Former Central Bank Governor Dr Indrajith Coomaraswamy noted that the interest rates in the country would have to more than double to provide a real return to savers. He further noted that though things are likely to get worse going forward it was better to have the confidence brought about through an IMF program than without one.
Coomaraswamy was speaking on March 23 in the CT CLSA Securities webinar on the ‘IMF: Order of Priorities for Reforms’. Given the current rate of inflation the real rate of return on the Average Weighted Fixed Deposit and the EPF is negative. He noted that the problem was not a liquidity problem concerning foreign exchange but rather a deeper issue concerning solvency and blamed successive governments for the current state of the country’s finances.
The ex CB Chief stressed the importance of fiscal reform saying, “We can’t have a situation where revenue is less than 9% of GDP and expenditure is close to 18%. We can’t continue to print money and get away with that. We are already seeing the results of that through inflation.” He noted that debt restructuring was likely to be pursued by the government.
He said the debt unsustainability was exacerbated by the recent tax cuts. He said, “Once the taxes were cut, we could see this happening. We have left it to the point where it is difficult to achieve any sustainability.” Coomaraswamy noted that there was no need to restructure domestically denominated debt which is largely held by the domestic banks, employees Provident Fund, and insurance funds. “It will cause a domestic financial crisis which will make paying everyone (inclusive of foreign-denominated debt) back more difficult.”
Coomaraswamy likened the current strategy to getting out of the debt situation through undervaluing the currency in which it is denominated (inflation). Coomaraswamy wanted better targeted social security measures and for these security measures to take the form of cash transfers as opposed to the provision of services.