brand logo

Knocked down by policies made under the influence

04 Jul 2021

I recall quite a humorous story. One night two friends under the influence of alcohol were attempting to cross the road. They saw two headlights in the distance and assumed they were from two speeding motorcycles. With determination to display their fearlessness to the motorcyclists, the two friends decided to stand in the middle of the road so the two bikes could pass them on either side. However, it turned out that the headlights were from a speeding four-wheel vehicle and the two friends were badly injured. Being too drunk to make sense of what had just happened, the two went on to assume that there had been a third motorcyclist in the middle that they failed to see.  Sri Lanka’s policy makers’ approach to the dire economic condition we are in is quite similar to the assumptions of the two drunk friends. With the optimistic expectation that two harmless motorcycles would pass us by, we run the risk of being badly hit by one big vehicle.  Last week the Cabinet approved the proposal for Sri Lankan companies registered under the Company Act No.7 of 2007, Licensed Banks, and Savings Banks to raise money overseas and invest in Sri Lankan Sovereign Bonds and Sri Lanka Development Bonds. Foreign exchange remittances have been further extended by another six months. Since last week, banks have been rationing their clients on opening up letters of credits (LCs).  So let’s evaluate the potential impact of these actions. We have been trying too many options over the last two years and we have to ask ourselves why nothing is working. The simple reason is markets don’t believe we are worthy of money. That is why regardless of decisions at every week’s cabinet meeting the forex market is still in peril. Our solutions don’t seem to address the problem of being worthy of money.  When we allow private companies to raise money offshore and allow investment in Sovereign Bonds and SLDB, we are incentivising non-financing companies to enter into the radar of finance companies. That will dilute the focus of the existing business operations of the non-finance companies. Also it would indicate a wrong signal to the market that we are stretching ourselves too much without taking necessary actions.  All these cabinet decisions and daily developments are a clear indication of the seriousness of the problem which we should not underestimate or misinterpret like the two friends did.  Allowing banks to ration Letters of Credit (LCs) is also an indication that the Government has prioritised Sovereign Debt settlements over conducting trade. This is a result of the shortage in the Forex or foreign currency. As a result banks have to ration LCs and obviously they will provide priority to their long standing best customers. That means some of the customers who may have a forex requirement will not have the ability to access finance and they will run out of business. Some may be export industries who depend on imports.  For example if we look at tea exports, some polythene films, packaging material, printing material are imported. As a result of the rationing process in banks, some of the exporters will not be able to keep their supply chains stable without the ability to open letters of credit. When the supply chain starts breaking down companies have to wind up or downsize their operation. The nature of the modern economy is that different  parts and components are produced and assembled all over the world, this is why we need to understand the importance of the global supply chain network. When we are kept outside of that chain, survival in a competitive environment is impossible.  In simple terms banks have asked to ration and prioritise their customers. The next step for us would be to prioritise whether we settle our creditors or continue our trade operations. In my view we can ask our creditors to wait for sometime but we can’t ask our businesses to wait. They are already bleeding with back-to-back shocks from the Easter Sunday attacks to Covid-19. If we ask our businesses to wait, it is very unlikely they will be able to survive, especially in light of worsening market restrictions.  At that point, choices will be very limited. So the solution is to prove to the markets that we are good for money and do it as fast as possible. Over the last decades we really haven’t proved that we are good for money. To do that as this column always advocated we have to make hard economic reforms. There was a time that we could have gone to markets and said that we will do reforms on our own. That window is closed now. When we go out and say the same thing now, no one trusts us now. So now we have to have an additional partner who can bring credibility and hold us accountable and help us put our own house in order. So far in the current set up it’s the IMF who can do it. Otherwise we have to get into a geopolitical game which is too risky to play.  There are rumours of a cabinet reshuffle and a new minister on Economic Development and Management. Their task would be a gigantic one. However, we should reevaluate the context and do the right thing, unlike the drunkard friends who misread a vehicle as a motorbike. If we misread the situation and context we will be not different from friends who got knocked by a car but thought it was a rider without his headlights.


More News..