A Critical Failure in Early 2021 deepened Lanka’s Economic Crisis Today

Shamindra Ferdinando, in The Island, 15 March 2022,where the title reads “Sri Lanka wouldn’t have been in crisis if CBSL had floated rupee in April last year –Dr. Wijewardena”

Former Deputy Governor of the Central Bank, Dr. W. A. Wijewardena says the country wouldn’t have been in the current predicament had the Monetary Board floated the Rupee in April 2021, six months before Ajith Nivard Cabraal succeeded Prof. W.D. Lakshman.

Consultant on banking, finance and economics, Dr. Wijewardena said so when The Island sought clarification regarding declaration on ‘Hiru’ on Sunday (13) that the incumbent government since Dec 2019 squandered as much as USD 5,500 mn trying to prevent the depreciation of Rupee. Dr. Wijewardena explained how the failure on the part of the Monetary Board to take remedial measures at the required time caused a catastrophe.

Dr. Wijewardena pointed out that Cabraal, who succeeded Prof. Lakshman, too, failed to address the issue. Cabraal quit his SLPP National List seat to receive the Governor’s post on Sept 15, 2021. Cabraal served as State Minister of Money and Capital Market and State Enterprise Reforms at the time of his resignation.

The retired CB Deputy Governor emphasised that the much touted ‘road map for economic recovery’ that had been announced on Oct. 1, 2021, didn’t recommend depreciation of the Rupee. The outspoken former CBSL official said that the depreciation of the Rupee/floating of the Rupee hadn’t been among the remedial measures announced by the incumbent governor.

The much-delayed decision to float the Rupee in the second week of March this year should be examined against the backdrop of the overall failure of the so-called ‘road map for economic recovery’ to achieve its targets within six months, Dr. Wijewardena told The Island.

Responding to Hiru interviewer, Dr. Wijewardena said that though CBSL expected the country to receive as much as the USD 10.5 mn during Oct-Dec, 2021 period, it didn’t materialise. Alleging that the timing of the floating of the Rupee had been unnecessarily delayed, Dr. Wijewardena asserted that the consequences could be quite devastating. The veteran banker compared the cash-strapped Sri Lanka economy with an uncontrolled kite.

Dr. Wijewardena cited the pathetic failure on the part of the entire banking system to meet USD 16 mn requirement to pay for a crude oil carrier underscored the crisis the country faced. Responding to The Island queries, Dr. Wijewardena questioned the culpability of the Monetary Board as regards the handling of the economy.

The current five-member Monetary Board consists of the Governor Cabraal (ex-officio), Treasury Secretary S.R. Attygalle (ex-officio), Sanjeewa Jayawardena, PC, Dr. Mrs. Ranee Jayamaha and Samantha Kumarasinghe. Mrs. Jayamaha, an ex-Deputy Governor, CBSL and Multichemi International Ltd Chairman Kumarasinghe joined the Monetary Board in late June 2020 whereas Jayawardena received his appointment in Feb 2020.

 The Monetary Board couldn’t absolve itself of the responsibility for the current crisis, Dr. Wijewardena said, urging the government to review the entire situation without further delay.

Basil Rajapaksa replaced Mahinda Rajapaksa as the Finance Minister in July last year.

According to Dr. Wijewardena, the banking system experienced a critical shortage of Rupees in addition to the foreign currency crisis. Dr. Wijewardena estimated that the current Rupee shortage at Rs 700 bn.

Dr. Wijewardena urged the CBSL to immediately increase bank interest rates from 7.5 percent to at least 15 as an initial measure to address the crisis. Dr. Wijewardena, who had served the CBSL for over 40 years emphasized that the recent decision to increase interest rates from 6.5 % to 7.5% was not adequate at all.

Sri Lanka couldn’t address the developing crisis by securing limited funds from India, China and Bangladesh. Instead, the assistance of the International Monetary Fund (IMF) should be secured, the veteran banker pointed out, adding that those who dismissed repeated calls to seek IMF help to restructure Sri Lanka’s debt should accept responsibility for the pathetic state of affairs today.

He compared a country’s foreign reserves with that of savings of an individual. “Savings are utilized in an emergency,” Dr. Wijewardena said, pointing out the absurdity in using foreign reserves to protect/prop up local currency. The ex-banker recalled how the Thai government moved court against the Governor of its Central bank Rerngchai Marakanond for spending USD 4.6 bn or 2.5 bn Pounds to prop up Baht during 1990s financial crisis. The Bangkok Civil Court in May 2005 directed Marakanond to reimburse the Bank of Thailand within a month, Dr. Wijewardena said. Although, the Supreme Court cleared him a decade later, the case established culpability of a decision maker/ decision makers in such a situation.

As the Parliament is accountable for public finance and enactment of laws, the responsibility of the House, too, should be examined, Dr. Wijewardena said.

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ALSO NOTE …. http://srilankaeconomicforum.org/weerakoon-wijewardena.html

2 Comments

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2 responses to “A Critical Failure in Early 2021 deepened Lanka’s Economic Crisis Today

  1. This is fire fighting. SL should have addressed the perenial problem of the trade deficit.

  2. Chandra Maliyadde

    Floating the Rupee is the mantra recited and the sole remedy prescribed by neo-liberal economists. The Rupee has been floating since 1978. Has Sri Lanka gained in any sense? The response of the so-called neo-Liberalists is the country has had a civil conflict, was devastated by Tsunami, affected by COVID 19 and Russia invaded Ukraine.
    Floating the currency in an economy like Sri Lanka is making the remedy worse than the malady. When the regime is corrupt, the country is bankrupt, the economy is bankrupt, the policy maker is bankrupt and the economists are bankrupt what more can be anticipated.
    We all have been doing patchwork on a seriously wounded patient and coming out with remedial measures to take the patient from sickbed to the mortuary.
    God save us.

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