Sri Lanka faces last chance for economic recovery, warns Central Bank chief

Nandalal Weerasinghe, the Central Bank chief entrusted with rescuing Sri Lanka from its financial crisis, revealed that he had previously raised concerns about an impending economic calamity. However, his efforts were met with opposition, leading to his forced retirement.

Weerasinghe, who returned last year to assist the nation in navigating the collapse, stated that this is Sri Lanka’s final opportunity to break free from a cycle of economic shocks that have plagued the country for decades.

Speaking from his office in Colombo, Weerasinghe emphasized that there would be no room for excuses or second chances this time. He firmly believes that the crisis presents an opportunity for the country to make necessary changes. During his tenure as the Central Bank of Sri Lanka’s deputy governor, he consistently expressed his concerns about the government’s policies. However, his objections were disregarded, and he ultimately felt compelled to retire early.

After retiring to Australia and enjoying a peaceful life with his family, Weerasinghe was called back by President Gotabaya Rajapaksa to lead the central bank. Upon his return, he was faced with a nation in chaos, characterized by a rapidly depreciating currency and the imminent threat of defaulting on a $46 billion foreign debt. The COVID-19 pandemic exacerbated the already precarious public finances, as the tourism industry collapsed and remittances from overseas Sri Lankans dwindled.

Foreign exchange reserves were nearly depleted, impeding importers’ ability to purchase essential goods required to sustain the economy. Consequently, supermarket shelves remained empty, fuel shortages led to long queues at gas stations, and power outages lasted for 13 hours each day.

Rajapaksa eventually fled the country in July following months of protests demanding his resignation for his mishandling of the crisis. His successor, Ranil Wickremesinghe, pursued a $2.9 billion bailout from the International Monetary Fund (IMF) to revive the nation’s finances. The bailout agreement includes strict austerity measures, such as substantial tax hikes and the elimination of consumer utility subsidies, which have been met with significant public discontent.

The approval of the IMF package faced delays due to resistance from China, Sri Lanka’s largest bilateral creditor, regarding potential write-offs on its loans. Chinese debt has been a contentious issue, with accusations that the Rajapaksa brothers used funds from China to finance extravagant projects. Weerasinghe acknowledged the delays, noting that China, being a relatively new participant in bilateral lending, eventually pledged its support to help Sri Lanka emerge from the crisis.

Last year witnessed Sri Lanka’s worst economic downturn in its 75-year history as an independent nation, with a contraction of 7.8% in GDP and peak inflation reaching 70%. However, the country has previously experienced economic shocks due to foreign exchange shortages, leading to recessions and government rationing of consumer goods.

Despite having approached the IMF for assistance 16 times before, Sri Lanka failed to adhere to agreed-upon reforms, creating a credibility gap. Weerasinghe outlined two options for the country this time: if it remains committed to the current IMF program, the economy could recover within two to four years. However, if Sri Lanka deviates from the program and returns to its previous spendthrift ways at the first sign of stability, it will face severe consequences. Weerasinghe stressed that this 17th engagement with the IMF is different and cautioned that failure to adhere to reforms could signify the end of the country’s recovery story.

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