Economy has collapsed – what’s the next step?

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On May 20, Sri Lanka defaulted on international debt repayment. Defaults happen when governments are unable to meet some or all of their debt payments to creditors. 

The government owes US$51 billion and is unable to make interest payments on its loans, let alone put a dent in the amount borrowed. Tourism, an important engine of economic growth, has sputtered because of the pandemic and concerns about safety after terror attacks in 2019. The country’s currency has collapsed by 80%, making imports more expensive and worsening inflation that is already out of control, with food costs rising 80%, according to official data.

In the aftermath of President Gotabaya fleeing the country, Ranil Wickremesinghe – a six-time former prime minister – was constitutionally elected by parliament to the office of the presidency. He has inherited a collapsed economy, a bankrupted country, miles-long fuel and gas queues that stretch along the streets of Colombo and many parts of the country, a sky-high food inflation which has pushed people into poverty and a sharply depreciated currency.

The chairman of the Samagi Jana Balawegaya (SJB) – the leading Opposition party in parliament – is echoing the call of the remnants of the protest movements for continuous protests to unseat the new president. The president and his government in the meantime, continue encircling the activists of the protest movement.

Meanwhile, the people are hungry and angry, calls for relief are coming at a time when global credit markets are tightening and is closing space for government to address the pain with subsidies or other interventions. ‘Relief’ measures such as the Rs.10/- reduction in fuel price decreases by way of printing more paper money, will only lead to higher inflation which now stands at over 60% and will push the economy into a point of no return.
In a recent interview with CNN, the Governor of the Central Bank Nandalal Weerasinghe said the country is in urgent need of financing. “The liquid external resources available with the central bank are almost non-existent,” he added

The protests which until recently rocked the country were NOT, as claimed entirely peaceful. The peaceful candle light protests by members of the public at street corners were hijacked by members of an extremist group which attacked ex-president Gotabaya’s private residence on March 31 and set vehicles ablaze.

The ‘Aragalaya’ was born and protest sites were set up at Galle Face Green (GFC) on April 8. Subsequently violence launched by supporters of ex-PM Mahinda Rajapaksa on unarmed protestors at GFC led to organized counter-violence by black-shirted helmet-clad extremist groups who physically attacked the Leader of the Opposition, carried out arson attacks on the residences of government ministers, they lynched a government MP and attacked members of the armed forces. In the end, it led to embattled president Gotabaya fleeing the country and the constitutional appointment of Ranil Wickremesinghe as president.

The growing violence saw a sharp drop in support for the ‘Aragalaiya’ as evinced by miniscule numbers congregating at protest sites. It is now necessary that both the government and opposition act with responsibility. The country stands in dire need of a bailout package to “restore macro-economic stability and debt sustainability” while carrying out reforms geared at protecting the poorest.

The need of the hour is for the government and opposition to stabilize the political situation. Without political stability, it becomes impossible for financial institutions such as the International Monetary Fund to support a bailout package. The IMF has already stated its willingness to support such a programme. But political stability will be a paramount requirement.

The current drop in occupation of government buildings by protestors and the systems to tackle fuel shortages and shortcomings in public transport, are positive signs and beginning to replace images of violence in the international media. Hopefully it will help raise confidence in the country’s ability to get out of its current dilemma. 

Today, the president is expected to submit a plan to restructure the country’s debt and commence discussions with a diverse set of creditors – from China to the World Bank, the IMF. But this will take time. While these are commendable first steps, the country’s leading problem the ‘National Question’ still hangs fire. To achieve stability, this problem must be tackled now and not left for another day. However a factor in Lanka’s favour, to successfully negotiate an international bailout, is our country’s strategic position on one of the world’s busiest shipping lanes. 
Letting such a strategic location collapse into a failed state like Somalia, is hardly an option.

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Disclaimer: Economy has collapsed - what’s the next step? - Views expressed by writers in this section are their own and do not necessarily reflect Latheefarook.com point-of-view

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