Another year of economic deprivations or one of economic recovery?

At the dawn of the New Year, the question uppermost in our minds is whether the deprivations experienced of essentials last year will be aggravated or whether there is a prospect of their alleviation. Is there a prospect of economic recovery in the New Year?

Food shortages

Food shortages that was a feature of last year is likely to worsen this year and be a grave threat to the livelihoods of people. The country’s food production was ruined by a hasty, unscientific and foolish decision to ban chemical fertilisers and agro-chemicals. The recent dismissal of the Agriculture Ministry Secretary for saying there will be a fall in food production is not likely to increase food production.

Crippled

Agriculture, often described as the backbone of the economy, has been crippled by the hasty move to deny farmers chemical fertiliser and agro- chemicals. It has not only reduced the country’s food production it has ruined rural livelihoods.

Food security

Food security of a large proportion of the population is threatened this year by a short supply of food and inaccessibility to food due to high prices and low incomes. The country that near self- sufficiency in rice has been made dependent on rice imports that it can ill-afford due to a shortage of foreign currency.

Uncertainty

The New Year that has just dawned is one of economic uncertainty. It begins with the economy at a nadir, political turmoil and social upheavals. The country is at a near bankrupt status.

The depletion of the foreign reserves to around US$ 1.6 billion, inadequate to meet essential import needs and international debt obligations, is the paramount problem.

India and China

The Government has been negotiating for currency swaps and credit lines from China and India. There were also expectations of aid from several countries in the Middle East to purchase oil. An agreement has been reached to settle the outstanding debt to Iran by export of tea.

No confirmation

There is no confirmation of these aid programmes at the time of writing this column. However, we expect that at least some of these expectations would materialise soon. They could relieve some of the people’s extreme hardships.

Good news

Just before Christmas there was good news from the Central Bank Governor that foreign reserves that which had fallen to US$ 1.58 billion at the end of November would rise to a comfortable US$ three to 3.5 billion.

Likely assistance

Although at midweek, when this column is crafted, there is no definite news of receiving foreign assistance, there is reason to believe that the assistance from India is forthcoming. Hopefully, this assistance would come by the time this column is read. Chinese assistance is also imminent.

Indian assistance

The much delayed assistance from India was a currency swap of US$ 500 million and credit lines to purchase food, pharmaceuticals and oil from India. It is conjectured that the delay in obtaining these is owing to conditions laid down by India.

The handing over of the Trincomalee oil tanks to an Indio- Sri Lankan joint venture is one condition that has been agreed on and Cabinet approval is expected soon. Perhaps other conditions too have been agreed upon and the assistance will be forthcoming soon.

Chinese aid

There are also expectations that China’s Central Bank, the People’s Bank of China, will provide a US$ 500 equivalent currency swap and a Yuan credit line to purchase goods from China.

Assistance imperative

Obtaining such assistance from India and China is extremely useful as we are in dire need of essential food, pharmaceuticals, oil, gas and kerosene. While these aid packages will alleviate the country’s shortages and are much needed, they resolve the problem of debt repayments only indirectly by easing the depletion of foreign reserves. Nevertheless, they are essential palliatives till the country is able to obtain financial assistance to repay or restructure loans.

Stubborn resistance

As the country has to repay debt of about US$ four billion this year, we have to find ways of replenishing the reserves either by a balance of payments surplus, borrowing in international capital markets or through international assistance.

With the balance of payments widening, there is no prospect of a balance of payments surplus. Issuing International Sovereign Bonds (ISBs) is not feasible with the current international credit ratings. International financial assistance is the only option. The best option is to seek assistance from the IMF.

IMF assistance

The stubborn reluctance to get IMF assistance is owing to the fear of the IMF imposing conditions of good governance such as fiscal consolidation, eliminating losses of state enterprises by reforms and prudence in public expenditure. These are essential conditions for economic stabilisation and growth. They are the conditions for an extended credit facility for economic stabilisation and growth. However, seeking emergency assistance in our dire circumstances will not impose such conditions.

Emergency Assistance

We have to initially ask from the International Monetary Fund (IMF)’s emergency assistance under the Rapid Financing Instrument of the IMF. There is a need for urgent negotiations with the IMF to obtain emergency assistance under its Rapid Financing Instrument ( RFI). It will not

impose conditions.

RFI

The Rapid Financing Instrument ( RFI) provides rapid financial assistance to all member countries facing an urgent balance of payments need. It replaced the IMF’s previous emergency assistance policy and can be used in a wide range of circumstances to support diverse needs of member countries. The RFI provides support for urgent balance of payments needs, which is our immediate requirement for the country.

Conclusion

The dire condition of the country’s external finances requires immediate emergency assistance from the IMF. This has to be followed by a medium term programmeof economic reforms for economic stability and sustainable growth.