Bandula Gunawardena, economic analyst and one-time deputy finance minister of the United National Party (UNP) Government expressed his opinion on current financial issues in the country; what had caused them and how to overcome them. He also commented on a few other areas of financial and political interest. [This interview was conducted before VAT was increased.] Excerpts:
Q What are your thoughts on the current state of economic affairs in the country?
The economy of the country is in ruins today due to the balance of payment issues. The Sri Lankan rupee keeps dropping; so are foreign reserves. Those who do not possess a sound knowledge on economics try to see these issues from a political perspective; not from an economic perspective. At the end of the war, foreign reserves increased under the government of President Mahinda Rajapaksa and the rupee was stabilised. Members of this government, when in the opposition, alleged that the Rajapaksa regime maintained the value of the rupee artificially. If we had done that, foreign reserves should have decreased instead of increasing.
However, the intervention under this Government was USD 3.2 billion last year. Untill March 18, 2016, the intervention through selling reserves was USD 876 million. A government can’t behave in this manner. This is a crisis. When the exchange rate was reducing, the finance minister said the rupee would be brought down to 130 against the US Dollar. How did he do that? He used reserves to maintain the value of the rupee artificially.
The government can’t continue with this type of intervention. The crisis is not a result of the loans obtained by Mahinda Rajapaksa, but a result of the loans this government had obtained. It obtained a USD 1.5 billion loan from India in September last year to invest in reserves. Only USD 400 million was paid back. USD 1.1 billion is yet to be paid. The deadline given by the Indian Government to settle the loan was March 3 this year. The government has failed to settle the loan on time but it had paid USD 6.6 million as interest so far. Indian Cabinet ministers were summoned to extend the deadline to settle the loan. If the Government receives funds from the International Monetary Fund (IMF), it has to settle the Indian loan right away.
Q Fitch Ratings downgraded Sri Lanka to B+. Why do you think this happened?
Yes, Fitch Ratings has downgraded us as a country with a negative outlook. Our rating went down to B+ from BB-.
Fitch reports indicate that foreigners who had invested in Treasury bills and government bonds had pulled out USD 2 billion worth of investments after this government came into power. But this is not about loans obtained by Mahinda Rajapaksa anymore. The Government itself had created its own quicksand and drowning in it.
An amount of USD 3.2 billion was released as intervention from the reserves and USD 2 billion was pulled out by investors.
Finance Minister Ravi Karunanayake keeps lying. He says USD 1.2 billion had been invested in local banks by foreign investors. Where are these investors and who are they? What happened to the investments?
The source of the USD 1.2 billion investment is still unknown. Banks are always vigilant over transactions of large amounts of money and also transactions over USD 10,000 under money laundering rules and regulations. But there are no records of 1.2 billion dollar investment.
When reserves are deteriorating, Letters of Credit (LC) issued by banks won’t be considered as valid. There are countries in a similar financial crisis. We tried to divert the attention of the minister to the crisis and to discuss about it in Parliament, but now, there is no room for progressive discussions in Parliament today. Jokes and foul language were the responses when the Opposition tried to bring the topic of the financial crisis.
We tried to divert the attention of the minister to the crisis and to discuss about it in Parliament, but now, there is no room for progressive discussions in Parliament today. Jokes and foul language were the responses when the Opposition tried to bring the topic of the financial crisis.
Q What are the reasons behind these financial issues?
There are five key reasons which had resulted in the financial crisis
1. The Finance Minister repeatedly said that all the numbers and details provided by the Central Bank and the Census and StatisticsDepartment during the previous government were fabricated. When foreign investors want to invest in a country or want to have an idea about the financial statutes of a country, they look at Central Bank reports. That’s how they would carry out an economic analysis. When a minister says all the numbers are false, no-one would have confidence in our economy.
2. The next reason is the Central Bank Bond sale scam. Though many politicians aren’t aware many in the share market and the Central Bank (CB) know what happened and the magnitude of the heist. A report was submitted to the Committee on Public Enterprises (COPE) on the scam but the government escaped when the Parliament was dissolved. They said the new COPE would probe the matter after the election but no action has been taken so far.
3. The construction of China-funded projects such as the Port City and the Lotus Tower were halted. Today, China has invested USD 1,300 billion in US Bonds, given USD 46 billion to Pakistan and USD 22 billion to India. By its action, the government had sent anti-Chinese signal all over the world.
4. The government imposed retrospective taxes. The Super Gains Tax was one such tax. Companies were taxed in the year 2015 for profits they had secured in 2014. Investors are afraid to invest in such a situation.
5. The entire Budget was a joke. There was no sign of proper fiscal management in it. When the amendments were made, there was nothing left of the budget literally. Therefore, another budget was brought in 2016. There is no cash flow and the businessmen can’t create a business plan without a Budget.
Meanwhile, the Capital Gains Tax which was abolished in 1987 was reintroduced. Also the choice of taxing casinos was far from reasonable. Some of them had been slapped with a heavy tax while others with a lower tax.
Q The UNP was considered as capable of handling the economy better than other political parties. What has changed?
Under the government of President Chandrika Kumaratunge, the economy went backwards. Therefore, we broke-away from her government and made Ranil Wickremesinghe to run the country. In that government, I was in the Finance Ministry under the K. N. Choksy. So were Charitha Ratwatte, R. Paskaralingam and Faiz Mohideen. There were no protest marches or withdrawal of budget proposals then.
We didn’t take revenge from businessmen or imposed unbearable taxes. We didn’t increase salaries or recruited employees to the state sector till 2004. The UNP doesn’t have qualified people today. Even some foreign economists have opined there was no proper fiscal management.
However, there are few individuals in the UNP who understand the crisis the country is in. The Prime Minister, Charitha Ratwatte, Paskaralingam and Faiz Mohideen are amongst them.
Investors have no trust in investing in Sri Lanka now. This is a matter of concern since only about 6 per cent are state investments and 23 per cent are by the local private sector. Foreign investors have lost their faith in the state of affairs of the country.
Q What are the solutions the government can pursue to overcome this crisis?
There is one way to overcome this. If the government can get hold of USD 4 billion for the rest of the year, it can overcome the crisis. In what manner it happens doesn’t matter.
Q People voted for the UNP-led coalition at the presidential and general elections over the Rajapaksa coalition. Why has this situation arisen?
Mahinda Rajapaksa saved the country from the LTTE. What we did was running the country. We constructed roads, anicuts, hospitals and initiated many mega development projects. But we didn’t do politics. No new party offices were established or youth party activists especially selected and recruited for employment. No special privileges were given to SLFPers. During the Mahinda Rajapaksa era, the entire country was a working site. Today it is not.
The government is engaged in politics but not running the country.
Q What went wrong with the Rajapaksa regime?
Personally, I think ending the 30-year-old war was a turning point. Therefore, pro-LTTE elements such as the LTTE diaspora wanted to take revenge from our soldiers and Mahinda Rajapaksa. Secretly they have gathered their forces against Mahinda Rajapaksa.
One of the most popular slogans used by the then Opposition was that Mahinda was a thief. They kept repeating the word thief. This was a method in imperialism used to control other countries. They did the same to Anagarika Dharmapala in 1915.
Q Are you saying that the Rajapaksa government didn’t have faults?
Of course there were. A number of errors were caused by some individuals close to the government. Such opportunists can be found in any government; in this government too. They are the ones who are called ‘Dealkarayo’.
But we have learnt our lesson and the Joint Opposition with its SLFP majority under the leadership of Mahinda Rajapaksa, is ready to establish a government with a different approach.
Q Is it fair by the voters that the SLFP MPs are divided today? One faction is in the government and the other is in the Joint Opposition.
The core of the Joint Opposition is the SLFP. Many senior SLFPers like Mahinda Rajapaksa, Chamal Rajapaksa, Janaka Bandara Tennakoon. C.B. Ratnayake, Kumara Welgama and Dullas Alahapperuma are with us. They are like mature trees not like the tender plants with the government faction of the SLFP. Tender plants cannot replace mature trees. People have respect for mature trees; not for tender plants. We are the real SLFP.