Sri Lanka’s ex-President Mahinda Rajapaksa said reckless post-election spending involving a state worker salary hike and subsidies generated an economic crisis, driving investors away though it is being blamed on debt taken during his rule.
“All the economic problems of the yahapalana (Good Governance) government are due to the fact that they bribed voters with salary increases and price reductions in order to win the 2015 August parliamentary elections,” Rajapaksa said in prepared text of a speech delivered on September 15.
“They thought only of winning the elections, not about how they would manage the country after winning.
“This election related largesse set off a chain reaction which began with the loss of control over government expenditure, and an increase in the budget deficit.”
“The money thrown around to win the election resulted in an increase in imports.
“Seeing the recklessness of the new government, foreign investors began withdrawing their money and leaving Sri Lanka.”
Sri Lanka’s rupee collapsed from 131 to 147 during 2015 as the central bank printed money to 290 billion rupees finance the deficit as credit demand went up and also sterilized forex interventions as foreign investors fled.
During the Rajapaksa’s rule in 2012 also the rupee collapsed from 110 to 130 to the dollar.
The 2012 balance of paymetns crisis was triggered by energy subsidies, not election spending, and the central bank printed around 220 billion rupees as utilities borrowed from state banks to keep rates down and boost credit and imports.
Rajapaksa said during his time there was no difficulty in repaying debt and he did not complain about the lack of money.
Analysts say during the last few years of his rule, then Treasury Secretary P B Jayasundera did slowly squeeze expenditure, with total spending as a share of GDP falling.
In addition revenue to GDP also fell, reducing the overall tax burden on the people, while the budget deficit also fell. The strategy is superior to cutting deficits by raising taxes from the people to pay state workers.
However part of the expenditure fall, analysts say was a statistical sleight-of-hand where road building costs were hidden by off-balance sheet borrowings.
The economy was also hamstrung by Rajapaksa’s tendency to mis-manage state enterprises and build new ones and his support for domestic businesses and farmers to exploit consumers with import duties.
A large part of Sri Lanka’s current problems are due to the losses and inefficiencies at state enterprise and import protection.
The current administration has continued the policy of helping businesses build monopolies with import duties.
Rajapaksa charged that the International Monetary Fund had imposed ‘strict conditions’ on Sri Lanka because the new administration could not be trusted.
“The international lending agencies saw the reckless manner in which the yahapalana government destabilised the economy in a matter of weeks and months which is why they imposed strict conditions on Sri Lanka,” he said.
He denied that the economy was heading for a crisis in late 2015 when he called an election.
“The yahapalana leaders say it was not my astrologer who persuaded me to call an early election but Dr P.B. Jayasundera my treasury secretary. I am quite amused by such stories,” Rajapaksa said.
Economic analysts say the economy was recovering by the third quarter of 2014 as shown by credit and trade numbers. But expropriation, favoring businesses with import duties, the burden of loss making state enterprises, lack of rule of law, corruption and growing vicious nationalism had hurt the country’s growth propects.