Top economist warns against ostrich approach to worst crisis since Independence

Sri Lanka is now in the midst of the worst balance of payments crisis since Independence. Admitting the severity of the problem was the first step towards finding a solution. The ostrich approach to crisis management would not help the country, said National University of Australia Economist Premachandra Atukorale.

Prof. Atukorale was addressing the 10th Sri Lanka Economic Research Conference held over the weekend at the University of Peradeniya's Animal Science Department Auditorium. The Sri Lanka Forum of University Economists organised the conference and the Chairperson was Prof. Jeevika Weerahewa. The chief guest of the conference was Education Ministry Secretary Kapila Perera, while the guest of honour was Prof. Atukorale.

Prof. Atukorale said during most of the post-Independence era, the Sri Lankan economy had been a twin deficit economy, that had gone through several episodes of economic distress. This twin deficit included a liquidity crisis and a solvency crisis.

He said managing a twin crisis involved not only replenishing foreign exchange reserves or maintaining import flows, but also the arduous task of achieving debt sustainability, while preserving solvency and avoiding a default.

Prof. Atukorale also said the level of foreign exchange reserves was alarmingly low. By the end of December 2021, US$ 1.5 billion was adequate to cover the import bill of only about one to two months, the lowest ever figure since 1975. Credit rating agencies had drastically cut out Sri Lanka's credit rating. The country had virtually been severed from the world's capital markets and foreign portfolio investors had already deserted the country, he added.

"What is the way out? The current 'muddling through approach' does not seem to work. It is shifting the economy and it is impossible to rely too much on import and exchange controls without causing a massive economic collapse and social upheaval, much like the economic crisis in the mid-1970's," Prof. Atukorale said.

The foreign currency deficit had already put sharper limits on how much more debt the country can gain. International borrowing and debt serving costs were bound to increase with the emerging inflationary pressure in the US economy, he added.

Professor Atukorale also questioned whether Sri Lanka could continue to rely on China to overcome the crisis. But this was unlikely, based on the recent experiences of Zambia, Laos and Pakistan, which had heavily borrowed from China and are now in trouble, he said.

The keynote address was delivered by former Central Bank Governor Indrajit Coomaraswamy. A felicitation ceremony was also held for Dr. Nimal Sanderatne-- a renowned economist of more than 50 years.