Colombo, January 9 (newsin.asia): The Colombo-based Pathfinder Foundations on Sunday released a statement saying Sri Lanka’s economic crisis is so severe it has no wiggle room and should opt for debt restructuring and to start talks with the IMF.

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Here is the statement in full:

The government has talked about shortages of rupees and dollars. The severity of these issues is reflected in the following surprising data points.

Out of the lack of rupees (or fiscal space) for the government, interest payments alone account for over 70% of revenue. It is perhaps the highest in the world. In addition, salaries and pensions represent more than 90% of income. Thus, interest and wages / pensions together represent over 160% of income. It is hardly surprising, then, that the central bank’s net credit to government (money printing) stands at Rs. $ 1.1 trillion in November 2021. This large amount of printed money inevitably fuels inflation; exerts pressure on the balance of payments by stimulating imports; and compromises the stability of exchange rates.

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As for the illiquidity of the dollar, the net foreign assets of the Central Bank recorded a deficit of 1.6 billion dollars at the end of November 2021. The net foreign assets of the total banking system amounted to a deficit of 4.1 billions of dollars. This clearly explains the cause of the large-scale scarring in the economy resulting from the massive shortage of dollars. Turning the tide will require radical action, including debt restructuring and decisive action to attract foreign capital inflows.

The consequences of these twin problems have already been severe. Inflation, especially food inflation, has risen sharply. There have been food shortages, including dairy foods; fuel; gas; and drugs. There is also an endemic black market for foreign currencies. Businesses have collapsed and livelihoods have been lost.

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The Pathfinder Foundation, in its previous articles, has insisted that immediate priority be given to: (1) the restructuring of the external debt; (2) negotiate an agreement with the IMF; and (3) mobilize bridging financing to close the external financing gap over the next six months.

Debt restructuring will provide a break to stabilize the economy. A deal with the IMF can catalyze much-needed foreign exchange both directly from multilateral institutions and from some bilateral donors; and indirectly by strengthening the confidence of investors and creditors. Bridge financing is needed to finance essential imports and meet immediate obligations until negotiations on debt restructuring and the IMF program are completed.

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The now awaited aid package from India is an encouraging start in terms of a transitional arrangement. However, it will only gain a few months. This positive initiative must be complemented by negotiating support from other friendly countries, including Japan, to obtain the bridge financing that would be necessary while negotiating a debt restructuring and an IMF program (about six months).

Action on the three fronts identified above must be taken immediately to stem the escalating crisis and support a sustainable recovery.

This is A Pathfinder Perspective published by the Pathfinder Foundation can be viewed at https://pathfinderfoundation.org/ Readers’ comments by email at [email protected]dation.org are welcome.

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