In the recent annals of Sri Lanka’s economic history, the Central Bank’s policies have left an indelible mark—one that is far from flattering. It is time to confront the devastating consequences of these policies, hold the Central Bank accountable, and demand a course correction.
SLDB Conversion Debacle: Draining the Nation’s Vitality
As of March 31, 2022, Sri Lanka faced a startling transformation: outstanding USD 1,797 million in Sri Lanka Development Bonds (SLDBs) dwindled to a mere USD 46 million by September 2023. This staggering USD 1,751 million was converted into LKR bonds at a rate of 325.00 LKR per USD, amassing a crippling 570 billion LKR. Shockingly, the Central Bank of Sri Lanka (CBSL) permitted banks to offset their USD exposure from export earnings and remittances.
The consequences were catastrophic:
– Market liquidity was drained to the tune of 570 billion LKR.
– Sri Lanka’s official reserves plummeted by a jaw-dropping USD 1,750 million.
– Borrowing costs spiraled, with an average surge of 7%-20%.
– The Sri Lankan Rupee depreciated from Rs. 290 to Rs. 330 against the US Dollar.
A Missed Opportunity for Recovery
The remedy was evident: CBSL could have extended the maturity of these bonds to 5-10 years on a staggered basis, preventing the liquidity crisis and curbing interest rates, ultimately reducing the government’s interest burden on its citizens.
High-Yield Long-Term Bonds
Sri Lanka found itself grappling with a mammoth issue—a total of 1700 billion LKR in high-yield long-term bonds, yielding a crushing 20% to 30%. Among these, the CBSL’s outstanding issuance, maturing beyond 2027, stood at an exorbitant Rs. 805 billion. This policy choice directly contributed to escalating borrowing costs, a burden that will loom for the next 10 years.
Failing the Nation’s Economic Future
A sensible alternative was available: CBSL could have issued short-term debt bonds, a choice that would have lightened the economic burden and provided flexibility to borrowers.
Ineffective Open Market Operations
Despite the CBSL’s policy rates being pegged at 12%, 3-month Treasury bill rates have stubbornly clung between 18% and 19%, all due to ineffective Open Market Operations (OMO) that indulge in overnight reverse repos. This has inevitably led to soaring AWPLR and bank lending rates, strangling economic growth.
Undermining Economic Prosperity
A prudent strategy could have alleviated this crisis: CBSL should have understood the market dynamics and offered long-term reverse repos, possibly up to 3 months, revitalizing market liquidity and aligning lending rates with policy rates.
Crazy Interest Policy:
Let us not underestimate the impact of the CBSL’s interest policies. The Government of Sri Lanka’s interest costs are slated to remain high for a daunting 30-year stretch. The ensuing fallout will entail higher taxes, slashed capital expenditure for crucial infrastructure development, and diminished resources for vital social safety nets. Sri Lanka may find itself increasingly dependent on overseas grants and Foreign Direct Investments (FDIs) to stimulate GDP and reserves. Inflation might subside momentarily, but elevated price levels will persist, squeezing the middle class and stifling SMEs for a harrowing 25-year duration, at least.
In conclusion, the Central Bank’s policies have charted a treacherous course for Sri Lanka’s economy. It is no longer acceptable to stand idly by as the nation grapples with the repercussions of these actions. Accountability is not a choice; it is an imperative. The time has come for the Central Bank to rectify its mistakes, reassess its policies, and work toward restoring the nation’s economic prosperity and the livelihoods of its people. The future of Sri Lanka is challenging , and it is our collective responsibility to demand a brighter tomorrow.
Adolf
