ECONOMYNEXT – Senior Sri Lanka opposition figures and an ex-speaker have called for “orderly re-negotiation of sovereign debt” and “correct policies” for sustainable growth as the country heads for currency depreciation and possible default due to money printing.

Sri Lanka’s government external debt has reached nearly 120 percent, interest payments were also excessively high as a share of state revenues and there were forex shortages, the legislators and ex-speaker said.

“In such a context, we recognize the best way forward for Sri Lanka is to immediately initiate a multi-step process towards an orderly negotiated postponement and restructure of repayment of its sovereign debt,” the group said.

“Sri Lanka can then correct its policies towards a path of sustainable economic growth and debt management , while also ensuring access to essential needs and goods for the Sri Lankan economy and Its people.”

“We recognize that undoubtedly the government has a daunting task ahead, and as a country there is a need for us all to come together to overcome this challenge.

“We further acknowledge the need for sound reform to the national economic policy that will address the root causes for this situation and ensure sustainable solutions to steer the country out of this unprecedented economic crisis, and forge an equitable and just solution for our future generations.”

The diplomatically worded statement came following a bi-partisan meeting of legislators called by Northern legislator M A Sumanthiran which included several ruling party members who are concerned about the current economic problems.

Parliamentary committee chiefs Charitha Herath and Anura Yapa had participated in the meeting, while Tissa Vitarana had also placed his signature on the document, Sumanthiran said.

He said the effort was not to “apporting blame” but to arrive at a solution.

The statement also called for the welfare of the poorest communities.

“We acknowledge that Sri Lanka should take immediate measures to ensure strong social welfare for its people so that the poor and vulnerable communities are protected from the adverse impact of this economic crisis,” the statement said.

However unlike other countries that had severe debt problems like Greece which was part of the Euro region or Ecuador which is now dollarized and could not depreciate the currency, Sri Lanka has its own rupee which is weakened by money printed to keep interest rates down.

As a result, a fall of the currency would further push up inflation and destroy the real value of pensions, rupee denominated bank deposits and salaries (a real hair cut) while also pushing up the prices of exported and imported goods including foods.

Analysts had warned for several years that the hardship people face in a soft-pegged country with depreciated money is real and is not budget cuts opposed by the anti-austerity brigade such as in Eurorized Greece, but is that of Latin American collapsing pegged currencies.

The current troubles including the tendency to have power cuts and energy shortages were warned when the central bank was printing money in 2018 mis-using the independence provided by the then administration. (Sri Lanka is not Greece, it is a Latin America style soft-peg: Bellwether)

Sri Lanka had printed money in 2015, 2016, 2018, 2020 and 2021, making it impossible to repay foreign debt on a net basis and adding to the total debt stock, including that of Ceylon Petroleum Corporation.

The anti-austerity brigade had advised Greece to exit the Euro region, depreciate and inflate away the savings of all citizens and pensioners instead of cutting budgets and excessive benefits of state workers, adding fuel to the lack of direction among its pro-state ruling classes.

Related Why Greece Should Leave the Eurozone

Analysts and economists had called for rule based central bank control, which also serves as a hard budget constraint to stop deficit spending.

Sri Lanka’s legislators themselves had given wide powers for the central bank to print money, create forex shortages, depreciate the currency (in the first version of the central bank law the currency could not be depreciated without approval) and also impose exchange controls and interest controls.

Before 1950 money printing and currency depreciation and inflation had been outlawed via a currency board law allowing reserves of 11 months of imports to be collected when the central bank was set up.

Using the central bank’s money printing power, successive governments had engaged in inflationary deficit financing and policy makers have blamed other causes other that monetary policy for both inflation and forex shortages.

Sri Lanka in 2019 slashed taxes for ‘stimulus’ and the central bank printed the highest volume of money in its history to prevent interest rates from going up, leading to a severe external drain.

The central bank itself is now indebted.

Sri Lanka from September 2021 started to use foreign reserves for imports as forex shortages became acute and it is printing money to sterilize interventions, which leads to more reserve losses and inability service external debt.

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In the normal course of business foreign reserves are not used for imports but small amounts are collected each month to re-build reserves and repay lumpy debt.

When reserves are depleted the only course of option available is to hike rates and float the currency to stop reserves from being used for imports and sterilized with new money.

The full statement is reproduced below:

11th February 2022

A collective response to our economic crisis:

We the undersigned, recognizing the unprecedented nature of the economic challenges facing us, seek urgent, constructive, and sustainable solutions to this pressing situation.

We note that:

(1) The country’s ratings have fallen to the level of being blacklisted in International credit markets. Since April 2020, Sri Lanka has been locked out of borrowing using International Sovereign Bonds (ISBs) in the International market,

(2) Repaying US dollar debt in this context means that the usable foreign reserves are down to below one month of imports – the lowest on record since independence.

(3) The ratio of interest on debt to government revenue was above 70% in 2020, a historical high for Sri Lanka, and amongst the highest in the world.

(4) The ratio of public debt compared to the value of Sri Lanka’s domestic production (GDP) is also the highest on record, at 120%. It skyrocketed, by almost 2S percentage points, in the last two years. Each of these situations by themselves would spell a serious economic challenge. •
‘ . . .
Occurring simultaneously, this pressing and historic’ e conomic crisis is threatening our future, in both the short term and long term.

We recognize that undoubtedly the government has a daunting task ahead, and as a country there is a need for’ us all to come together to overcome this challenge.

We acknowledge that Sri Lanka should take immediate measures to ensure strong social welfare for its people so that the poor and vulnerable communities are protected from the adverse impact of this economic crisis .

We further acknowledge the need for sound reform to the national economic policy that will address the root causes for this situation and ensure sustainable solutions to steer the country out of this unprecedented economic crisis, and forge an equitable and just solution for our future generations.

We are fully cognizant that Parliament has full control of public finance, and that each member of parliament has a fiduciary responsibility to ensure the proper management of public finances in Sri Lanka .

In such a context, we recognize the best way forward for Sri Lanka is to immediately initiate a multi-step process towards an orderly negotiated postponement and restructure of repayment of its sovereign debt. Sri Lanka can then correct its policies towards a path of sustainable economic growth and debt management , while also ensuring access to essential needs and goods for the Sri Lankan economy and Its people .

This will reduce the pain and hardship that is currently exper ie nced due to the shortage of foreign currency. In any path forward, it is essential that the government takes measures to consider the difficulties of the poorest and the most vulnerable people in the country and provide them with adequate social security, protection, and relief.