SL needs strong austerity measures to overcome the economic crisis

We must not forget these young people in rural areas, who have no idea what is happening apart from the food prices which continue to rise.

According to the Daily FT, despite restrictions and currency shortages, 2021 import figures jumped 28.5% or $4.6 billion to $20.6 billion; the highest in three years. December inflows were the highest on record at $2.2 billion. The FT noted that Sri Lanka’s love of imports remains unstoppable as confirmed by the latest Central Bank data, up a steep 47%.

The highest import figure of all time recorded was $22.2 billion in 2018, the same year that Sri Lanka recorded the highest tourism revenue on record at almost $5 billion. In 2017, imports were $21 billion. The surge in imports is occurring despite various measures taken by the CBSL to discourage non-essential items amid the acute shortage of foreign exchange. If this trend is not corrected, it will certainly further aggravate the currency shortage.

Policy Makers

The big concern for CBSL must be the growing monthly deficit between imports and exports. Today, while the USD returned by banks and not on the market are used to import oil and basic necessities, the USD not returned by banks are not exchanged freely on the market, for the use other authorized imports. The large volume of LCs opened in the past three months on 30-60 day supplier credit will mature when the $1 billion ISB matures on June 22. The repo window is also running out of steam. It is said that after a case of a major potato tea exporter, the CBSL advised that they would not be hospitable to any transaction of this nature in the gray market.

Additionally, businesses with retained USD and willing to open LCs for non-USD customers will do so with premiums paid under the table. Black market transactions, it is said, are now at 253+. The government will obviously not devalue the LKR given the impact on the GDP figures and the COL. The CBSL may need to encourage institutions with strong balance sheets to enter the international currency markets and offer them some form of currency risk protection.

Limited options

Imports of fuel, textiles, machinery, medical and pharmaceutical products, and fertilizers are essential to maintain exports at current levels. Imports of consumer goods and non-food consumer goods increased by 46% according to the FT. These numbers need to be carefully considered and restrictions put in place quickly. Former central banker W. Wijewardena, in an article he wrote for the Financial Times, said that “the Gotabaya Rajapaksa administration made serious policy mistakes in the recent past when it announced an attractive tax break and unsolicited for taxpayers, the estimated revenue loss was around Rs. 650 billion, and the government turned to the banking sector to fund the budget.

“In 2020 and 2021,” he further said, “the government had borrowed from the banking sector i.e. Central Bank and banks, a net amount of Rs. 3.5 trillion marking an increase of 125%. It is a colossal sum. As a result, the total money supply of the country had increased during this period by Rs. 3,023 billion or 40%. The consequence of this extraordinary monetary growth was the building of inflationary pressures in the national economy, on the one hand, and the depletion of foreign exchange reserves, putting pressure on the rupee to depreciate in the market.

While those responsible for this short-sighted decision must be held accountable, as a country we must move forward, given that Sri Lanka needs approximately $6 billion in financial support to pass 2022. We have already earned the unfortunate title of world beggar. Greece and Iceland went through a similar crisis. They weathered the crisis through wise policy interventions and austerity measures. Zimbabwe and Argentina did not.

Go forward

Our politicians must rise to the occasion – a big ask given their dismal record. Importers can no longer be allowed to over-order stocks in anticipation of a forex crisis around the corner. The current situation in the country does not allow this. We must concentrate all our efforts to export more and attract FDI, while spending less. Those who say we should open up, have to put their money where their mouth is. The people cannot continue to blame the government, especially the. 6.9 million who voted for them. They must take responsibility for their actions; Unfortunately, the more than 5.2 million people who have acted otherwise also have no choice, given the scale of the crisis which can bury everyone together. A joint effort is what will get us out of this economic crisis, with Gotabaya as the catalyst. The question is? Can it and will it?

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