Sri Lanka’s debt ‘phone top-up’ plan unlikely to save economy: lawmaker

ECONOMYNEXT – Sri Lanka’s current debt repayment strategy, akin to recharging a prepaid mobile phone, is unlikely to pull the country out of a looming economic crisis as money printing and shortages are wreaking havoc on the island nation, said opposition lawmaker Patali Champika Ranawaka mentioned.

Sri Lanka was downgraded to ‘CC’ by Fitch, indicating heightened risk of sovereign default as foreign exchange reserves were depleted while being swapped for newly minted money that turns into imports.

Sri Lanka borrowed from foreign governments and central banks also borrowed through swaps to repay some of the maturing debt as money printing created currency shortages, instead of policy deflationary to transform current account inflows into financial account outflows.

Reload

“The government is insensitive to the financial crisis. It manages debts like recharging prepaid cellphones,” Ranawaka said during a meeting with the Foreign Correspondents’ Association (FCA) in Colombo.

The last administration also printed money, created currency shortages and borrowed under a so-called Active Accountability Act, increasing foreign debt, instead of pursuing a deflationary policy, showed analysts.

In January 2021, India offered a US$400 million swap, a deferral of cross-border payments due under a regional clearing agreement, a US$500 million oil line of credit and another US$1 billion. US food and medical credit dollars.

“If India hadn’t bailed out Sri Lanka in January, we would have faced bankruptcy,” said Ranawaka, a senior minister in the last government who oversaw the completion of Chinese Port City under his responsibility.

Inflationary policy

Sri Lanka has been printing money to stimulate growth for several years instead of making serious reforms to allow private sector activity to take off, committing to output gap targeting until 2019 and a full fiscal stimulus supported by money printing from February 2021.

In January 2021, 12-month inflation had reached 14.2%.

Fresh money trying to get out of the country has driven up premiums in the kern market and the Undiyal/Hawala settlement system, diverting money from the formal banking system.

Relatives of those receiving funds through informal methods say they receive Rs 250 for every US dollar, almost 20% more than the central bank rate of Rs 210, which also includes a Rs 10 incentive of which at least 8 rupees is printed money.

Delays in getting dollars to match the surplus rupees produced had led to shortages of cooking gas, powdered milk, sugar, auto parts as well as inputs for industries.

The central bank has already banned imports to preserve dollars, leading to shortages of imported milk powder, wheat flour and many other food items.

“The government is repaying loans at the expense of people’s needs. It deprived people of powdered milk and fuel,” Ranawaka said.

However, the central bank has given US$967 million for imports since October 2021, when a strict peg of 200 to the US dollar was strictly implemented, according to the data.

Unless money is printed, the central bank gives no reserves for imports, but instead collects reserves. Large volumes of reserves were last donated in 2018, when money was printed to target a production gap.

Money Printing Tax

Ranawaka questioned the current administration’s spending priorities as revenues fell after tax cuts.

“They are expanding the expressway network,” Ranawaka said. “But they do when there is a financial crisis. Now is not the time to spend money on infrastructure. Now is the time to address the basic needs of the population.

Despite the country’s looming financial crisis, Finance Minister Basil Rajapaksa has announced a relief package for already bloated public sector employees as well as pensioners and rice farmers who have been hit by a fertilizer ban.

“When the finance minister increases spending without increasing revenue, he is not only digging his own grave, but the graves of all of us,” Ranawaka said.

“We need to increase revenues, but not by taxing people more. People are already taxed both by commodity scarcity and by printing money.

“Printing money is also a way to impose more taxes on the public. High expenses should be hidden. You cannot extend freeways at this point. First of all, there should be food for people’s survival. (Colombo/February 19, 2022)

Tana T. Thorsen