The IMF supported reform programme is designed, such that by end 2028, Sri Lanka’s government revenue to GDP would reach 15.4 percent and Gross International Reserves would have reached US$ 15.1 billion and if these targets are maintained, Sri Lanka will be able to meet its post restructuring debt obligations with a degree of comfort, Treasury Secretary Mahinda Siriwardana said.
He was speaking on the topic “Sri Lanka’s Journey from Economic Stabilisation to a Sustainable Development Trajectory” at the International Conference on Sustainable Globalization (ICSG) Awards ceremony held at the Cinnamon Grand Hotel, Colombo, on Saturday.
While noting that since 2022, Sri Lanka has been through its deepest and most complex economic crisis in post-independence history, the Treasury Secretary said the crisis was the result of deep structural macroeconomic vulnerabilities being exposed by domestic policy errors and compounded by exogenous shocks, such as the COVID-19 pandemic. “Domestic policy errors included the large tax cuts at the end of 2019, excessive monetary financing of the resultant budget deficits, pricing fuel and electricity below cost leading to large SOE losses, and the attempt to fix the value of the rupee at around Rs. 203/USD since mid-2021.
“Sri Lanka lost foreign capital market access in early 2020 – following which Sri Lanka continued to service external debt using its limited foreign exchange reserves in the absence of the ability to refinance maturing external debt. By April 2022, usable foreign currency reserves completely depleted, and Sri Lanka had no option but to declare a temporary standstill on selected external debt, resulting in the Republic’s first sovereign default.”
He observed that policymakers at the time mis-diagnosed Sri Lanka’s crisis as a liquidity crisis and attempted to resolve it through foreign currency swaps, temporary loan facilities and import restrictions.
“In reality, Sri Lanka’s problem was not a liquidity crisis but a solvency crisis which required comprehensive macroeconomic reforms to restore confidence in the economy. Although delayed, Sri Lanka eventually sought the assistance of the IMF – which was essential to restore confidence in the economy, and enable financing flows to gradually resume,” he added.
The Treasury Secretary also stressed it is essential Sri Lanka develops a broad political consensus on the macro-economic policy framework.
“This should incorporate both fiscal discipline and sound monetary management. In the recent past, we have seen the initial signs of de-politicisation of macroeconomic management – and it is important that this persists. Such a consensus is supported by a robust legal framework comprising the Public Financial Management Act, the Central Bank of Sri Lanka Act, and the Public Debt Management Act.”
He said the fiscal rules (primary expenditure limit of 13 percent of GDP and defined primary balance target in the Fiscal Strategy Statement (FSS)) are key anchors of fiscal stability and discipline and collectively, this legislative and institutional framework can help Sri Lanka prevent another 2022 style crisis in the future.
However he cautioned that laws and institutions alone are insufficient, since this fundamental change also requires a change in mindset at a broader societal level and the public itself must demand and expect governments to deliver macroeconomic discipline.
He said the economic reforms implemented during the last two-and-a-half years have provided the economy with a foundation of stability and added this provides Sri Lanka with an opportunity to shift to a qualitative improvement in its economic trajectory as it embarks on a new growth path.
While observing that in the past, Sri Lanka’s growth was driven by the non-tradable sector, with exports as share of GDP showing a continuous declining trend over the last three decades, he said in order to ensure continued growth of external buffers, it is essential that economic growth is driven by non-debt creating inflows such as exports of goods, export of services, and foreign direct investment (FDI).
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