For Sri Lanka to attain its goal, it is of utmost importance to consolidate the budget which has gone out of control due to falling revenue and soaring expenditure
Tuesday, 24 May 2016
Crisis manifesting as a foreign exchange shortage
Sri Lanka’s economic crisis has now been manifested in its severest form as a shortage of foreign exchange, pressure for the rupee to depreciate and the need for IMF to extend a helping hand. This last manifestation, dubbed as ‘rescue of last resort’, arises when a country has no any other source to turn to.Sri Lanka is a member of IMF and, hence, there is nothing wrong in the country seeking IMF assistance. On the other hand, it is also in the interest of IMF to prevent a member country from sinking. However, had IMF extended its helping hand to Sri Lanka one year ago, the situation would have been different. But IMF which fielded missions to Sri Lanka several times in 2015 maintained stubbornly that the country needed no foreign exchange support.
The implication of this ruling is that Sri Lanka could come out of its economic crisis on its own, a quality of the economy which the Central Bank used to call as ‘resilience’ in all its reports including the most recent press release on monetary policy.
The belated support from IMF
IMF had made this ruling despite there had been some unmistakable signs of a crisis manifesting themselves from around 2012. These signs began to show up when exports started to lag, trade deficit to balloon, external debt to soar and economic growth to slow down. They were correctly read by independent analysts, professional bodies like the Sri Lanka Economic Association or SLEA and think-tanks like Institute of Policy Studies or IPS.
For evidence, one has to peruse only the proceedings of the annual sessions of SLEA or the State of the Economy reports of IPS in the last few years. It is strange that IMF which has global experience relating to economic crises in other countries could not correctly read those signs. Even as late as October 2015, the need for the country to seek IMF support to come out of the crisis was emphasised by this writer when he delivered the keynote address on the occasion of the release of IPS’s State of the Economy Report for 2015 (available at: https://www.youtube.com/watch?v=igsAaLP2wBY ). Had the country acted fast at that time, it would have put itself on the corrective path well in time and avert the crisis in which it is deeply mired today.
