Saving the country’s perilous economy and stabilizing it | Print edition
The perilous state of the economy is evident from the scarcity of essential items. Shortages of food, fuel, fertilizer and medicine have driven people to despair, protests and violence. The country does not have the capacity to import these essential goods due to the negligible amount of foreign exchange reserves.
Can Prime Minister Ranil Wickremesinghe’s new leadership save the country’s flagging economy?
The country can only be saved by foreign aid. Can new Prime Minister Ranil Wickremesinghe save the country by securing adequate foreign aid?
There is no doubt that the economic priorities are to solve shortages of basic necessities, but they are symptoms of deep structural problems that must be addressed. Restructuring the country’s debt repayment is an almost insurmountable problem.
Prime Minister Wickremesinghe understands the priorities that need to be addressed. He announced that his priority was to ensure that people had three meals a day and had medicine, kerosene, diesel and petrol for sustenance.
These must be provided by international organizations and friendly countries, as the country does not have foreign exchange reserves for their import. The Prime Minister held talks with India, Japan, the United States, the United Kingdom, Australia and China, as well as with the Asian Development Bank (ADB). and the World Bank for emergency assistance.
The government is in talks with the International Monetary Fund (IMF) to arrange a longer-term credit facility, debt restructuring assistance and a reform program to stabilize the economy.
The two serious mistakes that President Gotabaya Rajapaksa admitted to having made – banning chemical fertilizers and not seeking IMF aid – are being rectified. The government entered into negotiations with the IMF and obtained chemical fertilizers from India for food production.
Although immediate assistance is likely, it may take some time as each country and organization has its own procedures for granting such assistance. Hopefully such assistance will arrive soon enough to address shortages of food, fuel, medicine and other essentials.
The unavailability of these essential products and the resulting long queues and protests are hampering the country’s production capacity. Shortages of diesel, gasoline and electricity have reduced industrial production.
The unavailability of fertilizers and agrochemicals has reduced food production, increased food imports and reduced tea exports in particular. The availability of fertilizers and agrochemicals would improve export earnings and reduce food imports. Fertilizers are imported from India.
The immediate need is for financial and commodity assistance to address shortages of food, fuel, medicine and other essentials. Addressing these shortages quickly would not only help people’s livelihoods and reduce protests and violence, but also increase the production of goods and services.
Addressing these shortages is a priority, but insufficient to stabilize the economy and increase its productive capacity. Obtaining assistance from the IMF is vital for stabilizing the economy and accelerating its growth. Current discussions with the IMF are moving in this direction.
At present, the main concern of the government, as well as the concern of the people, is the severe shortage of foreign currency for essential imports. However, an overriding concern is the enormous debt repayment problem. The foreign debt of more than 50 billion US dollars is an insurmountable burden.
Foreign aid would provide respite to overcome severe shortages that threaten people’s lives. Immediate, short-term corrective action could go some way to remedying the immediate problems. However, the fundamental problems of the economy could only be solved by comprehensive reforms. These are painful and difficult to implement due to their political unpopularity and our political culture. However, they are imperative.
Balance of payments
The fundamental cause of the economic problem lies in the weakness of the balance of payments. The country imports more than it exports: Consumes more than it earns and borrows to meet its needs.
The ultimate and lasting solution to the balance of payments crisis is the adoption of macroeconomic reforms. This financial vulnerability is a fundamental imbalance that must be resolved by reforming the economy.
Most important and most difficult is the adoption of economic reforms that would stabilize the economy. Macro-economic policies must stabilize the economy. These would include containing the budget deficit, reducing monetary expansion and reducing losses in state-owned enterprises. Unless these reforms are effectively implemented, the country would continue to live beyond its means and the balance of payments would widen, reserves would decline and debt repayment would be difficult.
Reform or perish. Will the government undertake the reforms?
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