‘Govt heading for major foreign reserve crisis’


By Hiran H. Senewiratne

The government is heading for a major foreign reserve crisis because the country’s foreign reserves are sufficient for only four and a half months. Those funds are borrowed capital, which we need to pay interest on as well,a top economist said. At present the government has total foreign reserves to the tune of US $ 4.5 billion, which is only sufficient for four months' imports and the forthcoming budget has to focus more on revenue generating areas for the government, Deputy Director, Institute of Policy Studies Dushni Weerakoon said.

Weerakoon said at an economic forum organized by DFCC Bank in Colombo that the Sri Lankan government is faced with serious fiscal problems, which need urgent solutions. For example, reducing the operating fiscal deficit through cutting wasteful, extravagant and unproductive expenditure and applying strict fiscal discipline in the government owned institutions, commencing 2016, are priorities.

She said the previous government adopted a public sector led infrastructure development model by raising funds at a higher interest for their infrastructure development projects."This has led to the erosion of foreign exchange and exports of the country in a drastic manner, she said.

Weerakoon said that to increase foreign reserves the government should adopt a private sector driven revenue increase method/model, which is mainly targeting export markets, to put the country in proper shape.

Weerakoon said there were sharp currency adjustments and abrupt hard landings in quick succession, with the most recent being in 2009 and 2012. She said the IMF appeared to be expecting a 'decent budget' for a program. The government gave a 40 percent salary hike to public servants along with pensions, needing large volumes of resources to be transferred from private citizens and their workplaces to state workers. She said the government could opt for an IMF program or alternative means of raising capital including a sovereign bond.

Sri Lanka may need a new International Monetary Fund bailout, the economist said as a consumption bubble fired by a state spending spree, worsened by low interest rates and outright money printing, continue to pressure the balance of payments.

"The IMF option seems more prudent, because even if you want to tap the sovereign market, having an IMF program also lends some confidence."

The sovereign raters will also look at it as bringing some medium term stability, she said.

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