The level of damage in the World Economy through the impact on health in the wake of the COVID-19 (also known as novel Corona virus) Pandemic is beyond recognition. This is not something that goes unfelt, or unheard, by anyone who is sensitive to the behaviour of these variables affected to Sri Lanka in a time even the World Powers have been fallen in their knees in the occurrence of the Coronavirus Pandemic. Therefore, economic missions have to be carried out in the country in the restoration of the lives of the people whilst solving the health crisis. The government is already taking various measures for this purpose and the Public and the Private sectors are gradually being reactivated.
As a developing state, we are in the middle of a highly challenged situation and have to rise back by managing it. In this context, it is imperative we identify and manage the economic challenges befallen upon us. It is in this backdrop we contacted Mr. Vincent Mervyn Fernando, a former director of the Central Bank and an famous economic analyst, to clarify some of the current economic problems.
How do we remedy the economic meltdown amidst the Corona Pandemic? How should we contribute to it? We discuss many of these things with Mr. Vinson Mervin Fernando, and may you see what your compliance is.
Can the impact of the COVID-19 Pandemic on Sri Lanka’s economy be predicted?
There are four actors of Economy in a country, which are called the Economic Actors. They are the Household – the families collective of a country, the Firms – every working body in a country formal or otherwise, the Government Sector and the Foreign Sector. All four went down in the COVID-19 Pandemic’s occurrence. The families are forced to keep their children of school age at home. Their education, schooling and tuition have been impeded. The income of the families whose sole income was self-employment turned almost null. Families who worked in the formal sectors, did not lose jobs in the Government or the organized Private Sector managed to survive with income. Due to lower income, their demand has also been declined. Supply of some of the requested goods was reduced. Therefore, through the Household, the Aggregate Demand in Economy has severely been declined.
The Firms, the second important actor in Economy, were seized. With the exception of the now efficient security services, police services, health services and some essential services in the public sector and market services, most of the industrial sector in Sri Lanka are closed. Formal Agricultural sectors are down. The Government is now asking to plant a tree in the garden dedicating to address solutions to the coming scarcity of food. Overall, the private sector, which is considered the growth mechanism of the Economy, was severely struck by COVID-19.
A severe setback was also put in the third actor in Economy, the Government Sector, due to COVID-19. Speaking of the State Income, the annual taxable and non-taxable state income mounting to Rs. 2200 billion were struck due to the Government’s decision - upon its establishment - to slash taxes in view of developing the Corporate sector, and the awakening of COVID-19. On the other hand, the Government had to carry extra weight on people due to COVID-19. In a time the Government Expenditure amounting Rs. 650 billion for Public Servants and Military Officers, Rs. 850 billion to be settled in State Debt, and Rs. 450 billion to be allocated for concessionary packages including Samurdhi beneficiaries, pensioners and fertilizer subsidies could not be slashed by a single cent, funds ought to be allocated for the expenses of the Quarantine Centres, concessionary services, security services and others fostered for the mitigation of COVID-19. In that sense, even if the overall budget deficit of 7.6% in 2015 could be curbed down to 6.8% by 2019, it is inevitable that it exceeds 10% by 2020. In the backdrop that the state debt hiked from 78% to 90% from 2015 to 2019 without the occurrence of any pandemics like COVID-19, it could reach the level of 100% by 2020.
The Foreign Sector of Economy has also been accounted for a complete calamity in the wake of COVID-19. The Apparel Industry which contributed 45% to the total exports of US$ 12 billion has been crashed. Expected export earnings may drop down to US$ 7 billion by 2020, and the expected target by 42%. The United States, which operated as Sri Lanka's Apparel Market and contributed to the Tea Export Market, temporarily crashed into 26% of total exports, 30% of Europe and 7% of India. This has also affected the Shipping and Aviation in particular in a manner they have been blocked. Imports of 19% from China, 19% from India and 9% from Europe have also been halted for various reasons. Exports of services including tourism earnings amounting to US$ 4.2 billion and foreign employment remittances of US$ 7 billion have been temporarily suspended. This could affect the rest of the year. Foreign investment inflow and outflow have temporarily been halted. Consequently, the total consumption expenditure = C, the total investment expenditure = I, the government purchases = G, X-M = net exports, which calculate the output of economy (Y), have been collapsed. Therefore, Sri Lanka’s Economic Forecast over COVID-19 is that the economic development reaching a null (0) or a negative value would be inevitable.
How will it affect Sri Lanka in the first quarter amidst the collapse of powerful economies in the world (E.g. China down by 6%, France by 8%)?
China, where the COVID-19 Pandemic was born in the first place, said its economic growth rate dropped by 6.8% in the first quarter of 2020, and by 6% in France for the first time since 1945. Estimations claim that the figures of 2020 are being dropped, namely 3-4% in the Us, 0.4% in the UK, 0.3% in Italy, 2.1% in the Asian Region, and 1.5% globally, due to COVID-19. These estimations could vary depending on the magnitude of COVID-19, we must consider. Given the flow, Sri Lanka’s economic rate would undoubtedly be declined. At the beginning of 2020, the Central Bank of Sri Lanka presented the 2020 Road Map, which forecasts that Sri Lanka's economic growth will be 4% by 2020. The IMF said in the present that it would be 2.8%. At the beginning of April, CB Governor Prof. W.D. Lakshmana said Sri Lanka's economic growth rate was reportedly negative in the first quarter. If we can overcome the challenge of COVID-19 very soon, we can bring that negativity to zero (0) or 1%. However, Sri Lanka witnessed a slowdown in the economic growth rate since 2015.
2015 Growth Rate 5%
2016 Growth Rate 4.5%
2017 Growth Rate 3.4%
2018 Growth Rate 3.2%
2019 Growth Rate 2.3%
Although the new government, upon gaining power, was able to reverse this situation and increase the country's average economic growth by 6.5% in 2020-2025, the COVID-19 Pandemic not only made it less likely, but also made it lower than the lowest growth rate of 2.3% recorded in 2019. A negative economic growth rate since 1948 was recorded in Sri Lanka in 2001, -1.5%. We can only hope that this may not reach below -1.5% due to COVID-19.
Explain the short-term strategies that should be adopted in Sri Lanka in the midst of this COVID-19 Crisis
The occurrence of COVID-19 crisis was much unexpected, that in the short term we were unable to predict the strategies which every country in the world, including Sri Lanka, should adopt. If China acted in blocking entering and exiting the soil when COVID-19 first occurred in the region, this crisis could have been ended within China itself. However, in a globalized environment, such scenario could have never been predicted. Either way, by now it has spread all over the world. It even has spread to the continent of Africa. Nonetheless, the initial occurrence of COVID-19 influenced neither the emergence of a new President in Sri Lanka in the wake of the COVID-19 Pandemic nor dissolving Parliament in forming a new government with a two-thirds majority to save the country. Witnessing the process of how the infected Chinese woman found in the country was recovered and sent back to China, everybody believed that Sri Lanka would not be affected by this pandemic. But we have not even blocked the possibility of free arrivals to Sri Lanka through air and sea, possibly due to the assumption that we will not be in such a crisis given the country’s climate and that Sri Lanka is an island.
However, Sri Lanka too was affected by the COVID-19 Pandemic, simply because the people who returned to the country were not honest about claiming that they had contracted it. Because of that little mistake from our side, we too have been affected by the disease. Upon realization, the Government channelled into short-term strategies. First it was decided to close the schools in protecting the school children of the Household (families in Sri Lanka) and the school teachers and the tuition masters who teach them. Through it, 11000 schools were closed and 4.5 million students and 260,000 teachers were protected; 15 universities and 19 education centres were closed with protecting over a hundred thousand people; curfew was imposed and everyone was kept in their homes; on and off curfew was relaxed in several areas; Arrangements were made for the people to obtain food and medicine. Work is already underway. At the time of this writing, it is heard that schools and universities are to open in May. Also, curfew in several districts will be completely relaxed.
Organizations in large numbers worked from home and many have been temporarily out of work. They can be called under-employed groups. But some factories had to be closed down losing jobs. Many who were self-employed lost their income. Many small and medium scale enterprises had to be closed down. But the Public Sector intervened and implemented a series of concessions through banks. Issuing loans at 4% interest, granting lease payments, postponing loan instalments and granting credit card concessions were some of the short-term measures adopted in solving working capital issues of businesses. Through this, the Central Bank has fostered a solution to the liquidity issues faced by the banks whilst providing various facilities to their customers. To this end, the Central Bank has gradually reduced its policy interest rate, the Standing Deposit Facility Rate (SDFR), up to 7%. The statutory reserve ratio has been slashed down to 4%, increasing the liquidity of banks. That way banks can be kept safe and the Government’s financial burdens will be reduced. In the event of a bank's financial need, the Bank Rate, as the lender of the last resort, has been curbed from 15% to 10% by 5% after 17 years (since 2003). Meanwhile, a separate analysis in this regard would be necessary.
The Central Bank has reduced the Bank Rate. What about the commercial banks and their benefits to the public?
With immediate effect the Central Bank has curbed the bank rate from 15% to 10%, for the first time since 2003 - after 17 years. A ‘Bank Rate’ is defined as an interest rate which determines the amount of credits to be lent to commercial banks on an asset value deemed appropriate by the Monetary Board - the administration of the Central Bank - in the event of a financial crisis that may threaten the country’s financial and banking system, as the “Lender of Last Resort”. This had been adopted as a quantitative financial tool in navigating the country’s Monetary Policy by The Central Bank when it was founded in 1950. At the time, the Central Bank had not implemented any other policy interest rates. In 1950, the Bank Rate was 2.5%. It was doubled to 5% in 1965. The 5% Bank Rate was raised up to 10% in the introduction of Open Economy in 1977. Then, the Bank Rate, constantly changing overtime, had reached 25% by 2000. It was gradually declined and hit 15% in 2003. Even during the ethnic conflict of 2009, this figure did not change. Soon after the awakening of COVID-19, a far worse crisis than the 2009 struggle, the Central Bank acted in dropping the Bank Rate by 5%, to 10%, in order to save the financial sector from a potential financial crisis to be occurred in the country.
In the instance of a commercial bank loan obtained from the Central Bank at a Bank Rate of 10%, the banks are prohibited from adopting the loans to increase their total loans and investments without the approval of the Monetary Board. This is because the Central Bank, as the Lender of Last Resort, provides emergency loans at 10% interest rate to commercial banks to meet the immediate liquidity requirements of the bank and not to invest in loans. This can be defined as a huge step the Central Bank has taken in response to the liquidity issues that may arise in banks due to huge financial concessions the government has provided to the people through banks in the wake of COVID-19, preventing any bank from facing a financial crisis as being provided the credits under the 10% Bank Rate. This is another program introduced to remedy the liquidity problems that may occur in banks when the public is benefitted with reliefs pertaining to debt settling issues, working capital needs issues, lease relief issues, credit card debt settlement issues due to COVID-19’s awakening.
At the moment, COVID-affected countries, including Sri Lanka, are launching the Stimulus Package. How do you think it should be initiated?
It is evident that every country struggling from COVID-19 has provided a stimulus package to their people. The allowance of Rs. 20,000, promised for all graduates whose contribution was guaranteed under the Graduate Employment Scheme pledged during the presidential election, was halted by the Election Commissioner under his powers coincided with the handing over of nominations for the General Election just before distribution and the training program. However, in a proactive measure prior to handing over of nominations, this allowance was deposited in their bank accounts. They, accordingly, found solutions to a financial issue which could have potentially occurred with COVID-19.
Secondly, the Cabinet decided to provide Rs. 5,000 to 4 million vulnerable Sri Lankans. Accordingly, a large number of senior citizens, differently-abled persons, kidney patients and Samurdhi beneficiaries were granted aids.
Thirdly, the President implemented a weekly package of essential consumer items for the low-income families, businesses and other persons affected through the Samurdhi Authority.
Fourthly, the deadline for renewing drivers’ licenses was extended till April 30. All of these are relief packages provided directly through the government. In the meantime, as we mentioned earlier, we have provided many financial concessions through banks, one of which is the suspension of debt payments up to three months for personal loans amounting to below Rs. 1 million obtained from banks and financial institutes. This was because many lost their income due to COVID-19. Also, those who have lost their income from three wheelers and school buses due to COVID-19 are given a grace period of six months to avoid late payments in the inability to settle lease.
The Government’s efforts to provide a package of concessions and many other concessions bearing much losses to the Financial Sector, Extending Credit card repayment loans amounting to below Rs. 50,000 till April 30 avoiding penalization, allowing the Value Added Tax (VAT) settlement not be paid till April 30 to name a few, should be appreciated without much hesitation. Although a few setbacks may have been occurred in the step of implementation, none of them need to be taken seriously. Many good proposals were tabled on the part of the Government, among which former Central Bank governor Cabraal’s is prominent.
Did you mention the proposal of former Central Bank Governor Ajith Nivard Cabraal to allocate 20% of EPF money to members based on requirement? An idea that stands against the suggestion is that it is an attempt by the government to seize the employees' money. Can you explain of this proposal and its impact on the economy?
First of all I must say, that if one fails to consult expertise and experiences on Economy from Prime Minister’s Economic Adviser Ajith Nivard Cabraal, whose uncanny contribution, as a charted accountant and a former Central Bank governor, to the public service had improved the country’s economy by over 8% in 2010 – 2012 with driving the inflation up to a middle figure since 2009 and developed the country together with former president now Prime Minister Honourable Mahinda Rajapaksa and former defence secretary now Head of State Honourable Gotabaya Rajapaksa amidst a war for nearly 10 years, long before the mission to save the country from the COVID-19 crisis, it would be a sin of the country, not his.
The proposal to produce 20% of the EPF funds to its members is a very timely proposal. The Employees’ Provident Fund (EPF) has about Rs. 2,500 billion. He never suggested that the produced funds amounting to 20%, Rs. 500 billion, ought to be owned by the government, but to be distributed to the members. When people with sound knowledge and experience in our country make a suggestion, one should not retaliate like a fool. He was the head of 33 departments of the Central Bank, not just EPF. I too was a director of the Central Bank during his time. I have a better understanding about his efficient administration. He brought the EPF proposal to help solve some of the economic problems faced by those who are connected to these funds and are challenged by the situation. The second objective may be to give a boost to the economy. Through this, the EPF members pay 36% interest on loans worth Rs. 121 billion they have obtained through credit cards (as they have obtained credit cards amounting to Rs. 1.8 million). They would be getting the chance to save them. Both them and banks can escape from the burden of issues raised with the grade periods. He alone cannot carry out such proposal, for it needs State patronage. In 1988, these EPF funds were given to its members to build houses and obtain housing loans.
Through this, 10,000 housing loan applications amounting to Rs. 5000 million have reached the EPF in 2018 alone, suggesting that the members were able to live with their children happily even after 10 years by building houses through the loading scheme without waiting till they reach 55 or 60. Mr. Cabraal's 20% proposal would give the EPF members a chance to enjoy the good times of life which was stolen from them by COVID-19. Otherwise, they can invest that money to start a small business. This will increase the country's overall demand, business growth and development and would decrease the government's budget burden. As the Prime Minister’s Economic Adviser, he has the official power to implement such program, however, should anyone oppose to such suggestion, a better suggestion should be tabled, without being a hypocrite.
Another suggestion at this time is the infrastructure development. To what end can the idea of increasing investment and career opportunities for the people be achieved? What are their short-term and long-term economic benefits?
A country in general may face two major gaps. The first is Saving – Investment Gap. The second is Trade Gap. Combine the two it is called the Two Gap Model. Sri Lanka faced both of these gaps long before COVID-19. Our Savings Rate is 21%; The Investment Rate, 29%, thereby concluding the Saving – Investment Gap as 8%. The gap is to be covered by foreign savings (loans, investments, grants). Sri Lanka's exports are about US$ 12 billion and Imports, US$ 22 billion. Its market gap is US$ 10 billion. This too has to be settled through foreign debt and investment. Sri Lanka had entered into a 30-year war, and by its end (2008) the economic growth rate was 6.0%; Per capita income was US$ 2013; Unemployment was 5.4%; The inflation rate was 23%; Foreign reserve balance was US$ -1385 million; Budget deficit was -7%; the government debt, 81%. After ending the war, president Mahinda Rajapaksa, who had initiated a massive infrastructure development together with former defence secretary now President Gotabaya Rajapaksa and Central Bank governor Ajith Nivard Cabraal, had provided many infrastructure facilities to the country by building the Hambantota Port, Mattala Airport and two Expressways, boosting the Economic Growth after independence. (2010 – 8%, 2011 – 8.4%, 2012 – 9.1%) Per capita income increased by US$ 1,000 within three years to US$ 3,125 million in 2011. Over the next three years it hit to US$ 4,000.
Standing at the point of being a low-income country, Sri Lanka was about to become a high-income country. Unemployment dropped to 4.9%; Inflation hit a single digit of 3.4%; the total balance was US$ 2,725; the budget deficit was reduced to 5.7% by 2014, and the government debt to 71%.
Faced with COVID-19, the Economic Growth is being slowed down, the foreign earnings are down, the unemployment is rising, and the budget deficit is being increased, and the only remedy to overcome these challenges is to increase the local and foreign investments. It is important to address issues in the short and long term.
As the Government of Japan encourages to build their own companies outside China, we need to take these companies to Sri Lanka. Through it we can develop agricultural products and other new things.
At the moment, the US has initiated producing emergency loans amounting to US$ 349 billion to small businesses. Is Sri Lanka capable of substituting something like this? Because there are many small and medium scale enterprises and businesses in Sri Lanka?
Investments, especially foreign investments that we mentioned earlier, can be helpful in rebuilding a fallen country. Meanwhile, it is important that the US has launched a US$ 349 billion emergency loan to help small businesses that have collapsed due to COVID-19. This has been substituted in Sri Lanka in many ways.
The Central Bank also responds to complaints in related to banks that have failed to comply with the recent regulations of the Government and the Central Bank “exactly the way they should be”, such as timely disbursement of working capital loans.
Until the closed economic centres are reopened, the Government will spend for the purchase of 90,000 kilograms of vegetables from farmers.
Concessionary aids of Rs. 5000 for low income families, Samurdhi beneficiaries, pensioners and differently-abled persons have been produced by the Treasury.
The Central Bank has pumped a liquidity of Rs. 240 billion into the Banking System. Rs. 140 billion of these funds have reached the people and businessmen.
Since the government cannot produce debt aid on a complete measure, it is important to note that there are many countries now providing many aids to Sri Lanka and they are being distributed to the people and businesses.
On a special flight from Shanghai on the 01st, Sri Lanka received 20,064 COVID-19 test kits, and on the 18th, 20,000 test kits, 10,000 N-95 facemasks, 10,000 surgical facemasks, 10,000 hazmat suits, 100 safety goggles and 50,000 surgical gloves were received to Sri Lanka.
The Central Bank has reduced the Bank Rate by 5%, from 15% that existed since 2003 to 10%, and has offered to lend money as the Lender of Last Resort to commercial banks to resolve their liquidity problems.
The Prime Minister issued a gazette notification declaring that foreign investors should not invest in Sri Lanka for three months. Is this a progressive decision? There is no reason to believe that they will invest that money in the country either.
To understand this, let us first understand why foreign investment is important. The balance of the Current and Capital Account of the Balance Sheet of Sri Lanka is handled by the balance of the Financial Account. Foreign investment is a key component of the Financial Account. Notwithstanding this, there are two types of investments.
01. Foreign Direct Investment
02. Portfolio Investment
Foreign Direct Investment is the acquisition of effective real assets in a foreign country in anticipation of any benefit. Such investments cannot be taken away immediately. For an example, the Katunayake Free Trade Zone has such investments. Such investors are always concerned of profits, and the fact that Sri Lanka's apparel exports have severely been deprived in the wake of COVID-19 their jobs have been lost. All non-permanent employees were severely hit.
Portfolio Investments are business shares and government securities (T-bill, T-bonds) that are purchased by foreign investors seeking financial returns. By April 9, 2020, Sri Lanka's government securities had foreign assets amounting to US$ 180 million. When Mahinda Rajapaksa's government withdrew from government in late 2014, it was valued at US$ 3,450 billion. In comparison, this is a severe drop. In this backdrop and due to other reasons, the exchange rate fell overnight depreciating the Rupee from Rs. 193.75 to Rs. 199.40 per US Dollar, by 27.04.2020. In response, the Government has suspended the foreign investments of Sri Lankan expatriates for three months, with effect from 07.04.2020. They may take those investments to invest in another country.
Investing in the US or Japan these days would be advantageous because their currencies are strong. As a result, these investors may likely to deposit the investments in the Foreign Currency Investment Account newly introduced in the country for six months or a year. Because more interest is paid by 2%.
Now, imports have been restricted (banned). Although it is a good decision to control public expenditure, most of our economy are depended on imports. Within this boundary, will there be a shortage of goods once again once COVID is over? It can affect our exports too, can it not?
There are four categories of goods imported to Sri Lanka. Consumer goods are one of them, accounting for 22% of total imports. The second category is intermediate goods, accounting for 56%. Petroleum imports fall into this category. The third category is investment goods, owning 21%. Other goods imported are accounted for 1%. Sri Lanka spends US$ 22 billion in recent years to import them all. The country is facing a trade deficit amounting to US$ 10 billion compared to the US$ 12 billion we earn from exports. In settling the 10, a net amount of 2 billion was sent from the Service Sector, in which Tourism earnings were prominent. The deficit was then reduced to 08. 07 out of 08 were being sent by the remittances from the expatriates.
Covid-19 lost our tourism earnings. Foreign employment remittances were subject to a drastic dropdown. As a result, the balance of payments balance is in shortage. Foreign reserves are being declined, affecting negatively to the exchange rate. If this situation continues to exist, Sri Lanka will be in a forex crisis. The Central Bank imposed certain restrictions for resistance. In the beginning, importing vehicles was restricted in the country. Petroleum being an essential import has to be imported. Thanks to COVID-19, we have received savings in huge sums from oil, which had earlier demanded for a huge import expense.
The import of textiles for the Apparel has been stopped now. Because apparel exports were restricted. The government issued a special gazette on the 16th with names. Importing non-essential consumer goods and motor vehicles is not considered essential. Importing goods and investment goods have been stopped has been stopped and only industries have been allowed to import raw materials and machinery. Therefore, the Government’s patronage is now being extended to plant and build whatever is need to overcome the scarcity. Importing raw materials for the export market has been permitted. In the sense, the exchange rate may be protected and economic development would follow.
Some suggest that this would be a good opportunity to build a Closed Economy; an opportunity to repeat what Lady Sirimavo failed to do. To what extent is this positive? Can we face such a situation?
The whole world is talking about two Development Strategies to improve economy. One is Inward Looking Economic Strategy. This strategy was popularised since the 1960s when the concept of Socialism became popular in the world. Socialism-oriented politics was also prominent in Sri Lanka at that time. Dr. N.M. Perera was the finance minister of the government of Lady Sirimavo Bandaranaike, who came to power from 1970 to 1977. A closed economy was implemented at the time. It was called a ‘closed economy’ because it was backed by the government’s power. The theme song back then was, “Siyarata Dea Siri Sepa Dea” (the bliss is the country’s own making). Through it, we planted what we needed on our own; we made what we needed on our own. As of 1977, the export income was US$ 767 million; import, US$ 716 million. Accordingly, the market gap was +41. This meant that we were not a nation dependent on the world production. The foreign exchange rate in 1970 depicted Rs. 6 per US Dollar. In 1977 it was Rs. 08.80. By the looks of it, it may have been good. However, the quality of our production was poor.
This was because we had poor technical knowledge. On the other hand, the economic growth of the country was 2.8%. Unemployment was 24%. There were controlled prices. In the 1960s we were parallel with Singapore in terms of development. We followed this closed economic strategy for 17 years from 1960-77 and became one of the lowest income countries in the world for many years. As a result, J.R. Jayewardena, who came to power in 1978, introduced the Open Economy to move the country forward with the world trend. The strategy is still being continued, however with certain changes. Singapore, the first country to implement the strategy, is one of the 30 most developed countries. Today, we are a high-middle income country due to the Open Economy. The rich countries that have been victimized by COVID-19 today follow Open Economy. Through it all countries became involved in globalization. In the 100 years from 1920 to 2020, the greatest of epidemics and economic crises had occurred in ten-ear periods from time to time. Therefore, it can be overcome only through open economic policy based on technological advancements. At the same time, it is essential that we encourage the development of local agriculture and the industrial sector.
We are technologically advanced, so that by 2020, we will be able to start a highly developed agriculture sector than that of 1970 - 77. Therefore, we have a talented pool of people to create technology-based agriculture and technology-based industries.
COVID-19 has had a strong impact on the Tourism, Apparel and Export Industries in particular. Although the spread of COVID-19 is being mitigated, time plays a decisive factor in restoring such industries globally. But the Government has the challenge of running these industries as well. How do we manage this situation?
It is true that the Tourism Industry and Export affairs are being affected by COVID-19. However, it is my view that this impact would be in short-term. Even if globalization is affected by Corona, Corona cannot eliminate globalization. In my view, Corona may help to make it systematically work. So, we cannot designate the country for isolation. For an example, we cannot exist without petroleum. The Middle East cannot exist without our Tea. Because, neither can be produced nor grown in anywhere else in the world. Therefore, the era of connecting the world with excluding all the unnecessities with including the necessities is being reached in the wake of Corona. For example, the World Health Organization states that Masks are needed to protect from Corona. Then we can sew and sell these masks at a lower cost compared to other countries in terms of our low labour costs and skills. Although other exports have been hampered by the Coronavirus, new exports may emerge. This may also diversify our traditional exports. On the other hand, this cannot be eliminated by Coronavirus because there are differences between what can be produced in countries and what is capable of being produced. With the advancement of medical technology, vaccines for epidemics such as Coronavirus can be produced in the future.
Travelling has been halted only due to lack of transport, designated lockdown, and increased risk of disease. Once this is gone, it will recover. 20 districts of Sri Lanka are being recovered from the situation. 5000 buses are running, so are 300 trains. This will increase in the future, so do the rest of the world. We predict that this may continue to grow slow, to be restored in 2023 globally.
The Rupee is being depreciated fast. If this is not controlled, the impact on our debt and interest cannot be underestimated. To stabilize the Rupee, we have to increase the circulation of money in the country. Is it possible at this moment? What would be the impact if the credit limit further increases?
The External Value of Rupee is being predicted by several means. When Sri Lanka gained independence in 1948, a dollar was equal to Rs. 4.77. Since 1977, a Fixed Exchange Rate System was operated for a long time. So, there was an exchange rate determined by the authorities. In the circumstance, the dollar was changed only from Rs. 4.77 to Rs. 08.83, a smaller rate, throughout 30 years. This suggests that a Closed Economy in a country stands for a stabilized exchange rate system; that the depreciation of Rupee is very slow in occurrence. However, this does not allow for exports, imports and other foreign transactions to be successful, which was why every country in the world goes for a Floating Exchange Rate System or a Managed Floating System. Sri Lanka is a country that followed all three. Today we are following a floating exchange rate system.
Under a floating exchange rate system, the external value of the rupee was determined by the demand and supply of foreign exchange. That is, in terms of Foreign Exchange Receipts (Export Service Receipts, Remittances, Credit Receipts) and Foreign Exchange Payments (Import Service Payments, Loan Payments). Below is how Sri Lanka's foreign exchange rate, which had been navigated by either Floating Exchange Rate System or a Managed Floating System (that is, the central bank intervening in the market and using foreign reserves to control exchange rates), went against the dollar.
Year Rupee compared to USD Increase in 10 years
1978 15.56 -
1988 31.81 16.25
1998 67.78 35.97
2008 113.14 45.36
2018 162.50 49.40
End of 2019 183.00 20.46 (per year)
The value of Rupee, which had been annually depreciated by Rs. 4.50-5.00, was dropped by Rs. 45-50 in ten years for the last two decades, and was driven to further depreciation by four times annually (Rs.20) in the meltdown of Tourism and other reasons triggered by the Easter Sunday Attack. By April 5, 2020, the dollar was grown to Rs. 200, further depreciating the Rupee by Rs. 17 in the next four months. However, due to the reduction of imports, seized imports and export and the huge price reduction of oil in response to COVID-19 due to the immediate action by Central Bank, the Rupee was strengthened back to the rate of Rs. 195 per dollar, by April 17, 2020. Therefore, the notion that the depreciation of Rupee cannot be controlled cannot be accepted. Nevertheless, the Rupee was depreciated during Christmas in December and Sinhala New Year in April, only to be worsened due to COVID-19. Now that both of them are being gradually decreased, tightening of restrictions and opening up of a new FCD account to attract foreign currency with increasing interest, the depreciation of Rupee may be controlled, to be restored in the rate of Rs. 190 per dollar, in my view.
However, former finance minister Mangala Samaraweera and Dr. Harsha de Silva argue that the Government has to increase the Debt Ceiling. Does such a situation exist in the present? What are the factors that need to be considered should the Debt Ceiling be increased?
The Government has to work on the Debt Ceiling only when there is no budget or a Vote on Account. In that sense, their argument is valid. Generally, a budget is an appropriation bill. It is tabled for the government’s expenditure and income for next year. You cannot spend a single coin without passing such a bill. Nor you can borrow more. For an example, the Appropriation Bill for 2020 could not be passed, therefore, a Vote on Account was passed for the expenditure. Its expiration is due on April 30. Another Vote on Account or an Appropriation Bill would have to be passed to spend for the next four months. There should be a Parliament for the affair. However, the Parliament has been dissolved now. In such circumstance His Excellency the President is vested with power in terms of Article 150 (3) of the Constitution to access funds. That power can be up to three months after the next election. The President's right to obtain debt from the Consolidated Fund for this purpose is backed by the Article 150 (3), thereby nullifying the above two’s logic.