CAN SRI LANKA SURVIVE?

1. Underlying causes for the economic collapse

a). Unsustainable fiscal deficit

Long years of allocation of money for unproductive expenditure (Eg: even long after the war was over, defense had the highest budget allocation), continually sustaining loss-making State-Owned Enterprises (Sri Lankan airlines), Capital expenditure which yielded no return (Eg: Mattala airport, Hambantota port, Nelum Pokuna tower and Convention Centre), lifelong subsidies for fuel, power, fertilizer.

b) Funding the above with Printed money

Fueling inflation and damaging the exchange rate by creating an excessive demand for dollars through cheap money

c) Decline in Revenue

Indiscriminate tax exemptions and lowering of tax rates resulted in Revenue which accounted for 20% of GDP in 1990’s and declined to 8% now, thereby resulting in unsustainable fiscal deficits.

d) Deficits in Balance of Payment (BOP).

Continual outpacing of Exports by the Imports, greatly facilitated by the low-cost supply of printed money, the Dollar continued to increase its value against the Rupee. This resulted in exports stagnating or falling due to the Rupee being pegged administratively to the Dollar, rather being allowed to find its own value in the international market. This amounted to an anti-export policy.

e) Indiscriminate foreign borrowings

Since access being given to Capital Market, ISB’s were purchased regularly for non-revenue generating projects.

2. Historical cause

One may raise the question that for 74 years since independence we have had a BOP deficit, but we never faced such a crisis, so why now? The reason lies in what happened in 2006, when Sri Lanka was granted the Middle-Income status. Prior to graduating to this status, we were the recipients of generous aid and concessionary loan packages at hardly an interest rate with very long repayment schedules. Even with long years of negative BOP, we had no debt sustainability problems because we were bailed out by the several IMF/World Bank/ ADB etc packages because countries with lower income status had no access to the Capital Market and the International Sovereign Bond (ISB). Our first ISB borrowing was in 2007 and that certainly was not the last and our Government debt soared from that point onwards funding projects which had no Return on Investment and no Pay Back period. Hence the result is the current debt unsustainability. Our entry into ISB made us come under the rating agencies which exposed our financial indiscipline.

3. Steps taken in the mismanagement of the problem

a) Fixation of the Rupee to the Dollar by using the scarce reserves to defend the Rupee.

b) Large amount of Revenue loss due to Tax exemption and reduction.

c) Placing a cap on Treasury Bill rates thereby creating an artificial interest rate. This resulted in the under subscription of the Treasury Bills leading to printing of more money to compensate for the under subscription.

d) Delay in seeking IMF support. We should have done this in December 2020 when our debt was still sustainable and debt restructuring would not have been a pre-condition to IMF assistance. IMF in the 19990’s was very prescriptive but today they adopt a far broader approach.

4. The way forward

We need to acknowledge some of the positive steps that have been taken during the last 2 months.

a) Sharp increase in interest rates to combat inflation and dampen demand both locally and for imports.

b) Removing the cap on Treasury bill rates thereby allowing the interest rates to be market based.

c) Restrictions on Open Account trading instilling financial discipline thereby discouraging the grey market.

d) Removing the fix on the exchange rate and once reached a stable level allowed fluctuation within a specified band without allowing it to be out of hand.

e) Tax increases and allowing price increase in fuel and gas.

f) Curb on government expenditure

The above are measures for the management of inflation, exchange rate and fiscal operations. What needs to be done now is:

a) Debt sustainable analysis and an IMF Staff level agreement. This will open the door to (b)

b) In view of the Reserves being virtually zero, bridging finance needs to be negotiated. The likely countries are India and Japan.

c) IMF funding.

The above should instill confidence and see more export conversions taking place, greater share of worker remittance coming into banking channels and inflows into the Stock exchange

Written by: Angelo Patrick

Indian Pm Narendra modi at Germany g7 summit

Modi discusses Sri Lankan crisis during G-7 meeting

Indian Prime Minister Narendra Modi discussed the crisis in Sri Lanka at the G-7 summit in Germany.

Modi was quoted as saying that India is helping Sri Lanka to ensure food security.

“We have dispatched about 35,000 tonnes of wheat as humanitarian aid to Afghanistan in the last few months. And even after the heavy earthquake there, India was the first country to deliver relief materials. We are also helping our neighbour Sri Lanka to ensure food security,” the Indian Prime Minister pointed out, according to the Press Trust of India.

Underlining that rising prices of energy and food grains are affecting all countries amid global tension, Prime Minister Modi suggested that for ensuring food security the focus should be on fertilisers’ availability, structured system for use of Indian agricultural talent, nutritious alternatives like millets and natural farming.

In an apparent reference to the Ukraine crisis, Modi noted that the G-7 and those invited at its summit were meeting amid an atmosphere of global tension and asserted that India has always been in favour of peace.

“Even in the present situation, we have constantly urged for the path of dialogue and diplomacy. The impact of this geopolitical tension is not just limited to Europe. The rising prices of energy and food grains are affecting all the countries,” he said in his remarks at the session on Stronger Together: Addressing Food Security and Advancing Gender Equality’ at the G-7 Summit.

Putting forward his suggestions on the subject of global food security, Modi said the focus should be on the availability of fertilizers, and keeping the value chains of fertilizers smooth at a global scale.

Source: Colombo Gazette

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Horse Carts And Bullock Carts Are Back On Roads As Solution To Fuel Crisis

Horse carts are back in several cities including Jaffna as a solution to the current fuel crisis.

Bullock carts have also been deemed as a solution by the people severely affected by the acute fuel shortage in Sri Lanka.

Horse carts and bullock carts were widely used for transportation several decades ago. However, they became a rare sight as more and more vehicles entered the roads.

According to government sources, Sri Lanka is yet to source fuel for the next three months and the country is facing a debilitating foreign exchange crisis.

Source: Asian Mirror

Sri Lanka to open fuel import, retail sales market to foreign companies

The Cabinet of Ministers has green-lighted opening up the fuel import and retail sales market to companies from oil-producing nations.

These companies will be selected on their ability to import fuel and operate without foreign exchange requirements from the Central Bank of Sri Lanka (CBSL) and other banks for the first few months of operations, Minister of Power & Energy Kanchana Wijesekara said in a tweet.

According to him, the Ceylon Petroleum Corporation (CPC) will be the service provider for logistics, stocking and distribution with a service fee charged from the selected companies.

Selected outlets of the existing 1,190 belonging to the CEYPETCO and new outlets will be made available for Lanka IOC and the new companies selected, he explained further.

 

The proposal for this was tabled by the Minister of Power & Energy, for entering into long-term agreements with selected companies in oil-producing countries by following the formal procedure.

Approximately, 90% of Sri Lanka’s fuel demand is fulfilled by the CPC, and the remaining 10% by Lanka IOC, the IndianOil’s subsidiary in Sri Lanka.

Ensuring an uninterrupted fuel supply to the country has become a challenge due to the current foreign exchange crisis in Sri Lanka, the Government Information Department said in a statement.

Accordingly, long-term agreements signed with selected companies in foreign oil-producing countries will allow them to import and sell fuel using their own funds, in a manner that does not put pressure on the foreign exchange issue in Sri Lanka.

Source: Adaderana.lk

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President Biden announces $20 Million in additional assistance to feed over 800,000 Sri Lankan children

At the G7 Summit today, President of the United States Joe Biden announced $20 million in additional assistance to strengthen food security in Sri Lanka. Building on other recent funding announcements from the United States, this newly posted assistance will target Sri Lankans most in need during the current economic crisis. The funding aims to support a school nutrition program that will feed over 800,000 Sri Lankan children and provide food vouchers for over 27,000 pregnant and lactating women over the next 15 months. The effort also plans to support approximately 30,000 farmers through the contribution of agricultural assistance and cash in order to increase food production in vulnerable Sri Lankan communities.

“President Biden’s announcement of $20 million in additional assistance to Sri Lanka demonstrates the United States’ ongoing commitment to food security, public health, and the economic well-being of all Sri Lankan people,” said U.S. Ambassador to Sri Lanka Julie Chung. “The United States will continue to support Sri Lankan efforts to promote economic stability and will ensure this assistance reaches the communities – and children – who need it most.”

The $20 million of humanitarian assistance announced today builds on nearly $12 million in recent U.S. commitments in economic and humanitarian assistance, totaling $32 million in U.S. support for the Sri Lankan people since June 16, 2022. Funding is provided through the U.S. Agency for International Development (USAID) and will be awarded to partners that adhere to globally recognized monitoring and evaluation standards. This ensures that funding is accounted for and assistance reaches those identified as most vulnerable to food insecurity.

Source: US Embassy in Sri Lanka

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Foundations of Sri Lanka’s economic revival have to be built on export industries

In the last 30 years, Sri Lanka has lived through a debilitating civil war, a tsunami, the Easter Sunday bomb attacks and a two-year long pandemic. As a nation, we have battled through them all, emerging bruised but not broken. We are resilient, and yet again, we will overcome the current economic crisis as one nation united. But we need support, and we need the rest of the world to continue to believe in the resolve of the Sri Lankan people.

Through myriad crises, companies have built an apparel industry that has become a reliable sourcing destination for some of the largest global brands. They have reaffirmed confidence in Sri Lanka’s delivery of both product and quality and always looked to Sri Lanka as a safe and reliable pair of hands. The country has developed an enviable reputation for ethical and sustainable manufacturing.

Now, the country is in the throes of a self-inflicted macroeconomic crisis. But what complicates matters this time are events occurring beyond Sri Lankan shores and not within our control.

Russia’s invasion of Ukraine exacerbated a trade and tariff war between the US and China. Supply chain breakdowns across the world and galloping global inflation added to the explosive mix. Emerging unscathed from this latest crisis is going to be hard and perhaps a long drawn-out process.

The return of some political stability offers much needed hope. However, sustaining that stability and political consensus around a common set of goals will involve deft maneuvering on the Government’s part. All political parties seem to be aware of the risks of upsetting that fragile stability for narrow gains.

Despite fuel shortages, unreliable electricity supply and the precarious state of external finances, exporters adapted to change quickly and continued to deliver product to their customers. Apparel, which accounts for 40 per cent of total exports, and at least half of all merchandise exports, has not halted production even for a day. In the first four months of 2022, export records have been set, and the industry has continued to earn much-needed foreign exchange.

Those export earnings have been useful to pay for critical imports, combined with lines of credit from trading partners such as India and China as the Government negotiates a restructuring of its external debt of almost US$57 billion (mostly in dollar-denominated bonds, public and private). Sri Lanka is negotiating with the International Monetary Fund (IMF) and other lending agencies for a resolution to the crisis and progress is being made.

Prior to the pandemic, the apparel industry had set a target of $8 billion in exports by 2025; the Joint Apparel Associations Forum (JAAF), the industry’s apex body etched a vision and strategy for 2030 estimating double-digit growth. Companies cemented their buyer relationships and infused further investment. The Government set up the Eravur Fabric Park, to onshore even greater value addition.

Apparel has been and will continue to be the foundational structure of Sri Lanka’s manufacturing capacity. The commitment is such that two companies just announced the infusion of new investment, adding manufacturing capacity to the current milieu, despite the unstable macro environment.

So, what can be done now? Different stakeholders have different responsibilities.

Firstly, the Government needs to get its fiscal house in order. The Prime Minister has announced tax reforms, but he, his Cabinet and Parliament will have to stay the course. Some taxes have been raised, and more will be. But the need is for structural reform, aligned in response to significant global economic changes. White elephant infrastructure projects, for example, should be removed from the country’s future plans.

Secondly, export and manufacturing industries must be prioritised; it is the foreign exchange earned from these industries that pay for the country’s essential imports, primarily fuel and pharmaceuticals. The operating environment for export-oriented industries must be strengthened, with the supply of energy and import of essential raw material continuing uninterrupted.

Thirdly, citizens should be made aware of the actual cost of living. Subsidies have been very generous in the past, but these are unsustainable and are the reason for Sri Lanka’s public finances being in a mess. In the short run, the prices of all essential commodities increasing, including energy and food, will be unavoidable. Belts will have to be tightened.

Fourthly, the Government should establish a clear five or six-step economic revival plan, developed with the assistance of the IMF and other agencies. That plan should be committed to by, and implemented with, Parliamentary oversight, holding the entire political system accountable for meeting the goals set out.

The Government – not just the Executive, but Parliament as well – should communicate this plan to both Sri Lankans and the global community, explaining the reasons and cost implications of the steps taken and the benefits that accrue by taking a disciplined and responsible approach to economic management.

Experience over three tumultuous decades has demonstrated that buyers, customers and lenders are as invested in Sri Lanka’s apparel industry and economic revival as Sri Lankans are. This is where faith in the apparel industry’s resilience is well seen.

It’s not going to be easy; things will get worse before they get better. Being resilient is about staying committed to proposed reforms and actions, and not losing sight of set goals.

Sri Lanka has fought many a battle and emerged triumphant. We can do it once more – and win.

Written by Wilhelm Elias

Non-essential petrol sales halted for two weeks in Sri Lanka

Sri Lanka has suspended sales of fuel for non-essential vehicles as it faces its worst economic crisis in decades.

For the next two weeks, only buses, trains and vehicles used for medical services and transporting food will be allowed to fill up with fuel.

Schools in urban areas have shut, while officials have told the country’s 22 million residents to work from home.

The South Asian nation is in talks over a bailout deal as it struggles to pay for imports such as fuel and food.

Sri Lanka is the first country to take the drastic step in halting sales of fuel to ordinary people “since the 1970s oil crisis, when fuel was rationed in the US and Europe and speed limits introduced to reduce demand”, Nathan Piper, head of oil and gas research at Investec, told the BBC.

He said the ban underlined the steep rise in oil pricing and limited foreign exchange reserves in Sri Lanka.

Many of the island’s residents don’t know how they will cope without fuel. There have been long queues at filling stations across Sri Lanka for months.

Chinthaka Kumara, a 29-year-old taxi driver in Colombo, thought the ban would “create more problems for people”.

“I’m a daily wage earner. I’ve been in this queue for three days and I don’t know when we will get petrol,” he told BBC Sinhala.

Drivers have been asked to go home, with tokens distributed aimed at rationing scarce fuel stocks. Some kept queuing, but others couldn’t.

“I was in a queue for two days. I got a token – number 11 – but I don’t know when I will get fuel,” S Wijetunga, a 52-year-old private sector executive, told the BBC.

“I need to go to the office now, so I have no option but to leave my vehicle here and go in a three-wheeler.”

Kenat, a motorised rickshaw driver in the Colombo suburb of Kotahena, said people like him were being “destroyed”.

“Our family used to have three meals a day. Now we eat only twice a day. If this continues, it will come down to one meal,” he told BBC Tamil.

‘Severe economic crisis’
With an economy hit hard by the pandemic, rising energy prices and populist tax cuts, Sri Lanka lacks enough foreign currency to pay for imports of essential goods.

Acute shortages of fuel, food and medicines have helped to push the cost of living to record highs in the country, where many people rely on motor vehicles for their livelihoods.

On Monday, the government said it would ban private vehicles from buying petrol and diesel until 10 July.

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Cabinet spokesperson Bandula Gunewardena said Sri Lanka had “never faced such a severe economic crisis in its history”.

The cash-strapped country has also sent officials to the major energy producers Russia and Qatar in a bid to secure cheap oil supplies.

Over the weekend, officials said the country had only 9,000 tonnes of diesel and 6,000 tonnes of petrol to fuel essential services in the coming days.

It has been estimated that the stocks would last for less than a week under regular demand.

“We are doing everything we can to get new stocks, but we don’t know when that will be,” power and energy minister Kanchana Wijesekera told reporters on Sunday.

In May, the country defaulted on its debts with international lenders for the first time in its history. That followed weeks of protests against President Gotabaya Rajapaksa’s government. His brother Mahinda quit as prime minister, but the president is still under pressure to resign.

“The government seems to take no action at all,” Kannan, another driver seeking fuel in the capital, told BBC Tamil.

“They are asking us to be patient. They say they don’t have dollars. But I ask the government – who is responsible for this?”

He suggested “educated youngsters” should lead the country instead.

Last week, an International Monetary Fund team arrived in Sri Lanka for talks over a $3bn (£2.4bn) bailout deal.

The government is also seeking assistance from India and China to import essential items. New Prime Minister Ranil Wickremesinghe said earlier this month the country needed at least $5bn over the next six months to pay for essential goods such as food, fuel and fertiliser.

In recent weeks, ministers also called on farmers to grow more rice and gave government officials an extra day off a week to grow food, amid fears of shortages.

The government blames the crisis on the Covid pandemic, which affected Sri Lanka’s tourist trade – one of its biggest foreign currency earners.

But many experts say mismanagement is the main cause of the economic collapse.

Sri Lanka’s foreign currency reserves dwindled to almost nothing after years during which it imported much more than it exported and racked up huge debts with China on controversial infrastructure projects.

When Sri Lanka’s foreign currency shortages became a serious problem in early 2021, the government tried to limit the outflow by banning imports of chemical fertiliser, telling farmers to use locally sourced organic fertilisers instead.

This led to widespread crop failure. Sri Lanka had to supplement its food stocks from abroad, which made its foreign currency shortage even worse.

Source: BBC News

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Applications invited from Sri Lankans for Indian scholarships

The High Commission of India, Colombo, announces scholarships for Sri Lankan nationals under the Ayush Scholarship Scheme of the Government of India for undergraduate, postgraduate and doctoral courses in Ayurveda, Yoga, Unani, Siddha and Homeopathy for the academic year 2022-23.

The Government of India selects meritorious Sri Lankan nationals for the award of these scholarships in consultation with the Ministry of Education (MoE), Government of Sri Lanka.

These scholarships cover full tuition fees and a monthly sustenance allowance for the entire duration of the course. In addition, accommodation allowance, healthcare facilities and an annual grant are also provided.

Details of these scholarships are available on the MoE website: www.mohe.gov.lk. Last date for uploading the application on the ICCR A2A portal (www.a2ascholarships.iccr.gov.in ) is July 15, 2022. Please contact High Commission of India, Colombo (E-mail- eduwing.colombo@mea.gov.in /0112421605, 0112422788 ext-605) for any additional information.

Source: NewsInAsia

Defence Ministry green lights cargo ferry service between KKS and TN

Sri Lanka’s Ministry of Defence has approved the launch of a cargo ferry service between Kankesanturai (KKS) and Pondichery in Tamil Nadu.

According to Minister of Fisheries Douglas Devananda, the ferry service is to commence from July 01, 2022.

The minister had previously said that once launched, Indian goods can directly reach Sri Lanka’s Northern Province through the ferry service, which would be operated between KKS and Karaikal Port in Pondichery or Puducheri as it is also called.

Minister Devananda had further said the ferry service will allow the import of required fuel, kerosene, diesel and other essential commodities including fertilisers, palm oil and pharmaceuticals at reasonable prices.

Meanwhile it is reported that arrangements are being made to start flights between Palali International Airport and Trichy and Chennai from July 01, as well.

Top US officials visiting Sri Lanka meet PM for talks

The visiting high-level delegation of officials representing the US State Department and the Treasury Department met with Prime Minister Ranil Wickremesinghe, a short while ago, for a discussion, the PM’s Office said.

The delegation including officials from the U.S. Department of the Treasury and the U.S. Department of State had arrived in Sri Lanka yesterday morning for a three-day visit.

Members of the delegation include Deputy Assistant Secretary of Treasury for Asia Robert Kaproth and Ambassador Kelly Keiderling, who is also the Deputy Assistant Secretary of State for South and Central Asia.

The visitors are expected to meet with a wide range of political representatives, economists, and international organizations in Sri Lanka from June 26 – 29, the U.S. Embassy in Colombo says.

In all their meetings, they will explore the most effective ways for the U.S. to support Sri Lankans in need, Sri Lankans working to resolve the current economic crisis, and Sri Lankans planning for a sustainable and inclusive economy for the future, the U.S. Embassy said further.

Over the past two weeks, the U.S. has announced $120 million in new financing for Sri Lankan small and medium-sized businesses, a $27 million contribution to Sri Lanka’s dairy industry and $5.75 million in humanitarian assistance to help those hit hardest by the economic crisis.

The United States also committed $6 million in new grants to provide livelihood assistance to vulnerable populations, and technical assistance on financial reform that will help stabilize the economy.

In the coming months, the U.S. will continue to support Sri Lankans as they revive their economy, combat food insecurity, and promote public health and education, the statement said.

The United States said it also strongly supports Sri Lanka’s decision to seek assistance from the International Monetary Fund, which can provide the most durable resolution to the present crisis.

Source: Adaderana

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