Sri Lanka is at a very dangerous juncture and Sri Lanka’s usable reserves have dropped to levels of about USD 150 million.
Acute shortages of essentials ranging from fuel to medicine have become prevalent.
Increasing public discontent amidst increasing prices and shortages has led to large protests all across the country.
The country has reached a position where the country is unable to import essential fuel without the help of credit lines from bilateral partners.
As the crisis reaches such depths the government and the administration have failed to come up with a credible economic plan capable of taking Sri Lanka out of a fully blown out economic collapse.
At such a crucial juncture, a group of independent economists have launched an emergency plan of action with the aim of stopping further collapse of the economy and to stabilize over the medium-term.
The independent group of economists highlight that macroeconomics risks will continue to worsen if immediate action is not taken.
“Although a default may cause legal complications in debt restructuring negotiations and reputational damage for the future, much of the economic consequences of a sovereign default are already here. “
Therefore the group of economists urge the government to take the necessary steps to achieve this outcome immediately.
Key signatories of the emergency plan further argue that a staff-level “agreement with the IMF can establish market confidence and help unlock bridge financing.
Sri Lanka has run dangerously low on foreign reserves, and faces the specter of a ‘disorderly default’ on its debt obligations.
Although a default may cause legal complications in debt restructuring negotiations and reputational damage for the future, much of the economic consequences of a sovereign default are already here.
The country is already locked out of International debt markets and is unable to refinance its maturing debt or its current account deficit.
The result is an acute shortage of foreign exchange that has led to power outages, shortages of cooking gas, fuel, medicine and other basic necessities.
With headline inflation based in CCPI at 18.7% and food inflation at 30.2% as of March 2022. Sri Lankans are seeing the cost of goods spiraling upwards, and the value of their savings diminishing rapidly.
Spiraling costs and wage demands are making it difficult to do business in particular for small and medium sized firms who are struggling to survive.
Long-run policy errors have become concentrated to a point that make daily life very difficult. Most Sri Lankans are now facing more than 10 hours of power cuts, with no end in sight.
This discontent is fuelling protests, as the authorities have thus far failed to put forward a credible plan to tackle the economic crisis.
The economy is collapsing and people’s livelihoods are being destroyed, the immediate objective should be to stem further collapse.
This document is an attempt to provide an emergency action plan to focus the attention of Parliamentarians, activists, and civil society to take urgent steps to stem the economic decline.
The immediate priority is to stop things from getting worse and implementing policy changes that provide stability in the medium term.
Stop things from getting worse, begin stabilization
Sri Lanka has run out of foreign reserves and its debt is no longer sustainable.
All independent analysis point to an inability to meet debt repayments even leading up to the international sovereign Bond of $1 billion maturing in July 2022.
Ill-conceived decisions to use scarce foreign reserves and the over reliance on short term credit lines such as swaps have caused extreme damage to the domestic economy. This has aggravated the current shortages and pain felt by all Sri Lankans.
Sri Lanka also runs the risk of runaway inflation. Immediate action is necessary to stop prices spiraling out of control and to stop the value of the Sri Lankan Rupee diminishing rapidly.
The short-term objective is to stop the worsening situation by entering into negotiations with our creditors and building confidence in the currency and the economy overall.
The following actions will help mitigate the situation and must be executed immediately:
We recommend the following priority legislative reforms to build medium-term economic stability and restore credibility and confidence in the governance of public finances and monetary policy.
However, to be effective, these changes require broader changes in the governance structure such as strengthening the independence of the judiciary, rule of law, and the necessary checks and balances for each branch of government.
This would inevitably mean constitutional reform that addresses these issues in order for these legal changes to serve their intended purpose.
The independent economists who are signatories to the document are Aneetha Warusavitarana, Anushka Wijesinha, Anushka Wijesinha, Asanka Wijesinghe, Chayu Damsinghe, Daniel Alphonsus, Deshal de Mel, Naqiya Shiraz, Rehana Thowfeek, Shiran Fernando, Thilina Panduwawala and Umesh Moramudali.