The government of President Gotabaya Rajapaksa wittingly or unwittingly has made yet another brazenly, risky mistake similar to that of the previous regime by appointing Ajith NivardCabraal to be at the pinnacle of the Central Bank of Sri Lanka(CBSL).

Arjuna Mahendran’s appointment as the head of the Central Bank was mired in controversy and resulted in an enormously extraordinary and complex situation which the previous regimehad to handle.

His actions came in for relentless scrutiny by Parliament, and serious questions were raised about his ingenuity.

The decision to appoint Ajith Nivard Cabraal to the position is no better. It prompted heavy fire from various quarters.

The criticism and the salvos fired were spontaneously passionategiven his background and the reputation he earned during his eight-year-long tenure as the CBSL chief during the Presidency of Mahinda Rajapaksa.

He immersed himself in deep controversy over the Greek Bond case, the hedging issue, Central Bank bond issues and his involvement with Imaad Shah Zuberi, who cheated the government of Sri Lanka to the tune of millions of dollars.

Zuberi, now serving a jail sentence of 12 years, was assigned to rebuild the image of Sri Lanka in the United States during the formative years soon after the end of the LTTE insurrection.

Eran Wickramaratne, a one-time State Minister of Finance and a member of the Samagi Jana Balawegaya (SJB), made some virulent and lethal remarks to the local media following Cabraal’s appointment.

Replying to Cabraal’s contention that the previous regime had ample time to deal with any misdemeanor allegedly committed by him, Wickramaratne stated that the forensic report done by two reputed institutions was only available just one week before the presidential election in 2019,causing some sort of hindrance for the administrative apparatus to act on it.

Wickramaratne, in the same breath, states the person appointed to the position should be fit to hold the substantive position and conduct its affairs as an independent institution devoid of politics.

In the nearly seventy years of the history of the Central Bank, this was the first time a staunch political motivator was appointed to be the head of the Central Bank. Cabral, holding the portfolio of a state minister, was vigorously defending the government when it was clear that what he was saying was far from the truth.

Wickramaratne said that Central Banks are always independent of the government, and they aren’t just another government department. He noted that their primary responsibility is to look at the stability of the financial system.

Secondly, it is to make sure that inflation is under control. Therefore, the CBSL needs to have the independence to ensure these policies.

Usually, a very experienced official from the Bank can be appointed. If it’s an outsider, he should have the relevant economic and monetary economic backgrounds. Some might believe that by resigning from the ministerial post, a politician can become the governor of the CBSL. It is not the case, as this presents a clear conflict of interest. It is patently unethical as there has to be a cooling-off period before making such an appointment’, he observed. Be that as it may, despite all the criticism and a writ petition that was filed in the Court of Appeal challenging his appointment, the government proceeded with the task of appointing Cabraal to the coveted position.

As it stands today, the country’s economy is bound to face disastrous consequences in the hands of Cabraal if he by any chance resorts to his old habits of gambling with its fragile economy.

The Arjuna Mahendran episode serves as a grim reminder to any government to refrain from messing around with the affairs of the Central Bank.

Almost everybody is aware that it was one of the principal reasons, among others, for the downfall of the 2015 UNP regime of Prime Minister Ranil Wickremesinghe.


The debt crisis

Besides the foregoing, Sri Lanka is currently facing multifaceted issues economically owing to the liquidity of the dollar and the rupee, caused mainly by the effects of an unrelenting pandemic, the sharp decline in tourist arrivals to the country and a loss of foreign remittances.

Inevitable developments of this nature have created a critical economic situation, compelling the Central Bank to step in to stabilize the economy.

Nevertheless, there can be a small sigh of relief since exports are doing well during this period.

Under the current circumstances Sri Lanka can no longer borrow from the international capital market since our rating is surprisingly low,  but the government remains unperturbed.

The government, knowing the market conditions well, states they are against borrowings. Many economists viewed the government decision as pragmatic. However, they qualify their statement by adding that borrowings should have their diminishing effect gradually. This decision has to have direct relevance and corresponding ramifications on the foreign exchange earnings such as Foreign Direct Investments, remittances, export earnings, proceeds of sales of state assets etc.

Sri Lanka has already lost the IMF arrangement to manage debt servicing in a more precisely structured system. The decision has a direct inference to the downgrading by international rating agencies.

The government strived hard to cope with the imminent economic downturn by controlling the capital outflow and import controls.

Eventually, the government came into possessing a gaping budget deficit.

The recurrent expenditure, as a percentage of the GDP, stands at 20%. The earnings or government revenue stands at 9% percent of the GDP. Hence it denotes a total deficit of 11% of the GDP.

There is a strain on the domestic money market as the triple C rating has caused untold hardships. Imports are restricted while the dollar to rupee rate has escalated unabatedly. Although the Central Bank has exerted pressure on local banks to put a cap, there appears to be an acute shortage of dollars in the market. Under these circumstances, the Central Bank inevitably has to step in to bridge the deficit. Imports are restricted as there is a global price boom of commodities affecting the supply chain.

The Central Bank is necessarily under compulsion to print money to supply the domestic money market which has triggered inflation since the private sector, after a dormant period, has recorded a growth of 14percent.

The government has resorted to borrowing money bilaterally as swaps but the volume is hardly enough to bridge the budget deficit. In this backdrop, the private sector has also increased borrowings. Against all this economic impropriety, the trade deficit has also put pressure on the balance of payment.

The current dilemma of the Central Bank is to attract money for government securities. The Sri Lanka government security bonds are also not yielding ample volumes of currency to fulfil government needs. Hence the Central Bank may be compelled to increase lending rates, thus requiring the rates on deposits to rise proportionately. The continued pressure exerted on the banks to keep the dollar rate down at Rs. 203 is yet another issue plaguing the banks. The banks are nevertheless unable to sell dollars at the rate prescribed by the Central Bank, creating a dollar shortage in the official money market. However, dollars are available in plenty in the unofficial market at a rate of Rs. 230 per dollar. The pressure on commercial banks is to increase the supply of foreign exchange through export remittances.

An increased interest rate on deposits may encourage people to invest money in treasury bonds and other government securities.

Nevertheless, the most vital issue is whether Sri Lanka can have a sustainable economy without properly re-scheduling the debts.

All in all, the best remedy may be to negotiate a debt re-scheduling package with one of the lending institutions.

In the prevailing circumstances, Sri Lanka should devise a formula for debt repayment with the assistance of the IMF or a designated lending institution.  By the fiscal year 2022, Sri Lanka has to pay 4.45 billion US dollars and in the consecutive years up to 2026, 4 billion US dollars per annum.

The amount of debt inevitably is a matter of concern for the higher echelons of government. Policymakers therefore are duty-bound to formulate a viable solution to surmount this recurring issue.

They should find answers to the question, Can external sustainability be achieved without re-scheduling foreign debt?

What remains for the country is to decide to go before acclaimed lending institutions which will enable Sri Lanka to handle the rest of the problem meticulously with their certification.

Once the assistance of the IMF is sought, others will follow and their contribution to the economy will be considerable.

With the involvement of the IMF the rating agencies will have a positive outlook, enabling the country to borrow in the international capital market at competitive rates to ease the debt burden.

The question remains whether the government will act wisely to salvage the country from an economic quagmire. (Alakeshwara)


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