A time to come together | Sunday Observer

A time to come together

16 January, 2022

Sri Lanka, like all other countries, has been battered by the Covid-19 pandemic, now in its 22nd month. Repeated lockdowns have severely curtailed economic activity.

The pandemic has practically decimated its tourism industry. Expatriate remittances are also down. This has created an economic tsunami that has been devastating for all Sri Lankans.

Thus the next few weeks and months will be very challenging for Sri Lanka from an economic point of view. A US$ 500 million International Sovereign Bond (ISB) is maturing on Tuesday (18) while the overall debt repayment obligation for 2022 remains at a staggering US$ 4.5 billion. Several financial ratings agencies have downgraded Sri Lanka based on fears that the loans will be defaulted and the country will go bankrupt.

This is a very pessimistic view, especially in the context of various mechanisms that have been deployed to increase the foreign exchange reserves (which had gone up to US$ 3.1 billion by January 1) and to pay all the debts on time. Central Bank Governor Ajith Nivard Cabraal has said the Government will meet all 2022 debt repayments and work on a more comprehensive plan to address dwindling foreign exchange reserves.

The Government is literally banking on its excellent foreign relations with countries far and near to get out of this crisis in the short term, at least until the traditional forex inflows stabilise over the course of this year and next year. The country managed to boost its reserves up to US$ 3.1 billion at the end of December thanks to a Yuan currency swap with China worth $1.5 billion. Barely two weeks later, India announced a US$ 400 million currency swap under SAARC arrangements and also a US$ 500 million deferment of another facility.

Sri Lanka is holding talks with countries such as China, Qatar and Oman to obtain multiple credit lines totalling around US$ 3 billion. This shows the value of having a neutral foreign policy wherein Sri Lanka is not allied per se with any particular superpower or bloc. In this backdrop, Sri Lanka recently hosted high profile visitors from many friendly countries.

This will hopefully enable Sri Lanka to avoid seeking a bailout from the International Monetary Fund (IMF), which is known to impose harsh conditions for aid, that sometimes even infringe on the very sovereignty of individual countries. They are likely to recommend a range of measures from the sale of State assets to the pruning of many welfare measures. Sri Lanka has gone down this path on many occasions earlier, sometimes with disastrous consequences for the economy and the people. Thus it is wise not to opt for IMF help, unless as a last resort.

The good news is that with many such arrangements in place, Sri Lanka will not default on its debt repayment obligations. According to Governor Cabraal, allocations have already been made for the US$ 500 million ISB. In the words of Governor Cabraal, “not paying debt will push us into bigger challenges. We need a more comprehensive, longer-term plan to address debt and other issues in the Sri Lankan economy. Not honouring ISBs will get Sri Lanka into a path of pain”. In this backdrop, it makes sense to honour the ISBs as and when they mature.

Sri Lanka can also look forward to a revival in the tourism industry and an uptick in expatriate remittances. Governor Cabraal said the country has lost about US$ 9 billion from tourism revenue due to the pandemic in the past two years, but he expects that a pick-up in tourism in the next 2-3 months would help rebuild forex reserves.

In spite of all the lockdowns and travel restrictions, Sri Lanka welcomed nearly 200,000 tourists last year, with a sudden surge of 90,000 arrivals in December alone. Moreover, many airlines have resumed flights to Colombo, increasing the number of inbound seats to Colombo.

Around 100,000 Sri Lankans have gone abroad for employment in 2021, which will help to increase expat remittances especially if they remit funds through the traditional banking channels.

They must be encouraged to remit funds through the officially sanctioned systems instead of informal systems lest the country lose valuable foreign exchange. In this respect, the Labour Minister has proposed giving an additional incentive payment for remittances made through licensed commercial banks and international money transfer companies. The Government should seriously consider this proposal.

The recent sharp increase in the energy import bill, due to surging global prices for oil and gas, has exerted more pressure on Sri Lanka’s reserves. Sri Lanka is a net importer of oil to the tune of around US$ 5 billion per year.

While short term arrangements will perhaps be able to cover the next few months of oil imports, it is a luxury we can ill afford in the long run. It is time to make a drastic switch to renewable energy such as wind and solar for power generation and also opt for all-electric cars once vehicle imports resume next year. The public must be encouraged to save fuel and energy whenever possible.

The public has a bigger role to play in strengthening the overall economy as well. The time has in fact come to get together as one people, one nation to surmount the challenges facing us.

It is also heartening to note that several Opposition MPs have pledged to work together with the Government to extricate the country out of the present situation. That is the spirit that must prevail among all strata of society and politics if we are to ride out this unprecedented storm.