Are we safe from another economic crash?

IS Sri Lanka due to face another economic disaster, or are we safe? While presenting the 2026 budget, the President assured Parliament and therefore the people, that we are absolutely safe. “Where’s the crisis?”, he asked taunting jovially, “What crisis?”

- By Sanja de Silva Jayatilleka

He seemed amused that anyone should think there was the slightest danger of such a thing. It looked rather like he had forgotten that we were just emerging out of one, so great was his incredulity at anyone suggesting even the whisper of any difficulty in paying our external debt, the cause of our 2022 default.

Among other things, he trotted out the fact that there was a balance of $ 6.2 billion in our reserves as evidence of our ability to meet our debt obligations.

Enter the Committee on Public Finance (CoPF). Its Chairman SJB MP Dr. Harsha de Silva posted the video of the meeting they had with the Central Bank, at which its Governor, Dr. Nandalal Weerasinghe was present, together with other senior officials. As the meeting progressed, the $ 6.2 billion reserve lost its shine rather rapidly. It turns out that not all of it was available for debt repayment, and in fact, as Dr. Harsha de Silva bemoaned later on a TV talk show, when the IMF formula for calculating reserves is applied, we don’t have any reserves at all, but a negative number. The host of the TV show was clearly dumbstruck, as are we all.

Although this was perhaps not headline news to economists, these little details are important to those of us citizens who eventually pay the price. We bother with these only because we paid the price once before, when we didn’t think we needed to ask the questions.

It turns out, the Central Bank has its own formula to come up with the figure for Foreign Exchange Reserves, which makes it less than the $ 6.2 billion cited in the President's Budget speech. That $ 6.2 billion includes everything and the kitchen sink of foreign exchange related things, including short term dollar borrowings from local banks. ‘Short term’ is anything less than a year, and could be a risky 3 months. It also includes currency swaps from China and India, which cannot be used for debt repayment, besides having conditionalities for any kind of use whatsoever.