Exclusive | Hardship for Sri Lankan citizens is going to increase, Weerakoon Wijewardena tells WION

In an exclusive interview with WION, the former deputy governor of the Central Bank of Sri Lanka, W.A Wijewardena has said that the hardship for the country's citizens is going to increase.

The island nation, which has a population of 22 million, is facing its worst economic crisis since it gained independence from Britain.

It has been rocked by protests, with demonstrators calling for President Gotabaya Rajapaksa to resign.

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Wijewardena, who had initiated the setting up of Sri Lanka accounting and auditing standards as the Chairman of Sri Lanka Accounting and Auditing Standards Monitoring Board from 2000 to 2008, pointed out that the country's inflation rate has reached nearly 30 percent in April, a seventh consecutive record high.

WION: According to the department of census and statistics, month-on-month inflation for the month of April stood at 29.5%, now over the past few months specifically, in 2022, Sri Lanka has continued to record a very high level of inflation each month topping the previous. Do you really see a trend going higher in the coming few months? What is the forecast so far?

Weerakoon Wijewardena: This is not unexpected because if you take 27 month period, starting from December 2019 during which Gotabe Rajapaksya was leading the country. There has been a massive explosion of money playing in the country by about 4 trillion Sri Lanka rupees which is factually equal to 53crores and normally when a central bank allows the money supply to go up there is a formula- if you allow the money supply to grow at the same rate as the real economic growth, there is no inflation in the country. But if the money supply growth is seen in excess of the real economic growth, that excess amount will chase after goods and services and as a result, there will be inflation in the country. If we take real economic growth during 2020-2021, that was actually close to 0.1 per centso when you have money supply growth of 53per centas against 0 economic growth, naturally the inflation rate should go up to more than 50per centin the next few months. There are independent inflation trackers outside Sri Lanka. One is Prof. Steve Henky of John Hopkins University. He is using a different formula. According to him, when we use the purchasing power parity formula, Sri Lanka's inflation rate is as high as 119 per centright now. We have to expect the inflation rate to go up further in the coming month. As a result, we will have to expect the worse in the next few months.

WION: When we look at why Sri Lanka got into this economic crisis, one of the reasons was the tax reductions that were made by Rajapaksa soon after he became the president in 2019. But finance minister, Ali Sabry has been seen speaking to foreign media and has been stating that it will be inevitable that the taxes will be raised. Given the current situation, is this the right move?

Weerakoon Wijewardena: Well there is a right direction because we have to congratulate Ali Sabry for coming out with that frank opinion. This is inevitable and this is just because of two reasons. One is that the govt of Sri Lanka after it lost its revenue due to the unattractive tax concession is offered to income tax, lost revenue. It was dependent on the money printing capacity of the central bank and the banking sector to finance its bills. Right now they cannot do it because the international monetary fund has laid down four preconditions for Sri Lanka to start any negotiations with IMF. One of the conditions is that the central banks will have to stop financing the government and tighten the monetary policy. In the few auctions of the treasury bill, we have been able to collect everything that the government needed from the market without lending a single cent from the central bank to the government. So he is actually complying with the requirement of the IMF in order to enable Sri Lanka to start its negotiations. So what Ali Sabry has said is correct and as an economist and citizen, I have to endorse him and support him in this endeavor.

Also see |Sri Lankan demonstrators clash with police in violent protest over economic crisis

WION: Amidst this crisis, a concept of debt restructuring and debt sustainability. How can Sri Lanka look into this in a fruitful manner given the fact that we did see China stating it is not in favor of debt sustainability, So can we find a compromise that will work with one of our creditors as well as the country's economic well being?

Weerakoon Wijewardena: Sri Lanka has no choice in this case. We do not have any foreign reserves, the foreign reserves of the central bank are negative to the extent of 4 billion US dollars and we don't have any foreign reserves to pay our debt. We have to compulsorily go for debt restructuring.

WION: Also we are now in the middle of a political crisis in the middle of an economic crisis. How is this impacted in your expert opinion, given that we have fractions within the government, certain factions within the opposition, and neither of them wants to get together and solve this issue? how has the current political crisis really impacted the Sri Lankan economy, especially over the past few weeks given that there has been a massive public outcry in itself for the government to step down? As an expert yourself, do you think this is the right moment to step down, and if he is to do so, what are the alternatives?

Weerakoon Wijewardena: He must be intelligent enough to read the writing on the wall. Writing on the wall is that everyone who has supported him at the presidential elections in 2019 has come out on the streets, they have countered the street and asked the President to step down, the cabinet to step down because the entire administration has failed in the last 27 months. Because they were not able to deliver any of the things they promised in the elections, instead of in their rule, the economic conditions have deteriorated. So in my view, political stability is highly fatal to Sri Lanka's economic growth. We must ensure stability as fast as possible. For that purpose, if Rajapaksa can read the writing on the wall accurately, he will have to now step down.

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WION: Amidst this economic crisis, people have been protesting for over a month. The common concern is that the current living costs are unbearable with rising inflation, the price of goods and services are dramatically high right now, and given the current statements made by the Finance Minister that further taxes will be imposed in the future. Will the people will really be able to afford basic necessities in Sri Lanka?

Weerakoon Wijewardena: We are a bankrupt nation today. A bankrupt nation has no choice. Because we are beggars and they say that beggars can't choose the meal that they can get. So likewise, all Sri Lankans starting from Gotabye Rajapaksa to the man in the street will have to make a supreme sacrifice in the coming 10-12 month time period in order to come out of the present economic crisis. We have been hit by all aspects of the economic crisis, health crisis, every possible crisis has hit Sri Lanka.

WION: Do you think the people of Sri Lanka are willing to make this choice?
Weerakoon Wijewardena: They have to, they don't have any choice.

WION: What can we expect in the coming few months, especially there are a lot of speculations that there will be more shortages of commodities, fuel and gas, electricity which are already in shortage in the country. Will it get worse in the possible future?

Weerakoon Wijewardena: It will definitely get worse. In the case of the central bank of Sri Lanka, it is negative to the extent of 4 billion US dollars. we don't have a single dollar with us in the central bank. So as a result, we have not been able to maintain the required import for Sri Lanka. because of the loss of foreign exchange by Sri Lanka, the situation will get worse in the few months. We have to expect the worse to happen. Small things don't get manufactured in the markets today, the necessary chip that they have to put in the LED bulb is not manufactured in Sri Lanka. Almost all manufacturing products will be in short supply in a few months. They have to go through this difficult situation. It has to come from the top.

WION: What sort of sacrifices do you think the politicians, President, prime minister, and cabinet ministers should be doing right now?
Weerakoon Wijewardena: The people on top will have to set an example for us, we will have to prepare ourselves for the worst things that might come across. We will not be able to eat 3 meals a day or wear 2-3 suits a year. We have to make sacrifices in order to make a better situation for Sri Lanka.

WION: How far away are we sort of seeing the light to the end of the tunnel? how long will it take for the people to reap the benefits of the sacrifices?
Weerakoon Wijewardena: We cannot give a timeline for that. All we can say is we have to make the sacrifices. Greater the sacrifices they make today, the quicker the time we will be able to reach the end of the tunnel.