Recovering from Sri Lanka’s present crisis: Challenges and possibilities By Chandra Amerasekare

The recently introduced Budget for 2022 shows some of the reasons why Sri Lanka fell into the present crisis. The pandemic affected the entire world, but its impact was worse in Sri Lanka as the present government failed to take the right decisions, at the right time, to manage it. Thus Covid-19 contributed to the present situation as the Government closed the barn after the horse escaped. It was pure mismanagement of governance that pushed the country into this mess. This government failed to implement appropriate policies to stabilise the economy and upgrade the standard of living of the masses. On the contrary, by following contradictory and ill-advised policies that defeated the very goals the government was aiming to achieve, and failing to listen to the woes of the people, it made the situation worse for the people and led the country towards bankruptcy, besides selling valuable resources to foreigners. As a result, the entire nation is now on a survival mode: political parties looking for ways to survive and come back to power and the general public struggling to survive in a situation of exploding cost of living and increasing police brutality.

Even in 2015, the country handed over to the Yahapalana government, by the previous Rajapaksa regime was falling apart due to mismanagement of fiscal and monetary policies, from 2005 to 2015, which destabilised the financial system and emptied the Treasury, limiting the incoming government’s ability to run the country. Ill-conceived policies and vanity infrastructure projects created a huge debt burden. By borrowing expensive Chinese loans, with short pay back periods, to construct large projects with no return on investment, like the Hambanthota port and the, airport etc., the Rajapaksa government caused annual debt servicing obligations to escalate sharply, making it impossible for the incoming Yahapalana administration to meet debt repayment obligations from the resources available at the time. The government was forced to go for early elections, hoping for a stable majority in Parliament.

Sri Lankans expected the new Yahapalana regime to bring the culprits, who plundered the country, before the law, but the Yahapalana government failed to do that. Did the lack of co-operation between the two partners of the Yahapalana government lead to this failure? The public continues to blame the UNP for allowing the Rajapaksas, and their supporters, to evade the law, and other political leaders are trying to exploit this to win votes by discrediting the UNP and accusing its leader of deals with the Rajapaksas. The report of the Commission on the April terrorist attack shows how some public servants performed their duties to the detriment of the country and this report might be a guide to understand why the Yahapalana regime failed to bring offenders before the law.

The current Gotabaya Rajapaksa regime, concerned with staying in power, has not changed direction after regaining power in Nov 2019 and continues to tread the same path as before taking the country towards bankruptcy, and the people to despair, spending time in queues to obtain the daily essential at unbearable prices.

People waited for the 2022 budget hoping for some relief. Sadly, this Budget has not given any relief to the people. It contains policy conflicts, shortsighted decisions, weak fiscal measures, statements to camouflage the truth and no substantial proposals to change the direction of the economy, to set it on a growth path, or address the critical issues holding back progress. The budgetary allocations among the Ministries show lack of far sight and concern for the people. The Budget does not say how it will bridge the gap between government expenditure and income in 2022.

During the Budget speech, the Finance Minister, Basil Rajapaksa, stated that the public service is a burden to the country, implying it is costly and bloated. Then in the same breath, a policy extending the retirement age for public servants up to 65 years and promising employment to all graduates next year was unveiled; is an example of blatant policy contradiction. Government has not learnt from its policy mistakes during the past two years. The number of gazettes issued and later withdrawn by this government is proof of this government’s shortsightedness, ineptness and inefficiency. Contradictory and foolish policies, such as import ban, including the ban on chemical fertiliser, price controls and then completely abandoning price controls of essential food items thereby creating blackmarkets, fiscal measures, like tax reductions, which reduced government income, while helping the politicians and government supporters to make money at the cost of consumers, are glaring policy mistakes proving this government’s inefficiency. The government is trying to survive by printing money, leaning more and more on China, selling valuable land to foreigners. All this make Sri Lanka’s future extremely bleak.

Almost 80 percent of the budgetary allocations are for Ministries under the Rajapaksas,including highways, and other departments with a lot of construction projects. The allocation for the military has been increased while the allocation for the Ministry of Health has been reduced in a situation where there is no war, but the pandemic is predicted to continue and become worse in 2022! Already the fourth wave of Covid has been noticed in China, Germany, Sweden, etc. In the US, an increase has been identified. Sweden is going for a country-wide lock down.

Education, too, is not sufficiently provided for, compared to the present need to improve online access to education for all children. Sri Lankan children have missed school for two years, and the majority of them have no access to online education as they are without internet facilities, phones, tabs or even the TV. Does the government realise that children are the future of the country and disruption to education for two years has enormous effects on this generation’s future and mental health? This Budget will not be able to make any difference in the country next year.

To bridge the gap between expenditure and revenue in the Budget, the government will probably resort to selling more and more valuable land, and other assets, to foreigners in the guise of bringing foreign investment. They might opt for more Chinese loans as other donors and multinational agencies are unlikely to support wrong policies that do not benefit the people and unproductive projects which only serve to boost the ego and fill the pockets of corrupt politicians.

Can Sri Lanka recover from this crisis situation?

As things are, it will take at least two years to turn around the economy by any government provided the next variation of Covid does not devastate the country and the world. The scientific community seem to believe that the new Omicron variant, now spreading, might be even more contagious. They also doubt the efficacy of the current Covid vaccines against new variants of the virus. It is difficult to expect a visible change for the better for the next two years if the Covid situation in the world does not improve. However, things could turn around for the better if people follow the instructions of the Health Ministry, and government acts sensibly. The chances of recovering from the current crisis depend on whether Sri Lankan voters succeed in bringing a leader into power who has the capability, experience and the overall knowledge required to manage the economy to get the maximum benefits from global trade and international aid programmes to stabilise the financial system while replenishing the reserves and finding affordable capital to finance development projects.

The challenges to economic recovery

1. The biggest challenge to recovery is the lack of dollars to do international transactions, be it private or governmental, and lack of capital to invest in projects to increase production. It is important to understand that Sri Lanka is an import- dependent country. There is no sector in the economy that can function without an imported input. Imported raw materials and machinery are needed for industries, agriculture, transport, construction and even banking. Dollars are required to import food and oil. The country depends largely on foreign employment, tourism, plantation and garment exports for its foreign exchange earnings. What are the prospects of an increase in income from these sources?

2. Impractical monetary policies that keep the rupee exchange rate artificially low for “show” are driving foreign exchange earners to use unofficial traders/brokers such as the Hawala system; thereby bypassing official channels and reducing the influx of badly needed foreign exchange into Sri Lanka. It is time to incentivise foreign exchange earners to transfer funds into the country through official means, and enact pragmatic monetary policies that balance all of the issues that are affected by exchange rates.

3. With disruptions to the global supply chains and low expectations of global economic recovery after the pandemic that stretched for two years, it is unlikely that global tourism will come back to the normal level, even in a year, since the fourth wave of Covid is already spreading in some countries. Local tourist hotels, except a few, need a substantial injection of capital to resume functioning smoothly. There is no capital available to revive this sector at the moment. Remittances from foreign employment in the Middle East, may not increase for another year or so because of the fears of another wave of Covid and the economies of these countries also have suffered due to global trends. Production in the tea plantations has already gone down due to the fertiliser policy.

4. Everybody knows what is happening in the garment sector. The threat of losing GSP + means losing the market for the garment sector and the industry will collapse. The market for apparels is in the west as most Asian countries and Latin American countries are garment exporters. The Middle East countries prefer branded western products and their traditional dresses. Hence the prospects of an increase in the dollar earnings from the present sources mentioned above are rather gloomy.

5. Attracting foreign investments is one way of overcoming the dollar crunch and lack of capital needed to finance projects that generate employment and exports. Investor confidence in the government of the country where their money is going to be invested is a precondition to attract investors. Enabling a policy environment which allows security for the investors’ profits, ease of doing business and political and economic stability in a country where there is good governance are the important considerations for investors to invest money in a country. This is the very thing that Sri Lanka lacks at present. Only an honest leader who commands the respect of the international community and has the ability to understand future trends in the global economy can succeed in creating such an environment to attract productive foreign investments (not casinos) to Sri Lanka.

6. Foreign aid in the form of loans with payback periods of 25 to 50 years at interest rates less than 2% and outright grants is the best way out for a country, like Sri Lanka, now burdened with external debt and lack of capital. China or Russia does not provide such loans. Only the West, international agencies and Japan provide such assistance. But a lack of good governance; a goal-oriented long-term development plan that does not contradict the donor criteria for giving aid; and a leader who is acceptable to the international community as reliable and experienced who honours international agreements; is preventing Sri Lanka from receiving such aid. Some politicians and opinion-makers, in Sri Lanka, who advocate rejection of help from “‘Imperialist West’ and the IMF and insist that Sri Lanka should depend on local resources, probably have no idea that even Russia and China have depended on foreign aid from the West to develop. US government and Japan still give aid to China considered as their potential geopolitical rival, to promote democratic values, such as free choice through Chinese voluntary organisations. China uses the aid at regional levels to overcome local opposition to some projects and for the technical knowhow that comes with the aid (Dr. Philippa Brant, Research Associate of Lowey Institute titled ‘Why does China still receive foreign aid’ and paper by Issac Stone Fish, both published in ForeignPolicy.com in 2013.)

7. The 20th amendment to the constitution created the possibility for a President to become a despot. The independence of the Commissions responsible for; a) conducting free and fair elections, b) disciplinary control, transfers and promotions of judges, c) transfers, disciplinary control and promotions in the public service, has been virtually revoked by the President by appointing his nominees to these Commissions. This amendment has given the power to militarize the administration. These Military men are in a position to override the decisions of civil administrators. These developments flowing from the 20th Amendment are not acceptable to donors or the UN as good governance is an important criterion for giving aid and democracies in the free world stand for human rights and rule of law.

8. Political culture in Sri Lanka is the last but not the least stumbling block to recovery. The voters responsible for making and breaking governments hardly consider policies or past performance of parties when they decide who should get their vote. They hardly think of the interest of the future generations. Their priority is to get an immediate benefit for the family. Sometimes they have a select memory that enables them to forget grave offences of some politicians while remembering the minor failures of other politicians. So, they keep electing the wrong people to parliament and rejecting better representatives. As a result, lawbreakers, sex offenders, thieves, drug dealers and even murderers go to parliament and its doors are closed to honest and educated people. Voters’ ability to take an enlightened decision is further stunted by the way politicians mislead them by lying and the way some electronic media houses playing the role of kingmakers, present their programs in a manner to mislead the viewers. Politicians know that most voters can be swayed by emotion at the last moment and they resort to using religion and race to sway the voters in their favor. Under normal conditions voter’s priority is to get immediate relief and the majority of them tend to vote for the candidate who promises employment for a family member or a free gift.

On the other hand, there is no visible alternative to this government at the moment. The main opposition has not presented a long-term plan to address the problem other than making promises. The JVP is acceptable to those who consider bringing the culprits who robbed the country’s wealth is the primary objective of changing the government. But JVP also has not talked of the ways to handle the ailing economy. On the other hand, they do not have even a limited experience in governance and economic development or dealing with the international community. Mere book knowledge of economics and organizational ability will not be sufficient to help the country at this juncture. This was proved by the mistakes of the current regime advised by Viyath Maga. The UNP has presented a skeletal plan and the leader is experienced and well received by donor countries and the international financial institutes. But the UNP has been rejected by the electorate at the last election. A coalition between the UNP, SJB and the JVP might be the last slim hope for the country.

(The writer is  retired CAS officer, who has served the country for over three decades working in the Finance Ministry and as a representative of Sri Lanka in the UN in New York (1991 to 94 )