Usually a well governed nation, Sri Lanka is rapidly descending into a political and economic crisis.
The last few weeks have been nightmarish in Sri Lanka. The country is witnessing an exceptionally serious economic situation, along with widespread political unrest. GDP growth and foreign-currency receipts have sharply plunged. Agriculture, the main stay of the island, has collapsed and with no fuel for production, power generation has also halved in quantum. With the Covid-19 pandemic causing sharp declines in revenue from tourism, exports and overseas remittances, the dependence on imports for fuel, fertilisers and pharmaceuticals remains phenomenally high. Faced with a drastic decline in the value of the local currency and 20% inflation with soaring prices of all types of food, milk, cooking gas, fuel and essential medicines, the average citizen is visibly angry. Led by the Rajapaksa family, the ruling party has suddenly and overwhelmingly, lost the confidence of most sections of society. This includes the common man, their own party men and the influential Buddhist monks who were hitherto on their side.
Across the country of 22 million, citizens of all ages and faiths are holding the Rajapaksa dynasty—who has ruled the country for most of the last two decades—responsible for the emerging sordid state of affairs. Many are out on the streets protesting day and night and have made “Gota Go Home” their clarion call (Gota being short for President Gotabaya Rajapaksa). They clearly want to see him gone, along with his eight brothers and nephews who till recently held important ministerial charges including the Premiership.
42 of his own MPs have deserted him and now sit as independents in the Parliament, with the ruling elite already finding itself in a minority. The Tamilian Alliance in the northern province of Jaffna has joined national opposition parties; together, they are readying themselves to move a no confidence motion against the rump government and an impeachment motion against the President along with the revocation of 20 statutory amendments which had vested extraordinary powers in him. The Governor of the central bank has resigned, and several senior functionaries in the government and the ruling party seem to be preparing themselves to jump ship.
On top of this social and political uncertainty is the Damocles’ sword of creditors who have lent Sri Lanka approximately US$25 bn. As much as $4.5 bn out of that, plus about $2.5 bn interest, is due for return this summer. With just under $2 bn in foreign reserves left in its own kitty, and the customary exports of textiles, rubber and tea badly lagging, Sri Lankan authorities have announced their first ever default on international debt. The inability to service sovereign borrowings will attract the usual downgradings and make further overseas borrowings extremely difficult. Defaults on private borrowings could cause repossessions of key funded infrastructure, including several strategic projects.
To partially tide over this dire situation, Sri Lanka is appealing for urgent and sizeable help to the IMF, World Bank, and Asian Development Bank, as well as to friendly countries like India, China, Bangladesh, UK and USA. But in doing so, the Sri Lankan authorities would need to demonstrate their readiness to accept the highly unpalatable terms and conditions, especially in the short run. These could include an all-round tightening of the belt, especially in terms of imported products, and undertaking a host of structural reforms viz. reversing the badly conceived and hastily implemented policies like slashing direct tax rates in 2019, vastly increased money supply by the central bank in 2020 and initiation of proactive measures to privatize its several badly run parastatal firms.
One thing is clear—the citizens of Sri Lankans do not deserve to undergo such hardships. Its successive governments between 1948 and 1977 have a track record of good governance, and a decent commitment to improving all the desirable social parameters of development. Geopolitically, the country had strictly followed the doctrine of neutrality. It was amongst the founders of the non-alignment movement of the fifties and sixties. Till the mid-eighties, when the autonomy-endeavours of the Tamilians of Jaffna began to intensify, it was a peaceful country with amicable relations with the neighbours. For its well managed economy and sound administrative practices, the country had often received international acclaim.
The sudden shift to private markets to provide most public services since availing IMF assistance in 1977-78, combined with three decades of civil war, has cost the country heavily. The fiscal focus has fundamentally changed. While enhanced spending on defence may have been necessary; for no plausible reason, its people centric policies also saw a metamorphosis. Inclusiveness in development efforts has significantly diminished, as also attention paid to primary health care, basic education, and focused women and childcare programs. Consequently, societal expenditure, both public and private, has moved from basic preventive healthcare and education to “pay and use” types of services and products. Those not economically well-placed were the obvious sufferers.
CHRONOLOGY OF EVENTS LEADING TO THE CURRENT ECONOMIC CRISIS
The origin of the economic predicament in which this Indian Ocean nation finds itself can be traced back to the three-decade-long civil war and the subsequent rash move to markets, instead of continuing with state-funded essential services. These developments manifested themselves by way of low GDP growth rates and extensive unemployment in the early years of the current century. Their subsequent exacerbation since then, however, owes as much to the policies and measures taken in the last three years by the Rajapaksa family, who made it to power with a slender majority in the 2019 hustings.
The Easter bombing of a Christian congregation in early 2019 had caused international tourism to come to a screeching halt, bringing with it widespread economic and social consequences. For decades, it had been a major foreign exchange earner for the island-economy. To tackle the resultant depletion in foreign exchange reserves, the Government resorted to moves such as banning the import of new cars. In pursuance of its election-promises, the Rajapaksas followed it up with a significant lowering of direct tax rates. Without the accrual of expected benefits in stimulating private investment and raising the level of economic activity, this instead caused the tax-to-GDP ratio to drop by a third in three years.
As few could have predicted, this was then followed in early 2020 by two years of the Covid-19 pandemic, which inflicted further suffering. Apart from the health-related consequences, other restrictions including those on the general movement of people disrupted most domestic and imported goods’ supply chains. Average earnings for workers slid appreciably. With the government’s capacity to spend on Covid relief measures having shrunk due to lower tax revenues, household expenditure for dealing with the pandemic rose. The effects of lower public expenditure were compounded by a steep decline in foreign remittances from overseas Sri Lankan workers.
Since late 2021, the checking of imports into the country had become inevitable. The constant lowering of essential imports ever since—especially fuel, fertilisers and pharmaceuticals—has had a telling impact on the daily lives of almost all its citizens. In fact, earlier this week, the Sri Lanka Medical Association (of doctors) candidly admitted that “all hospitals in the country no longer had access to imported medical tools and vital drugs and we have to make very difficult choices and decide who gets treatment and who will not.”
Instead of attending to these everyday woes of his citizens, “King Gotabaya” and his cohorts have continued to display their partiality for big ticket infrastructure projects that are built with heavy borrowings even though they have yet to start earning the anticipated revenues. For a variety of domestic and exogenous reasons, both the completion and the utilization of most such projects has been unsatisfactory. As a result, already scarce domestic resources have been drained out, and most such assets have turned into white elephants. This includes the southern international port of Hambantota (an area under the strong political influence of the Rajapaksa family), the Mattala airport with a nearby convention centre (which is now used mainly for weddings), as well as the four-lane Chinese built expressway from Colombo to Hambantota (used more to service the newly built international cricket stadium rather than the envisaged increase in traffic). As a recent editorial in Business Standard points out, such capital-intensive activities have continued “despite the budget deficits having soared to an astonishing 14% of GDP and the roll-over of foreign loans (used unwisely to fill the fiscal gaps) went from difficult to impossible—leading to the foreign exchange crisis and collapse of the currency.”
Perhaps, the worst infliction upon its citizens during the pandemic were the government’s two diktats—a forced overnight switch to organic farming and a blanket ban on the imports of chemical based agricultural inputs viz. inorganic fertilisers and agro-chemicals. In 2021-22, these moves together caused a 14% decline in the production of rice, its main staple, due to a fall in the average yield per hectare. The combined annual output of the two paddy crops was 2.92 mn tonnes compared to 3.39 in the previous year. The more significant “Maha” (winter crop), which accounts for 60% of total production, saw a staggering fall in produce by 40-45%. The “Yala” (summer crop) yields were less impacted, probably because by May 2021 when the bans went into place, most imports of synthetic fertilisers and crop protection pesticides and insecticides had already happened. Though the import and other prohibitions were removed in late November 2021, the damage had made the nation add rice as well to its long list of other essentials that needed to be imported. The country ended the financial year buying as much as 0.65 mt of rice from abroad. A significant quantity has come from India, though it also tapped Bangladesh and Myanmar as sources. Reportedly, the cost of importing the rice was higher than the cost Sri Lanka would have paid for importing the required fertilisers and crop protection chemicals.
The government’s ill-thought-through intervention in agriculture of banning imports of agri-inputs has also adversely impacted domestic tea production. Tea produce during October-December 2021 declined by 12 mn kg compared to the same period in the previous year, and it continues to fall in the new calendar year as well. Consequently, the set annual target of producing 320 mn kg has not been achieved. The exports of Sri Lankan tea, a product much sought after in the international market, where it frequently goes by the name Ceylon Tea, has noticeably declined. If global consumers switch over to alternate sources of tea, this could cost the island-nation much in its subsequent endeavours aimed at recovering market share in the high value and premium markets.
In the last fortnight, the foreign exchange scarcity driven economic situation has snowballed into political chaos. After the en masse resignation of Prime Minister Mahinda Rajapaksa’s cabinet a few days ago, his younger brother’s (President Gotabaya Rajapaksa) calls for the formation of a unity government have been rejected outright by the opposition. Instead, its constituents are contemplating moving a no confidence motion against the government and to impeach the President so as to altogether remove the Rajapaksa family from power. His declaration of a national emergency which vests unfettered detention powers in him, and the brash military like handling of the continuous public protests by President Gotabaya, have only further alienated the suffering citizens and plunge the country into a deeper imbroglio. Unfortunately, it would appear that in the days to come, the country is set to face further intensification in both its vitiated political environment and the emerging economic turmoil.
Dr Ajay Dua, a progressive economist by training, is a former Union Secretary, Commerce & Industry.
Part 2 of the article suggesting the immediate, as well as medium term ameliorative measures, will appear in next edition of The Sunday Guardian.