Tuesday, December 6, 2022

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The fashionable “soft default” that sacrificed Sri Lanka’s sovereignty

When these two Central Bankers were appointed to their Jobs, the economic storm was already on us. They were both in their own way responsible for the crisis. Both had served for decades in the Central Bank. They had both spent considerable time at the Central Bank at the expense of the tax payers developing economic policies. Both these people are the highest paid government executives. They both earn in excess of Rs 1.5 Million a month with their tax paid by the tax payers.

First thing they both jointly did was to default and make Sri Lanka a bankrupt country. They sold Sri Lanka’s 75 years of independence for 64 million USD. All the credit lines virtually disappeared overnight as a result. Getting out of this bankruptcy mindset will take years. This action is perhaps the worst action that could have been taken by a top bureaucrat.

That too without the concurrence of parliament.

How this is possible in a civilized world is a big question? Some say they must be charged for treason for not getting parliament approval. Next they increased interest rates by 200%. Now that interest rates rates have climbed to about 32%, compared to the roughly 8% of a year ago, demand is tumbling because fewer Sri Lankans can afford to buy anything. To see a similar crash in demand you’d have to look back to the financial crisis.

Sri Lanka largely survived that crash. Most analysts say economic forecast for 2023. will be worse than 2022. Under their economic leadership. The Central Bank is on a collision course with a recession, and the Treasury will have a hard time driving the economy toward anything else. What ever the President says we won’t be able to escape the waning investor confidence.

The way the economy has been managed thus far since Nandalal and Siriwardana were appointed by a President who did not even understand demand and supply, shows the lack of understanding of the reality and their capacity to understand the ground situation and treat it with the correct economic tools. By keeping interest rates so high has virtually put thousands of entrepreneurs out of business. CBSL is yet to understand that inflation is driven by a shortage of foreign exchange and energy costs. Take those two out of the inflation equation, inflation will be less than 30%. Even a layman like me can understand this. Not these two? When you have bureaucrats who have not even run a boutique running the economy what can you expect? The bond rates  have now reached fever pitch. 

The bond traders are now licking their lips waiting for the interest rates to come down to buy their next car and apartment. They will even put to shame the previous scam. Ironically both these people (Nandalal and Siriwardana) were severely reprimanded for their ignorance in the bond scam in 2015. Recently when Siriwardana was asked why the Exporters are taxed at 30% (100% increase), he had replied it is because their associates are paying 30%. Exporters are no fools they will set up in another jurisdiction and park their money elsewhere. How stupid? Nandalal is acting like a rock star and Siriwardana is his make up manager. They are both darlings of some of the Western Ambassadors who keep propping them up, including a few opposition politicians for their survival . There is not much hope for our country with these two at the helm.

Even if the interest rates are brought down in a hurry as an economist pointed out. The economy has now been very badly bruised. Therefore it will take a month of Sundays, perhaps years to heal the deep wounds created by a short sighted policies propagated by inexperienced bureaucrats and half baked politicians.


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