But it was warfare.
“Politicians wanted to protect their power, businessmen wanted to protect their profits and many others wanted to see what the country would provide them free of charge.”
Wickremesinghe was unable to bring private investment to the port under apparent internal political opposition. Relations with President Maithripala Sirisena also soured and he appointed his own economic advisors.
Meanwhile Wickremesinghe’s free trade agenda was hit by monetary instability as the central bank printed money under flexible inflation targeting and triggered forex shortages which were followed by trade controls.
Wickremesinghe’s ‘Yahapalana’ administration also went on a spending spree called ‘100-day program’ in 2015 triggering a currency crisis in 2015/2016 as the central bank printed money to suppress rates.
The central bank however had already started injecting liquidity and losing reserves (by terminating term repo deals) from the fourth quarter of 2014 as domestic credit recovered from a 2012 currency crisis before his administration came to power.
The rupee fell from 131 to 152 and stabilization policies led to an output shock. The International Monetary Fund then taught the agency which had already depreciated the currency from 4.70 to 152 to the dollars seeking bailouts 16 times, how to calculate an output target.
Under Finance Minister Mangala Samaraweera taxes were raised and budget were fixed in 2018 to bring deficits back to pre-2015 levels, though state spending went up from 17 to around 20 percent of GDP under the spendthrift ‘revenue based fiscal consolidation’ where cost cutting was dropped.
The central bank then printed money by purchasing bonds from banks to target the yield curve, jettisoning a bills only policy established by ex-Central Bank Governor A S Jayewardena, through term reverse repo and overnight injections taking the rupee from 151 to 162 to the US dollar.
The central bank also created money by entering into a swap with the Treasury in 2018, a type of strategy used by speculators to bring down East Asian pegs putting, further pressure on the currency from around July 2018 onwards.
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Stabilization policies then led to another output shock. As forex shortages came Sri Lanka resorted to heavy external borrowing as it was unable to settle maturing loans with domestic borrowings.
After two currency crises and output shocks, macro-economists of the new administration cut taxes saying there was a ‘persistent output gap’ and printed even more money for stimulus (close the output gap). (Colombo/Dec07/2022)