In an exclusive interview with WION, former Deputy Governor of the Central Bank of Sri Lanka WA Wijewardene has said that the difficulties for the citizens of the country are going to increase.
The island nation, which has a population of 22 million, is facing its worst economic crisis since gaining independence from Britain.
It has been rocked by protests, with protesters demanding the resignation of President Gotabaya Rajapaksa.
Wijewardene, who began setting Sri Lanka Accounting and Auditing Standards as chairman of the Sri Lanka Accounting and Auditing Standards Monitoring Board from 2000 to 2008, reported that the country’s inflation rate reached nearly 30 percent in April, the seventh consecutive year. . record high.
WION: According to the Department of Census and Statistics, the month-on-month inflation for the month of April stood at 29.5%, now in the last few months especially, in 2022, Sri Lanka continues to record a very high level of inflation. Topping last month. Do you really see a trend going higher in the coming few months? What is the forecast so far?
Veerakoon Vijewardene: This is not unexpected because if you take the 27-month period from December 2019 during which Gotabe Rajapaksa was leading the country. There has been a massive explosion of money in the country of around 4 trillion Sri Lankan rupees which is actually equivalent to 53 crores and usually when a central bank allows the money supply to go up there is a formula- if you want the money supply allow the country to grow at the same rate as real economic growth, with no inflation. But if money supply growth is seen to exceed real economic growth, that excess amount will chase away goods and services and, as a result, inflation in the country. If we take the real economic growth during 2020-2021, it was actually closer to 0.1 percent, so when you have a money supply growth of 53 percent against 0 economic growth, naturally the rate of inflation is above 50 percent. should be more. next few months. There are independent inflation trackers outside Sri Lanka. One is John Hopkins University’s Prof. Steve Hinkie. He’s using a different formula. According to him, when we use the purchasing power parity formula, Sri Lanka’s inflation rate is currently as high as 119 percent. We expect inflation to increase further in the coming months. As a result, we have to expect further deterioration in the next few months.
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WION: When we look at why Sri Lanka got into this economic crisis, one of the reasons was because of Rajapaksa’s tax cuts soon after he became president in 2019. But the finance minister, Ali Sabri, has been seen speaking to foreign media, saying that it would be inevitable that taxes would be raised. Given the current situation, is this the right move?
Veerakoon Vijewardene: Well, there is a right direction because we have to congratulate Ali Sabri for coming up with that candid opinion. It is inevitable and it is for just two reasons. One is that the Sri Lankan government has lost its revenue due to an unattractive tax concession, which is offered to income tax, the lost revenue. It relied on the currency printing capacity of the central bank and banking sector to finance its bills. Right now they cannot do so because the International Monetary Fund has set four pre-conditions for Sri Lanka to start any talks with the IMF. One of the conditions is that central banks must stop funding the government and tighten monetary policy. In a few auctions of treasury bills, we are able to collect everything the government needs from the market without having to lend a single cent to the government from the central bank. So it is actually complying with the IMF’s requirement to enable Sri Lanka to start its negotiations. So what Ali Sabri has said is correct and as an economist and citizen, I have to support him and support him in this endeavour.
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WIONDebt Restructuring and Debt Stability Concepts, Amidst this Crisis. How can Sri Lanka look at this in a useful way, given the fact that we have seen China saying that it is not in favor of debt stability, then can we have an agreement that will deal with one of our creditors as well? Will work with the economic well of the country. Creature?
Veerakoon VijewardeneSri Lanka has no choice in this matter. We have no foreign reserves, the central bank’s foreign reserves are negative to the extent of US$ 4 billion and we have no foreign reserves to pay off our debt. We have to mandatorily go for debt restructuring.
WIONAt the same time, we are now in the middle of an economic crisis, in the middle of a political crisis. How does this affect in your expert opinion, given that we have some factions within the government, some factions within the opposition, and none of them want to come together and resolve the issue? How exactly has the current political crisis affected Sri Lanka’s economy, especially given the massive public outcry over the past few weeks for the government to step down? As an expert myself, do you think this is the right time to step down, and if they have to, what are the options?
Veerakoon VijewardeneHe must be intelligent enough to read what is written on the wall. The writing on the wall is that everyone who supported him in the 2019 presidential election has taken to the streets, retaliated on the street and asked the president to step down, ask the cabinet to step down because the entire administration has failed. last 27 months. The economic situation has worsened instead of his rule due to not being able to fulfill what he had promised in the election. Therefore, in my view, political stability is extremely dangerous for the economic development of Sri Lanka. We must ensure stability at the earliest. For that purpose, if Rajapaksa can read exactly what is written on the wall, he will now have to step down.
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WIONIn the midst of this economic crisis, people have been protesting for more than a month. Common concerns are that the current cost of living is unbearable with rising inflation, the price of goods and services being dramatically high right now, and current statements made by the finance minister that more taxes will be levied in the future. Will people really be able to afford basic necessities in Sri Lanka?
Veerakoon VijewardeneWe are a bankrupt nation today. A bankrupt nation has no choice. Because we are beggars and they say that beggars cannot choose the food they can get. So similarly, all Sri Lankans from Gotabe Rajapaksa to the street man will have to make the supreme sacrifice in the coming 10-12 months period to come out of the current economic crisis. We have been affected by all aspects of the economic crisis, the health crisis, Sri Lanka has been hit by every possible crisis.
WION: Do you think the people of Sri Lanka are ready to make this choice?
Veerakoon Vijewardene: They have to, they have no choice.
WION: What we can expect in the coming few months, there is a lot of speculation especially that there will be more shortage of commodities, fuel and gas, electricity which is already in the country. Will it potentially get worse in the future?
Veerakoon Vijewardene: It will definitely get worse. In the case of the central bank of Sri Lanka, it is negative to the extent of US$ 4 billion. We don’t have a single dollar in the central bank. As a result, we are not able to sustain the required imports for Sri Lanka. Due to loss of foreign exchange by Sri Lanka, the situation will worsen in a few months. We have to expect worse. Small things are not made in the markets today, the chip required to be installed in the LED bulb is not made in Sri Lanka. Almost all manufacturing products will be in short supply in a few months. They have to go through this difficult situation. It has to come from above.
WIONWhat kind of sacrifices do you think politicians, presidents, prime ministers and cabinet ministers should make right now?
Veerakoon Vijewardene: Those at the top have to set an example for us, we have to prepare ourselves for the worst that can come. We will not be able to eat 3 meals in a day or wear 2-3 suits in a year. We have to make sacrifices to create better conditions for Sri Lanka.
WION: How far are we seeing the light to the end of the tunnel? How long will it take for people to take advantage of the sacrifices?
Veerakoon Vijewardene: We cannot give any time limit for that. All we can say is that we have to make sacrifices. The more sacrifices they make today, the sooner we’ll be able to get to the end of the tunnel.