charindra chandrasena  00:06
Hi Daranath. Hi Jari. Hi Riyadh. Hi

Speaker 1  00:08
hi.

charindra chandrasena  00:09
Were you guys planning to buy a new car? No. Now you'll be paying more if you if you decide now.

Speaker 1  00:18
Absolutely. I'm content with my old one. So you're

Dhananath Fernando  00:20
content is a old one. I know you're a you're a car fanatic, a vehicle vehicle lover, more than more than the two of us for sure. Don't don't get there, yeah. Then we'll explain like how the engine works and all that, and you know, then this become like automobile podcast. Because Sri Lankan automobiles have also a lot of because it has become an asset class now. It was

Speaker 1  00:45
always asset class.

Dhananath Fernando  00:46
It was always an asset class, not a commodity. Not

Speaker 1  00:49
a commodity, you know. So in other countries, you throw it, you use it, you throw it, right? So here you use it, you use it again, you use it again, and when you sell it, it's it has appreciated by three times. By three times, no.

Dhananath Fernando  01:02
Rather than investing in dollars, investing in yeah, yes, absolutely.

Speaker 1  01:11
I mean, it's it's absolutely it's absolutely horrendous. Horrendous. Yes,

charindra chandrasena  01:15
yes. So, so the surcharge was imposed last week on vehicle imports. That's of course the new orders that are placed. Now this is part of several measures that the government is taking as a response to the economic impact of the Middle East conflict or the Iran war. Now Sri Lanka's inflation in April was over 5% Foreign reserves, which were over 7 billion, have come down last month to about 6.7 billion. So there is there is you know quite rapid depletion happening there. The rupee is now compared to the dollar at 330 rupees plus, according to the latest figures.

Speaker 1  02:15
Yeah.

charindra chandrasena  02:15
So we are we are seeing the impact quite clearly, and in in response, so the surcharge was one. Now foal prices are being increased, but but foal prices are not exactly cost reflective still, right? But of course, this is not a local problem. No, it's a global problem that that even a giant like India is facing. India has requested people not to buy so much gold, not to take foreign or reduce foreign trips. So it's clearly a global problem. But my my first question to you, and then one of you can take it, and also maybe go on a certain detour if you want to in answering it, is the government and the CBSL in their policy measures? Do you think they are on the right track, and are they a little late? Because I ask, because now we have still not had a rate hike, a policy rate hike. The last monetary policy review meeting, late March, was almost a month after the outbreak of war, and they chose not to hike the rates. Now another one is coming up next week, so we don't know what will happen there. But are we are we on the right track in terms of monetary policy and fiscal policy, government policy overall? Okay, I'll take I'll take that up. Yes, so

Dhananath Fernando  03:43
no, this is a quite complicated one. Let's try to unpack in a simplified way. Share the whether the central bank has done adequately or not. Now, first thing is we need to understand now they are independent; they make their own decisions, so they have to be very responsible for inflation mainly. That's their main focus, of course.

charindra chandrasena  04:08
And the other side is that is done. Now they can't say that the government pressured them. Exactly. That fiscal policy dominates monetary policy. They can't. They can't have that excuse that a lot of previous central banks could. Correct. Okay. In Sri Lanka, absolutely.

Dhananath Fernando  04:21
So they are completely responsible for inflation. In our view, inflation of 5% is still too high. Of course, in their in the act, they can their target is 5% But in our view, at least it has to be at 2% because depreciating the shortfall.

Speaker 1  04:37
It's the thing is, it's even though it's 5% it's five to 7% There's a range. Yeah, there's three to 7% So they are their target in the mid range. That's 5% But they can go up to seven. 7% Yeah. So our

Dhananath Fernando  04:48
view is at least it has to be at 2% not because of anything else. You know, on first principles thinking, money is something store your. You know, money is a form that you store your value. So that has to be restored. I mean, you cannot have a situation that after you store it, after because you get that exact value when after one year when you realise that it has depreciated by 5% or 7% it's not fair by the person who stored that. That's number one. But on answering your like the log, but but now

charindra chandrasena  05:18
just stay there for a bit. Now inflation is also connected to economic growth as well, right? So, when they are targeting 5% doesn't the central bank have very good reasons for that target? You know, because from the consumer point of view, yes, you would say 2% or probably even less. But I mean, there's a larger picture of. Isn't the central bank factoring that in when you're when they are targeting 5% So

Dhananath Fernando  05:46
you need actually in in our view, when you actually have 2% inflation, that will help more towards the growth side, because when the value of the money is stored, then people have confidence in the system, in terms of pricing, in terms of getting economic equity because when you otherwise when you the logic is when the currency I mean when you depreciate the well I mean when you have 5% inflation so with the price increases that people will spend kind of more otherwise if there's deflationary that's a lot that's the other side argument from the other side if the prices are coming down, if it's deflationary, people will not spend thinking that the prices will further come down, right? So, so

charindra chandrasena  06:28
conversely, if if the prices are going to go up by say 5% or whatever, then people will be like, okay, I'll buy now and not wait for it to go up further, right? That that that urgency is created. Urgency speed, but

Dhananath Fernando  06:41
the challenge is also you are losing your wealth by 5% every year, so that is not going to help in terms of stability point of view. So that's why we say okay, you keep a margin for about 2% which we are not saying to keep it like zero minus. Keep it 2% but not 5% is too much because they can exceed it for 7% Now then the conversation comes: how these currency is depreciating, and whether the central bank and the government has taken adequate measures. That's why the conversation started with the with the vehicle custom duty having a 50% what you call a surcharge. Whether this is the right move, I think in my view, the central bank again. Before I say this, we have to defend the central bank independence. There's no just because of the currency depreciation. First of all, we can't say the central bank independence has to be taken off. That's not. But having said that, I think the central bank could have considered about the excess liquidity that had been the market earlier, but again, it doesn't mean because of that the central bank independence has to be removed. They are independent, and because of their independence, actually we are surviving even thus far because they had done an excellent job in terms of stabilising the economy. Of course, they did cardinal mistakes beforehand, like thinking that the inflation has nothing to do with money printing and all that, but somehow they have the same central bank has reversed their past mistakes, past sins with the new kind of. Is this not

charindra chandrasena  08:07
the same central bank?

Dhananath Fernando  08:08
In my view, it's the same central bank, right? It's the same employees, same people who back the same policies. But of course, the governor has changed and all that. But that's a separate. I mean, we don't. Let's not go there. I mean, the past is past. But having said that, the independence has to be protected. Of course, the there's flaws in the current act because it was diluted by multiple times, even by the Haparana government, not the Haparana government, the previous government, because the form that it could have come could have been better, and then it was diluted and all that. There's this is not a perfect act in terms of central bank independence, but it is better than rather than government has like you know unlimited access for cash through intervening in the primary market. Having said that, I think the central bank could have considered about the excess liquidity because in in our view, because there's already there was additional dollars in the market. Sorry, not people were in a complete misunderstanding. They thought we have $1 outflow. Outflow in the sense there are few ways now that the dollars come into the country: exports, tourism, services, exports, remittances, or foreign direct investment and other stuff. That total inflow exceeds our outflow. Not many people believe this. For the last 222, and a half years, we had an excess inflow. With that, if you consider the outflow, imports, services, imports, whatever that we pay for outsiders, all that we had an inflow. We had a we our inflow is exceeding our outflow, and that excess from that excess was actually the central bank was buying constantly dollars and building reserves. And building reserves is not a bad thing because we have to build reserves. But the problem is when you build reserves, the central bank buy dollars from the banking system, commercial banks, Ampak Bank, whatever People's Bank, they. Buy dollars from the market. So when they buy dollars from the banks, from which money that they buy, they buy from new money because central bank do not have any deposits. So they buy it from the new money. That new money, banks. What are they going to do? They have two options. One option is either they deposit it back at the central bank if the interest rates are higher enough for them to make a revenue, if not, what they would do? There's no point that the banks keeping that money inside their drawers. They will extend as loans. That's where you call credit picking up. If you look at the last few months, the credit is at historic higher levels. That means they extend more and more because you have money in the system. You just give loans. So when you take loans, what happens? As we know, vehicle importation of vehicles, steel, construction, businesses grow. All that happens. But the problem is when that happens, we have to check whether we have enough dollars to support that demand. If it doesn't happen, then you have to depreciate the currency.

charindra chandrasena  11:00
It's a fine balancing act, no? Exactly, it's a fine balancing act because I think following the economic crisis, the biggest fear for a lot of the population was we run out of dollars. Yeah. So I think now they have brought it back to the 7 billion USD range, which is what it was actually in the late 2010s, towards the end of the Happanagawan money. It was, if I remember correctly, somewhere around 7 billion. So now they have brought it back, and they were actually set to go way beyond that until this happened. So, so Riyadh, you can pick up on that point also about. I think it's a difficult job that the governor and the central bank have, right? But in terms of now you spoke about independence, do you think there's interference from the government side,

Speaker 1  12:02
to be first of all, Chari difficult or not, it's a job to do, right? That's not a job that he was forced upon with a gun, no. So that means he has to he has given a mandate to do. So that that we have to first keep that you know elephant out of the way. Second is in interference. I know. Normally, the central bank works in consultation, or the government works in consultation. It's other way wrong. Sorry, the government actually works in consultation with the central bank, and since now the central bank is fully independent, right? Now going back to this thing, the whole economic stability rests on two major pillars. One pillar is monetary stability. Other one is fiscal stability. Fiscal stability we have because, for example, the what you call the the the the budget, the negative, the the deficit, it's it's very low now, right? We are running a healthy primary surplus, so all that fiscal side is okay because the taxes gone up. Government has curtailed spending. Some of the spending, of course, they should do, but I don't know. But anyhow, they have cutted spending. So because of that, that's why they have that 1 trillion. I think they have 1 trillion surplus. If we're not mistaken, right? Which which really helped during diplo and all that. Then the other other major pillar, which is actually the pillar that actually is the most important one out of the two, is the monet stability. So Monty Stability we had up to now. Now little by little, like but Dana said, right? Because of the liquidity management, right? Monte Stability is trying to take a bit of a dive, and normally when Monty Stability takes starts to take a dive, there are telltale tales that signs that come, right? One sign is now example is rupee starts to depreciate. That has already happened. Then after a while, they start curtailing on imports, which is starting. Now they started with a with a yeah yeah. So now that that that 50 percent what they have added is tactically a deterrent for imports. Yes, telling people so. Yeah, they start to shift imports. Yeah, they are quite

charindra chandrasena  13:57
open about it. Yeah, yeah. So

Speaker 1  13:58
the other thing is they'll say three months. If they couldn't curtail, then they'll say six months. Then after that, they say no. I mean, it's better not to import vehicles at all. And after all, they'll say only essential goods will be permitted to will be permitted to import. The same sequence. What happened during President Gotaby's time? It was the same sequence, right? So first of all, the central bank has to decide how they are going to be monetary stable into the system. So, because as you correctly spoke when what do you call in the last review, interest rates didn't go up. So, interest rates is one deterrent where you mop the liquidity up, right? Then now, now I think of course a slight variant. I don't think will do. I mean, it'll do some change, but I don't think it'll be enough. So now the central bank has to decide what they're going to do. I mean, one another option what they have, they'll they'll just sell their bond stock and pull the liquidity back in, right? So there are certain things that they need to do. But the problems when you do that, what happens is on the other side, invariably the interest rates go up, which is something the government doesn't like, right? Because the government wants interest rates to be low, so credit moves and you get growth. So there's a fine balance that you have to. It's a balancing act that you have to do. So where the balancing act comes is up to the central bank because central bank is the person who has something called monetary policy and who decides the interest rate, right? So now that is where we are getting stuck. Now the government and the central bank will have to sit down over a cup of coffee or something and figure out okay what I'm going to do this. Are we going to keep this thing and let credit move and have and further further and see further the currency going down? I mean depreciating, or are we going to pull it back? Because normally, for any economy, the main thing what you need is you need monetary stability, and monetary stability. One key pillar of monetary stability is the currency has to hold its value, right? If the currency stops holding its value, that's where you start seeing telltale problems. And classic case, if you go back, but four years ago. If you go back four or five years ago, when President Gotaba was there, these are the same sequence that it happened.

charindra chandrasena  16:08
Yeah, a great. And

Speaker 1  16:10
one more thing, I just want to end. This thing is last time when we had the crisis, the world was not in a crisis. Yeah, exactly. So now, yeah. So now I was going to raise. That's what I'm saying. So now, if you make the same mistakes, and the world is at a crisis, the fall is going to be greater because the crisis is going to get the domestic crisis is going to get compounded by the international crisis. Of

charindra chandrasena  16:32
course, of course. Right. I

Speaker 1  16:32
mean, it's it's it's it's these are no brain. I mean, these are no brainer. So because of that, now we should be even more careful, right? That we keep domestic stability because domestic stability because if we get into that slippery slope, slippery slope, the slope is going to be steeper this time. Yeah, no, no, I know,

charindra chandrasena  16:49
but but the only point I was going to make, not as a counter, even as an addition, is that as you said, that was a global. Sorry, that was not a global crisis in the sense that we were

Speaker 1  17:00
in a crisis,

charindra chandrasena  17:02
our tax policy in late 2019, as soon as President Goda Viraj Basu came into power, the tax cuts made us very vulnerable when COVID came in, right? And then, of course, everything went south. But other countries didn't suffer like Sri Lanka, whereas here every country is going to suffer. So I think the only only thing I would disagree with you on with the comparison is that that I I wonder if the government and the central bank have as much sway, have as much control in this scenario, as they did in the previous one,

Dhananath Fernando  17:44
so they actually no true. I think one thing that we haven't done wrong is we haven't cut down taxes and completely compromised the government revenue because actually revenue side is doing remarkably.

Speaker 1  17:56
Actually, actually, they have done the reverse because actually some taxes

charindra chandrasena  18:00
have gone

Dhananath Fernando  18:00
up, gone up, right? So because of that, because the challenge is so we

charindra chandrasena  18:03
can take an ideological debate. Yeah, exactly. Yeah.

Dhananath Fernando  18:08
So so so on that front, actual revenue side is okay. So then that that that balance. I mean that excess money is there for them to spend in a. But the challenge is how these crises comes. We need to understand, especially in a vulnerable economy like that, like us. So you don't. I mean, as I was saying, how you get? I mean, how you go bankrupt slowly and suddenly, right? So there are slow mistakes that you do. You don't adjust the interest rate at the right time, or like you don't absorb the liquidity, and then you know, then all of a sudden, the some global shock happens. Same like even President Gotaba came. People even said to up to date, up to COVID when he was before the parliament election, he did a good job. This what general people believed in, and then this external shock happened. COVID happened, and then things go completely out of control because that external trigger makes your econ. I mean, the vulnerabilities makes it like you know the the intensity of that vulnerability is higher. So the same thing, you do slow mistakes, and when there's all of a sudden a shock, and then you really don't have the leverage to you know respond to that. At that point, you have lowered your taxes, your income is gone. Then you really don't have a way to support the population or the community, and then you went completely look to a different turn on monetary financing or like asking more money from the centre than intervening their primary markets. This time you have that thing, but the thing is when you allow the when you don't adjust. Now this time it's the difference is instead of the taxes, in my view, not adjusting the full prices because that's where the demand for dollars is coming from. Because I'll give you one stat. This is March 2026, out of our import bill, which is about. 2 billion US dollars, sorry, 2.6 billion US dollars in total. Our import bill for March 2026 is 2.6 billion US dollars. Out of that, about 630 million, or 23% almost 24% That means quarter is of work. Vehicles is total about 7% 8% So if you really want to curtail the imports, you have to adjust the prices because

charindra chandrasena  20:32
yeah. But Dana, how how would that solve the inflation problem? Because that would just lead to, especially with diesel, that just lead to more inflation. Correct. Yeah. So then, then wouldn't we sit here and talk about how the central bank needs to control inflation? Correct. You know the same discussion, but in a different. Now here's

Dhananath Fernando  20:51
the trick. Now of course, diesel when the diesel prices goes up, electricity prices goes up, water prices goes up, food prices, food prices up, everything goes up.

charindra chandrasena  21:01
Yeah.

Dhananath Fernando  21:01
Agree. There is an inflation. Definitely, the inflation has to go up. But let's assume what happens if you don't adjust the prices. Then the demand for dollars is going to continue and go up. And then you have to depreciate the currency. When the currency depreciates, what's going to happen for the fuel prices? Automatically, your fuel prices again has to go up. So now you have a double rally. You have a depreciated currency, and also increase fuel prices. And as a result, you have to your inflation has also gone up. And what happens when the inflation goes up? You have to increase the interest rates. So even if you don't increase, if you don't allow the currency to move steeply, but if you allow the diesel prices to go up, at least you are bringing down the importation through price mechanism, not through import controls by a demand and supply. Then the I'll also tell the count argument. Look, there are there's elasticity factor also. No, there are certain goods just because you increase the prices, the demand won't come down. True, true. But fuel we have seen, of course, it is the elasticity factor is not good as some other commodities. But when you increase it only, at least you get already there as a quota system in place at the same time. So then you basically curtail the demand because cutting down imports from 23% of your imports is easier than trying to cutting down your imports from 8% of imports, which is the vehicles. And again, I am not saying you know we have to invest on public transport and all that. But having said that, this is the trick. While you allow the fuel prices to adjust with the market prices, you also have to, you know, supplement it with giving cash transfers for the vulnerable community. You have to increase the cash transfer because if you are giving a subsidy for fuel, I am saying you better give that subsidy by increasing fuel and for the poorest of the poor people. I am not saying I'm not against the subsidy. The government probably will spend. I mean, they will have a saving, and even if they are going to spend the same amount for what they are going to spend on fuel subsidy, better it would be more effective to give it from for the poorest of

charindra chandrasena  23:14
the poor. Targeted, targeted as opposed to exactly consider the public

Dhananath Fernando  23:18
transportation. Give it like based on a for public transport for whoever who is needed, rather than giving it as a full subsidiary. That way you curtail to an extent inflation. You protect your currency. You keep the levels of confidence and all that. I'll tell you why this is dangerous because when the currency starts depreciating, Charendra, as you know, then people who are bringing dollars are going to hold it because they think, okay, why am I going to bring dollars? Because it's going to

Speaker 1  23:47
and then the central bank tries to for sell it. Exactly. Then they don't breed at all. Yeah.

Dhananath Fernando  23:52
First first step is then people even the remittances who are sending it, they are not going to send dollars. At the same time, the importers get panicked. They think, my goodness, the currency is depreciating at a rate, I should import as much as possible, even for stocks for next year. So then there is a massive polarisation that that takes place. No one is sending dollars; everyone was asking for that. Will create like a massive jump on the exchange rate, and when that happens, people start sending dollars on the informal

Speaker 1  24:19
market.

Dhananath Fernando  24:20
So that we have to stop. At the same time, when the currency is depreciating, and when the and if we fail to adjust the fuel prices, there's a limit that you can adjust to, Chari. Like okay, 10 rupees, 15 rupees, 20 rupees, 50 rupees. You can adjust in terms of fuel. If it goes for about 200 rupees, imagine the we also don't know. That's why the governor has said no. He hasn't said that Sri Lanka's future is uncertain in three months. I think he had a press conference. He

charindra chandrasena  24:47
clarified that. He said that he was talking about the global situation and exactly that's uncertain. Exactly. So

Dhananath Fernando  24:52
if that uncertainty comes out, or President Trump takes another move, and like if that fuel prices continue to stay high. And then, if we cannot do that adjustment, if it goes beyond a certain point, we really cannot increase the fuel prices by 200 rupees. It is better to adjust it now onwards. And if it comes down, you give the same benefit to the consumer. But if you go into 200 rupees, then you really cannot adjust. Then where? What are you going to do for the for the subsidy, so that's what I that's that's why I am saying that you adjust it from fuel and bring the imports down. It will anyway have an inflation because even if you don't do that, still with the currency depreciation you will have the inflationary depression. So better to do it from the poor people's point of view because they are the most vulnerable rather than trying to depreciate the currency too much for that you have excess liquidity for that probably the central bank has to sell some of their government securities and absorb additional liquidity but when that happens there will be pressure to an extent from the interest rates not from the the policy interest rate but the market interest rate because when you have the treasury bill bond auction that interest rate adjustment. Yeah, yeah,

Speaker 1  26:02
and it goes up. And if the if the central bank doesn't this thing, then but that's what you classically call as the auction has failed, and then they go to a captive source. So the captive source is normally EPF, ETF, and then probably some of the you know the superannuation funds like the life funds that are there. So that part. So just want to go now. This fuel is actually a very very catchy thing. Now, for example, you know you have something called you know if you go back to my former class teachers, basic economics, what I learned at A levels, mr. Vimalabrets So you get something called giffen goods. So I'll just go down to the basics, right? Basics of economics. So problem with fuel is there's no there's no subsidy. I'm not talking about a fuel subsidy. I'm saying there is nothing else that you can use for that. I mean, if your car runs on diesel, it only runs on diesel. You mean substitute? Subsidy. Sorry, sorry. Substitute. Substitute. It doesn't run. If it's diesel, if it's diesel, if it's petrol, if it's petrol, right? So the thing is, you can put something else and run. That is number one. So because of that, it's very sticky, right? Second is then you have the whole demand and the the the the what do you call you you have the demand and supply. That's what's currently happening. And then there's another argument that's going in Sri Lanka is is basically the price of India and the price in Sri Lanka. You can't compare India and Sri Lanka for simple reasons. The world's India has a population of 1.4 billion. Sri Lanka has just over 22 million, right? So the amount of fuel what India imports and the discount what they get, and they I have already they have fuel deals going with Russia for a long time. There even you know there were some open forums was where Foreign Minister Jaya Shankar said, "So what? So we are buying from Russia and the and the U.S. government. So

charindra chandrasena  27:45
they were going to stop purchasing from Russia because of the U.S. pressure. And then when this happened, they opened up. U.S. allowed exactly. So anyhow,

Speaker 1  27:54
anyhow, India has a history had a history of importing fuel from Russia at a discount. That is one. And I think Indian India has the biggest refinery in the world in Jamnagar. I think it's in Prime Minister Modi's in Gujarat, right? So the biggest refiner in the world is in India. So they have massive refinery capacity and all that, right? They buy in bulk. So you know, as anyone knows, the more you buy, the discount you get, like you know, there's a wholesale discount. So the pricing, but India, for India to produce a litre of oil, diesel or petrol, is way different to us because one thing is the sheer quantity what they buy. Second is their refinery can run on on on crude oil, not on light crude. They can run on heavy heavy crude, right? Where the Sri Lankan refinery can only run on light crude, and there are only very few countries in the world where produces light crude, right? For example, Iran, which is under sanction, so that option is out. Either you'll bring from Malaysia, or there's something called Bonny Light, which you'll bring from Nigeria, so right, or you have Siberian Light, so and these sign high demand, right? So because of that, our refinery cap, any of our refinery capacities, only about 20 to 30% right? From from the domestic demand, right? Out of that also, they can only use light crude. So the whole mathematics that goes into producing a litre of or purchasing a litre of diesel or petrol, a litre of I'm I'm I'm just going to say a unit. A unit is much higher than India, so we can't compare apples to apples with India on the price of fuel, right? So that is one thing that has been. I mean, if you take social media and all that, even the political circles and all that, they all compare a litre of you know fuel in India is only 300 something, and you know why should it go up to 600? The reason is not that we are not comparing apples with apples. It's completely. It's a completely different game.

Dhananath Fernando  29:45
And adding to what Riyadh said, also, Chari, India has been growing at a rapid rate. Yeah.

Dhananath Fernando  29:50
They have enough reserves. They were not a bankrupt country.

Speaker 1  29:53
Yeah.

Dhananath Fernando  29:54
So they can. Some of the companies are actually absorbing a loss. India can do that up to a. Certain extent because this is a shock for them, you know. So they can do it, and in terms of their because they are heavily dependent on agriculture, so because of that, they really cannot sometimes allow the fuel prices to go up. So as a result, they can keep the fuel even at a loss for a certain period of time. But we are still coming out from the crisis out of our expenditure, government expenditure, 50% goes for interest payments. So we really cannot, unfortunately, keep the. We cannot follow what India does because, as Riyadh said, these are two completely different contexts. So just because India sells it, or like people say Australia absorbs, you know, they can do it. But then

Speaker 1  30:38
that day, I mean, we we just did a rough calculation, you know, back of a napkin kind of calculation. Australia also says 550 bucks a litre of diesel.

Dhananath Fernando  30:45
Let's say that is with their let's say the cost structure. But but we need to understand is you really cannot. We are at a situation. We really cannot replicate what a you know 6% 7% economic growth country is doing on the other side of the Indian Ocean. You really cannot replicate that.

Speaker 1  31:01
And and the other things are buying capacity. Just imagine four years ago, right? Four just four just over four years ago, we didn't have the banking system. Talking about all the banks, banking system didn't have $50 million to bring down a shipment of fuel. Then only we open up the credit and we are getting it from India. So that's what I'm saying. So it's a completely different game. So you can't compare India or any of the other countries in this region. Now, for example, in Kenya, there are riots on the street because the fuel has gone up by 30% or something, right? So Kenya also is relatively, you know, being a you know African country, they are you know monetary and fiscal and all that lot of issues. So, but but the but the scenario is there is something to really look at. So the price of diesel going up to, as what Dana said, 600 or 700 is very plausible. Now the thing is, there are two sides. I just want to bring this out. Now let's say normally when the government budget office, when they make the annual budget, they normally now fuel is one of the big fuel is one of the big items, so normally what they do is they make a calculation saying, okay, this year this is going to be the demand for fuel, right? And we have to spend so much. So then they make the tax formula to it, saying that okay, so many million litres of fuel will be sold throughout the year, and we are going to make a fixed tax of this particular amount. So what happens is, it's made on let's say selling fuel at 392, and there's a fixed tax rate. But when the fuel goes up to let's say 600, the fixed tax rate is still the same. Demand might come down by maybe 10 15% but the but the what do you call the tax return has almost doubled. I mean, it's a fixed tax rate because it's done on a per litre, no, right? But but the cost has gone up. I don't know if you are getting this. The cost has gone up, right? So the thing is, one argument is you can bring the taxes down, right, and still hit your budget target. That is one argument. Second argument is no. I mean, this one, this one that we also agree have a fixed system because in Sri Lanka, Sri Lanka the decision making has always been very fluid. No, every government or sometimes the same government within its whatever five year term they'll make so many changes. It's better to give a fixed term. Then the businesses know this is going to be their cost structure. So any big manufacturer can be apparel, can be rubber, can be anyone. They know okay, this is the this is the price of fuel that's going to be adaptability that exactly budgeting and from yeah finance department will know exactly this is going to be the cost so that is one so then the government is going to make excess they are going to make excess I mean they are going to make excess capital sorry excess tax revenue that tax revenue either like what Dara has argued saying that for the poorest of the poor, you can do a cash transfer and say you are targeting them and saying, okay, fuel has gone up for your little motorbike, for your tractor, whatever. You are getting a subsidy. That is one option. Second option is you can actually put it into emergency fund. This is something I think that hasn't been thought over, but we inside Advocata, we were we were having this chat, so if it goes into that for any emergency, that fund is there under Parliament, right? So if they say right, okay, so many millions are there, countries going through a crisis, can be can be anything. This emergency fund is there where they can go and where they have drawing rights for for emergencies only.

Speaker 1  34:18
So that is another option to look at, so the thing is the formulas and the options are there. It depends on which option the government is government has to do. But one thing is for sure, the price of fuel has to be adjusted. It has to it has to go north. Right. So that part, if they don't do, what's going to happen is all this excess capital which they have built through the current account, it'll just start to vanish.

charindra chandrasena  34:41
Right. So let's let's look ahead a little bit.

Speaker 1  34:45
Yeah.

charindra chandrasena  34:46
And say that it gets to a stage where this is not resolved in the next three months because now President Trump even yesterday said that he was ready to launch. Yeah, launch a bigger. Tuesday on Tuesday, which is today, and that he stopped because the Middle Eastern countries, including Saudi Arabia, told him let's not start again. Let's let diplomacy take its course. Now, whether that's true or not, we don't know, right? But that means it's still on the table. Attacks are still on the table.

Speaker 1  35:20
Yeah.

charindra chandrasena  35:21
So if this doesn't stop in the next three months, six months, nine months, we don't know. Sri Lanka will get to a stage where it might have to curtail imports. Right. I know Advocata stance on this. Is your stance going to be the same in a situation like that?

Dhananath Fernando  35:40
Yeah. So no, absolutely, sorry. That's what I'm saying. By curtailing imports, you really cannot solve this problem because let's say okay, we'll say we'll stop vehicle imports. What could happen if there's still excess liquidity in the market? That means, as I said, if there's additional rupees in the banking system. Government says no vehicle import. So that basically means if I go and try to import a vehicle, simply what it means is bank is not going to give me money.

Speaker 1  36:11
Money. Yeah.

Dhananath Fernando  36:12
If I going to take a lease, they will say no lease. Yeah. If I trying to start open an LC, they will basically they will say no to an LC, not to a lease. Lease. I mean, even a second-hand vehicle, you can open a lease, but they will not say. So, what the bank is going to do with that money? They will not give that money for vehicles, but definitely they will give money that money for steel imports. They can't keep that money in their bank, no. So, while you see a reduction on vehicle imports, you will see some other commodities imports will go up. So that's what I'm saying. If you really want to curtail imports, don't put import controls. You adjust it through the prices. When you increase the, when you allow the prices to a anyway, the prices will come down. And even if you adjust, if you take the liquidity out with the interest rates, kind of in going interest rates will also have its repercussions. But rather than import controls and creating an informal market, when you adjust the interest rates, automatically people will start stop importing goods. That's also so. The

charindra chandrasena  37:18
solution you're proposing is to keep hiking interest rates and to keep raising prices as well.

Dhananath Fernando  37:26
Absolutely. Yeah. With the excess liquidity going on in the market, automatically the I'll give you a classic example. Now, during president, same thing happened. President, if you recall, President Gota be sign, he had he restricted almost all imports.

Speaker 1  37:38
Yes.

Dhananath Fernando  37:39
Right. Turmeric vehicles, everything. Actually, what happened to the currency? Now, if that was the solution, we should have. I mean, we were 180. It went up to 360 because when you curtail, and then you, if you recall, when this new governor came, actually he even the forward purchasing was curtailed. Remember, like there's an option that you go to the bank and buy dollars before that was curtailed, and if you recall, there was a first time there was a before they curtail vehicle imports there was like a what do you call you had to for for open an L C you had to give 100% deposit on the bank right and then even if you recall there was something called whether I really cannot recall the term on I think open papers like you know when you are importing food items and all that you really need not to show the documentation of your LC or anything to import goods. No, no, what happened?

Speaker 1  38:35
No, yeah, yeah. So what happened was no. So the thing is, what happened was the government actually got to a level where we couldn't import anything. No banks didn't have money, and Sri Lankan LCs are not accepted. Then the central bank basically turned a blind eye to anyone who can import import any goods on credit. I think it's called but DB terms. I can't remember right where they import without so there is no LC. Normally you can't import anything without LC, but what they said does okay through a through a what do you call through credit from your supplier that you can import your you can you can import your goods

Dhananath Fernando  39:11
and they brought lot of restrictions you have to have credit limits for 180 so so still the currency depreciated from with oh I mean vehicle imports removed like last year February you know so till then, with that, there was still kind of currency continue to depreciate. So that's what I'm saying. Import looking at the imports, Chari is not the way to look at it, because you of course the imports will automatically come down when you adjust the interest rates and when you move the liquid out from the market because there is no money for people to consume. Yeah, but that also has. We also need to where people the repercussions of that. When you know when the interest rates goes up, economic growth will slow down, micro and small, medium and

Speaker 1  39:51
you can't afford the lease exactly.

Dhananath Fernando  39:52
And also, your if you have taken a housing loan on like variable interest, you can't afford the loan. Yeah, exactly. But better to do it step by step. Rather than giving you remember no interest rate spent up about 28% you know from like eight 7% 3% to 28% no one can afford that but you have to slowly adjust so then people have time okay if I if I if I if I have build a house or building a house if I have a land if I have to sell it out and just settle my loan they have time rather than all of a sudden, like you increase the interest rate for like because of all these crises, then you cannot do anything because no one will then buy any property. You slowly, slowly adjust the market to you know, you know adjust accordingly. So that's why we are saying no point curtailing input, even at a temporary stage. That may be okay. I mean, if you really think that is, but the problem is all these temporary measures are going to, you know, extend. That's what happened. Even when that government, when they curtail vehicle import, they say it's a temporary measure, and it took like what five years for them to really open it up. Same thing is going to happen because when you control something, the other side is constantly like building the pressure and lobbying it not to open it, and then it only benefits. By the other side,

charindra chandrasena  41:04
you mean local parties. I mean local parties. So whoever, whoever who

Dhananath Fernando  41:08
could be who is getting benefited out of that, they say okay. Even it could be some importers. They will say okay, don't allow vehicle imports. We may not have enough dollars. All misperceptions. But having said that, I think on the vehicle, yeah. So there are also so many miscommunication and misperceptions about also this dollar like rupee depreciation, which is also not good. So that's why I think we have to understand the root causes of it rather than yeah. Yeah,

Speaker 1  41:34
because this time you're getting hammered from because last time it was basically because when when when because last time was it was what he called it was demand pulled because whatever there was high demand because the reason is because interest rates are low and liquidity was very high. Now this time on top of that to compound it, cost position was there because of what's happening in the Middle East. So this time is actually more tricky than the last time. So you have to be extra careful how you manage it because last time it became ugly on a particular sequence. This time it can become ugly very fast because the reason is because it's going to get whatever bad decision we made is going to get compounded multiple times because the Middle Eastern war. And we have absolutely and and the other thing is don't forget because Middle Eastern war the the the scenarios even if it stops tomorrow, it's a peace and everyone is holding hands and singing kumbaya, right? Still, Saudi Arabia refining capacity is hit. Qatar refining capacity. Fujira is hit. Fujira is one of the biggest oil export imports in in the world. That is it, right? There are issues in Russia, especially with the Ukraine war, right? Because some of the Ukraine drones have hit a couple of Russian refineries. So you know, so the energy supply supply is not going to suddenly come back. Exactly. So even if America goes full online, still it's not enough because most of American refining capacity is going into American consumption, right? Okay, prices will go up in America, but they'll at least have oil. So this part of the world, and the other thing is number one, the biggest consuming the world is America, number two is China, right? So those two are put together. I think probably about 30 40% of the world's demand is there, right? Then you have big economies like populations like India, Indonesia, and all that, right? So there is going to be a massive supply issue also, and I think don't forget the biggest problem is actually not oil, which nobody is not even talking, but it's fertiliser, right? Because you know, last time also you know we had the fertiliser issue because we didn't have money to import fertiliser. This time this is actually a supply issue because fertiliser, some other fertiliser, urea and all is a byproduct of petroleum, right? So Qatar, UAE, Saudi Arabia, they were big importers, sorry exporters. So that's another area we look. So that's what I'm saying. So this thing, whatever we are doing, we have to be extra careful this time because the world situation has gone completely topsy turvy. Yep.

charindra chandrasena  43:46
So we end with that bad news. No good news today. No good news today. I think no.

Dhananath Fernando  43:54
The good news is good news in the sense. No good. I mean, for everyone this is bad. But what we need to do is, Shari, the crisis comes not because of the external shock. I mean, it has an impact. Now we are going to respond to it. Exactly. Respond it rightly.

Speaker 1  44:08
Absolutely.

Dhananath Fernando  44:08
While the sometimes decisions are unpopular, you have to take that call at this moment before it goes out of control. Yep.

charindra chandrasena  44:16
We will do a separate show on the on the ideal Response with with with with with a few of our thoughts put in as well. Now before we go, you have your yes

Dhananath Fernando  44:30
absolutely. So if you I mean this content is brought to you free of charge thanks to our Advocata insiders. You can also become an advocatarisider. It's just 1000 rupees a month, 12,000 rupees a year. What we are trying to do is to build a policy community who support really data and fact-based research, and that's why we are bringing you this show. And we are available in all three languages: Sinhala, Tamil, as well as in English. So, if you think that we are doing a reasonable job. Become consider becoming an subscriber. It's not very expensive, and for becoming an when you're becoming an Advocata insider, you get also exclusive content about exchange rate, property market, stock market, all sorts of different other segments. So consider becoming an Advocata insider and support us. Help us to bring this content and continue the good work that we do. All right,

charindra chandrasena  45:22
all right. So we are done for today. Thank you very much, Tana and Riyad. Wish you again next week. And thank you everybody, as always, for tuning in. We hope you, you know, gain something from this. Enjoy the conversation. Leave comments and let us know what we need to work on, what we need to improve, and and your your thoughts as well on on the content of our discussions because we we are open to different ideologies, different ideas. So thank you, and I will see you. We will see you next week.


Transcribed by https://otter.ai