The internationally planned and executed country-wide terrorist attacks and the resultant insecurity in the country would weaken the balance of payments, erode foreign reserves, increase fiscal slippage and slowdown economic growth. The most serious consequence, the deterioration in the balance of payments, would weaken the country’s external finances and increase the nation’s external financial vulnerability. [...]

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International financial assistance needed to overcome economic consequences of terrorist attacks

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The internationally planned and executed country-wide terrorist attacks and the resultant insecurity in the country would weaken the balance of payments, erode foreign reserves, increase fiscal slippage and slowdown economic growth. The most serious consequence, the deterioration in the balance of payments, would weaken the country’s external finances and increase the nation’s external financial vulnerability.

Therefore, international assistance is vital in strengthening the external finances and stabilising the economy. An international emergency assistance fund is proposed to strengthen the country’s external finances, while a national fund is mooted to assist in reconstruction and to stabilise the economy.

Economic consequences

Last Sunday’s column discussed in detail the adverse economic consequence of the terrorist attacks. It pointed out that the terrorist attacks would have an adverse impact, inter alia, on the balance of payments, external financial position and fiscal outcome. It would destabilise the economy and slow economic growth.

Mitigating factors

Although the impact on the economy is significant, there are some mitigating factors, too. The fall in tourist incomes may be less than the initial estimate, if the security situation is brought under control and the country declared safe for tourists at least before the end of this year. In any event, the impact of the fall in tourism could be compensated to some extent by decreased imports as tourist expenditure has a high leakage for imports. The slowing down of other economic activities would also result in lesser imports.

On the other hand, there would be increased imports of security equipment with duty reductions. Imports from the defence establishments are also likely to rise. International financial assistance is urgently needed to save the Sri Lankan economy from external financial vulnerability. An international fund that would strengthen the external finances, and a Sri Lankan fund that would consolidate the public finances are needed.

In as much as there is an international obligation to assist Sri Lanka owing to this attack being an act of international terrorism, Sri Lankans, too, must make sacrifices to strengthen the economy in this hour of need in the same manner as contributions were made by the French recently to restore the Notre-Dame cathedral in Paris.

International fund

As the most serious consequence of the current wave of terrorism would be to weaken the external finances and enhance the country’s external financial vulnerability, an international rescue fund is urgently needed. It would strengthen the country’s external finances that is being weakened by adverse effects in the balance of payments owing to a fall in tourist earnings, foreign investments and capital outflows and increased imports. The insecurity would increase the amount and costs of foreign borrowing needed to repay debt. This underscores the need for foreign assistance to resolve the crisis in the foreign reserves.

The country’s external finances could be stabilised immediately by international assistance. Therefore an international fund for strengthening the reserves and enabling foreign debt repayment must be established quickly.

International Emergency Assistance Fund for Sri Lanka (IEAFSL)

This fund to provide emergency financial assistance is primarily to strengthen the country’s external reserves to meet debt repayment obligations in the coming months and meet the essential import needs. Contributions would be from governments, multilateral agencies, societies, diaspora and any other organisations.

It could have two windows. One window would be contributions and outright grants. The other would be loans at concessional interest rates as prevailing in the respective donor countries. Multilateral institutions like the IMF, World Bank, ADB and IFCC could increase funding from existing loans if preparing new loans takes time. It may be easier for these institutions to expand existing facilities or divert some of their agreed future commitments. The modalities of this fund must be worked out by a competent team.

Sri Lankan Fund for National Reconstruction (SLFNR)

The appeal for international contributions would be hollow and lack credibility unless we the people of Sri Lanka make sacrifices.

Contributions should be sought from institutions, corporates, banks financial institutions and individuals. It is imperative that ministers and members of parliament contribute several months’ salaries to this fund. Decisions with respect to this should be made by party leaders under the chairmanship of the Speaker. Ministers and parliamentarians should be willing to contribute at least three months’ salaries and other perquisites or perks. Hopefully some of our vociferous patriots in parliament would contribute more.

Essential condition

An essential condition for the success and efficacy of these funds is financial accountability. These funds must be administered under the close scrutiny and supervision of the Auditor General in association with two renowned accountancy firms.

Next step

If this proposal is accepted in principle, a team of specialists from the Finance Ministry and the Central Bank could draw up the financial, administrative and legal and institutional framework. What is presented here may form the broad contours of a proposal.

Summary

The internationally plotted and nationally executed terrorist attacks would have an adverse impact on the balance of payments, external financial position and fiscal outcome. The cumulative impact of the new wave of terrorism would slow economic growth. It is, therefore, crucial that economic activities, such as agriculture and manufactures for export produce at their maximum potential so that the nation’s external vulnerability would be lessened.

Conclusion

The most serious consequence of the recent terrorist attacks is the weakening of the country’s external finances and compounding the nation’s external financial vulnerability. International assistance is immediately needed to strengthen the country’s external finances. At the same time, a Sri Lankan fund must strengthen the public finances and stabilise macroeconomic conditions.

International assistance by strengthening Sri Lanka’s external finances and stabilising the economy would defeat the objective of global terrorism of crippling the economy.

 

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