Nihal Fonseka – a member of the Monetary Board of the Central Bank of Sri Lanka – speaking on an edition of LMDtv said of the state of the Sri Lankan economy at the time: “I am seeing a flickering candle inside the tunnel but not at the end of it, which is still some way away.”
He continued: “Actually, we are in a maze of tunnels; if we use the light that we see carefully, we might get to the end of it before the light runs out without becoming lost in the maze.”
“The light we now see is that of government institutions and the majority of people realising that as a country, we had to make a significant course correction in political arrangements, economic policies and even more importantly, in the management of the economy,” Fonseka explained.
Although it will cause inconvenience to citizens, the budget deficit could be reduced by revising prices to what would more accurately reflect the actual cost of commodities such as fuel and electricity, which were heavily subsidised in the past.
“Attempts are being made to restructure some of the big loss making state owned enterprises (SOEs). Through engagement with the banks and exporters, we have managed to get exports to proceed. Conversions are slightly increased in recent times,” said the veteran banker, in regard to a few strategies that appear to be making some headway.
“The negative publicity has been quite bad for business in general but foreign direct investments (FDIs) are not based just on publicity,” he pointed out, especially when a country like Sri Lanka is assessed as a potential investment destination.
It’s Fonseka’s belief that the country’s chances of attracting FDIs are still not optimal as investors make such decisions only after careful analysis of considerations such as the macroeconomic situation, political stability, ease of doing business, corruption perceptions and the ability to drive a reform agenda.
As a member of the monetary board with an overview of the national economy, he reiterated that “IMF funding is crucial as we have run out of options.” He also stressed the importance of debt restructuring, which would need to be considered to secure an IMF staff-level agreement.
Commenting on the interim budget scheduled for 30 August, he stated: “The poor and marginalised certainly need to be supported, and I think there will be proposals to that effect in the interim budget.”
But as he said, “the challenge is to target this relief. In our present mechanisms, the targeting has been relatively ineffective and the relief has not gone to the people who need it – or it has gone to those who don’t need it.”
Speaking about geopolitical tensions, Fonseka asserted that “we aren’t the only ones who are affected. The whole world is affected,” adding that there is indirect competition to strike a balance in diplomatic relations with larger and more powerful nations as this is necessary particularly for small countries like Sri Lanka, which depend on the goodwill of all nations in order to make progress.
Fonseka cautioned that “anything relating to local debt is a red flag because any restructuring of the government or any kind of haircuts on capital will have a terrible impact on our banks, our insurance firms and the economy in general.”
“Banks remain the biggest financiers of business and the biggest intermediary for financial services because capital markets are still not fully developed for that purpose,” he said, drawing attention to the pivotal role of the banking system.
Fonseka said in conclusion, pointing out three key necessary changes to overcome the current predicament: “The government has to manage its fiscal activities and significantly reduce the budget deficit; on the political level, to agree on a 10-15 year development plan; and the private sector should get out of its entitlement and subsidy mindset, and create globally – or at least regionally – sustainable and competitive businesses.”