When the interest rates go up to 36% small business owners are severely affected. If rates are reduced this would in turn result in high inflation. The government must initiate a program to reduce the impact it has on the people. Increasing the interest rates alone will not help, Samagi Jana Balaya MP Dr. Harsha de Silva told the Sunday Observer.
“The question is when the interest rates go up small business owners are severely affected. If rates are reduced this would in turn result in high inflation. A team should take up the task. We need to understand economics and identify the solutions. After that, a political stage must be set up around it. As a country everyone must contribute to this with the consensus of the people under a good political leadership, he said.
Excerpts of the interview:
Q: The Governor of the Central Bank said recently that there will be a remarkable change in the economy by next year. How do you see this situation as an economic expert?
A: The economy must be stabilised. That is what they are trying to do. I don’t see anything wrong with that. On the one hand, today’s food inflation is 94.5% and average inflation is 70%. This is something that has never happened before. The prices of goods which are increasing day-by-day must be stabilised.
The interest rate should be raised to stabilise it. If the interest rate is raised, then the printing of money should be stopped. There is no need to increase the interest rate if money is being printed. If inflation is said to have decreased, a depositor of money in a bank realises that after a year when he withdraws the money again, if inflation has increased, he does not need this money. So he wants an interest rate above inflation. This is why even the interest rate has gone up.
Q: As stated by the Governor of the Central Bank, can we see signs of a decrease in inflation in the future?
A: Today, the increase in food prices is 95%. At least this should be brought down to 5%. Is it easy to drop from 95% to 5%? Today, a large number of people in the country have reduced their food intake. There are no houses where meals have not been reduced. Either the cost, the quantity of goods purchased, or the quality of the goods bought have been reduced.
Q: The people are facing many difficulties. But the Central Bank Governor has said even if the economy improves next year the people must not expect a decrease in commodity prices. If inflation decreases can any relief be provided to the people?
A: Inflation is the increase in the price of goods. Deflation is the rate at which goods prices fall. Japan has had deflation for years. But we need to reduce inflation.
Q: Today there are no oil and gas queues. The Governor says that this was due to the positive steps taken by the Central Bank and the Government. Your comments?
A: The gas queues disappeared because we were given a loan from the World Bank to buy gas. As the price of petrol increased, the amount used decreased leading to a decrease in demand. The demand also decreased because of the QR code. The people did not get fuel until it was distributed through such technical solutions.
Q: At present, the Central Bank has focused on more orderly debt restructuring. But even though we have Central Bank experts a lot of money is being paid to foreign companies for consultancy work. The Governor says this is because this is a new experience for our country. Your comments?
A: He is correct. Debt restructuring has never been done before in the history of our country. So there are no people who have experience in this process. Therefore, we must obtain the assistance of skilled financial advisors.
Q: Has the Central Bank and the government taken successful measures to bring dollars to Sri Lanka?
A: Nothing new has taken place in this regard.
Q: The people have been severely affected by the high loan interest rates imposed by the Central Bank. There is still no indication of any preparation to reduce this interest rate?
A: The interest rate has been raised to rectify the inflation caused by demand. This is correct from the viewpoint of economics. The Rupee fell to Rs. 365 due to depreciation. The Governor should try to keep this at Rs. 365 then further strengthen it to bring it to Rs. 200. He has imposed temporary import restrictions to address this as well as taxes. He is carrying out the basic work that should be done according to economic theories. All this is economically sound.
But the issue is will we be able to stabilise the economy? The question is when the interest rates go up to 36% small business owners are severely affected. If rates are reduced this would in turn result in high inflation. Inflation was 5% when Gotabaya Rajapaksa came to power. Today food inflation is 95%. Who did this? The governor is also in a difficult position. The government must initiate a program to reduce the impact it has on the people. Increasing the interest rates alone will not help.
Q: Do you believe an IMF bailout will be forthcoming in December as predicted?
A: If they had gone to the IMF when we advised them to do so in 2020 there would have been no issue. Then the Rupee was at 195. We noticed the situation deteriorating and kept on harping on the issue. But instead we were attacked. Now it is too late.
Q: As an economist how do you analyse the current situation in the country?
A: There is no superman to solve this problem. A team should take up the task. On the one hand, we need to understand economics and identify the solutions.
After that, a political stage must be set up around it. As a country everyone must contribute to this with the consensus of the people under a good political leadership.
Q: If you had been Minister of Finance at this juncture how would you have faced this situation?
A: We must explain the current situation to the people and gain their approval for a program if this problem is to be resolved. If the people accept the solutions I have given since 2020, I can implement them. But nothing will succeed without the support of the public.
Q: Why can’t you set aside all party divides to support this venture?
A: I can do so but it must be cleaned prior to the application of medicine.
Q: Do you mean the outlook does not appear to be positive even though Ranil Wickremesinghe has now been appointed President?
A: We cannot oppose his economic policies totally. There is nothing wrong with the direction. The issue is if we can speed up the process and the people will tolerate the changes. There is also the issue whether the people will be able to agree to the program. As a politician I view the situation from the political economy angle. If I say the direction the President is taking is wrong, I would be resorting to cheap politics. Therefore, I will not say anything but only commend correct actions. But I emphasise that there should be a good background to carry out those activities.