Former Senior Deputy Governor to take over; key policy changes likely at next MPR
It has been confirmed that former Deputy Governor, Dr. P Nandalal Weerasinghe is to take over as the Central Bank Governor on or around the 7th of April. A career Central banker, Dr. Nandalal holds a Ph.D and Master’s Degree in Economics from the Australian National University. We view this appointment as a key positive at this juncture, where the need for corrective monetary policy measures is key to ensuring economic stability.
The appointment also comes amidst the President’s appointment of an informal economic advisory committee. This comprises of the former Governor of the Central Bank, Dr. Indrajit Coomaraswamy and former Senior Director for Development Economics at the World Bank, Dr. Shanta Deverajan.
At a recent discussion, Dr. Weerasinghe commented that the monetary and fiscal authorities should tighten monetary policy by higher margins, while taxes should move back to pre-2020 levels to support the fiscal balance. Some key suggestions at this discussion were;
Introducing transparent pricing formulas for both petroleum and electricity prices
Government announcement of its intention to restructure sovereign external debt
Seek assistance from the IMF to commence negotiations for debt restructuring immediately
To seek short-term bridging facilities from official creditors until an agreement is reached with creditors on restructuring
More flexibility in managing the exchange rate on a gradual basis
As such, we expect debt restructuring and a more credible economic reform plan to materialise in the near term, post Dr. Weerasinghe’s appointment. While today’s scheduled Monetary Policy meeting was postponed, we expect this to take place once Dr. Nandalal takes office.
We expect a sharp increase in interest rates along with further tightening measures to ease pressure on the financial sector.
Former justice minister gets Finance portfolio; looks to address IMF in April
Following the resignation of the Finance Minister, Basil Rajapaksa as talks with the IMF nears, the President appointed former lawyer and justice minister, Ali Sabry to take over. While questions remain as to who will address the crucial IMF talks in Washington in the coming weeks, we expect Minister Sabry to hold talks along with the newly appointed Governor Weerasinghe.
Following the resignations of MPs, the President announced the newly appointed ministers for Foreign, Education, Roads. However, with the ongoing fuel crisis and COVID-19, it’s the appointment of an Energy, Power and Health ministers is yet to be announced.
The president has refused to step down, but has indicated that he would be willing to work with a multi-party, interim government. The main opposition, SJB has reiterated its position that it would not take any government position under President Rajapaksa.
Crucial parliamentary sitting to take place today; parliament looks to be prorogued
Meanwhile, a key parliamentary sitting is expected to take place today. With 14 members of parliament (MPs) announcing their decision to leave the government, and remain as an independent group, Sri Lanka Podujana Peramuna (SLPP) looks to have lost its crucial 2/3 majority in parliament. This comes as a further 16 MPs of the 10-party alliance also now function as independent members. We also see a possibility of the government losing its simple majority if the independent ministers decide to vote against any bill tabled in Parliament.
In the event the government loses its simple majority, we expect parliament to be prorogued. We note that parliament can be prorogued for a maximum of two months.
However, with the cabinet still in place, we don’t expect significant barriers to the country’s near-term operations.
At this point, the probability of snap elections is low, given the current economic and political crisis. While a more stable political backdrop is crucial to support the potential debt restructuring and IMF talks, we note that further uncertainty is likely with the probable prorogation of parliament.
While the repeal of 20A has been spoken about, we note that the opposition would need a 2/3 majority, which at this point is unlikely.