Sri Lanka grappling with economic crisis
by R Hariharan on 13 Oct 2021 0 Comment

The lighting up of the state-of-the-art New Kelani suspension bridge, linking Colombo and Katuanayake airport, was perhaps the only bright spot in Sri Lanka during the month. The country reeled under shortage of essential food items due to runaway inflation and President Gotabaya Rajapaksa declared an economic emergency on September 1. This is not surprising as the country’s foreign reserves had depleted to $four billion at the end of 2020. After meeting foreign debt obligations in March, foreign reserves further declined; now it is estimated at $2.3 billion, below the benchmark of three months requirement. These are reserve levels never experienced by Sri Lanka in modern times.


Despite stringent import controls, imports in the first seven months of 2021 amounted to $11.73 billion as against $8.97 billion for the same period last year, increasing the trade deficit. Higher international oil prices, medical imports to combat COVID, demand for essential raw material and food items increased the import expenditure. At the same time, decline in remittances from abroad and steep fall in tourism industry resulted in fall in income.


Ill-timed ban on chemical fertilisers and pesticides, particularly when the economy was in steep decline, have affected food production and tea industry which may take time to recover. These have sent the pent-up demand for food imports to a steep rise, adding to the cash crunch. On top of it, import of 96,000 tons of organic fertiliser from China was found contaminated with harmful bacteria, rendering it unfit for use.


After declaring economic emergency, in keeping with his style, the President appointed an army general as the commissioner of essential services, armed with powers to seize stocks of food stuff, particularly rice and sugar, held by traders and distribute it to the public. But that did not provide immediate relief because 800 containers of imported food stuff were stuck in port, awaiting clearance. The importers lamented they did not have the money to pay as banks faced shortage of dollars.


Prime Minister Mahinda Rajapaksa had to go into damage control mode and issue orders to clear 500 containers of sugar. Importers who met him sought a long term solution to the dollar crunch and failure to do so would lead to further food shortages and price rise. After the meeting, the PM instructed the governor of the Central Bank of Sri Lanka to minimise current import restrictions as much as possible on non-essential goods and equipment to ease the plight of entrepreneurs.


The persistent balance of payment problem calls for economic reforms and not band-aid measures adopted by the government. Sri Lanka needs to urgently find a solution to get out of the foreign currency crisis. Country’s high risk rating has precluded borrowing in the international market. International assistance from India, Bangladesh and China in the form of currency swap and yuan loan has been partially successful to tide over the situation temporarily. But that option is also running out.


The only feasible option is to get an extended facility from the International Monetary Fund (IMF) to gain balance of payment support. The low rate of interest and longer duration for repayment make IMF funding attractive. It would also help regain international confidence as it could upgrade the international credit rating of Sri Lanka.


Milinda Moragoda (present Sri Lanka High Commissioner in New Delhi)’s public policy think tank, Pathfinder Foundation, in the last economic policy commentary has emphasised the importance of moving towards an IMF-led programme to manage the declining reserves. It stated the combination of decades of weak economic management and the unprecedented adverse impact of the pandemic means that Sri Lanka does not have any easy options. “Sri Lanka’s immediate priority is stabilising the economy by restoring fiscal sustainability in the medium term, primarily through revenue enhancement, and restoring debt sustainability by reprofiling debt servicing.”


Though Sri Lanka has benefited from IMF assistance over a dozen times in the past, the Rajapaksa government has been reluctant to approach the IMF for assistance because it comes with conditions. Essentially, they are based on good economic management and structural reforms to improve accountability essential for economic stability and growth. These measures will help generate liberal international assistance from agencies like the World Bank. Apparently, the Rajapaksa government’s reluctance stems from the President’s reservations in accepting any international intervention directly or indirectly that cramps his style of governance. 


It was in this critical backdrop at home, President Gotabaya Rajapaksa delivered his first-ever address at the 76th UN General Assembly session on September 22. In a brief speech, he covered Sri Lanka’s efforts to tackle issues the world was confronting: COVID pandemic and the economic difficulties in its wake and sustainable agriculture to overcome environmental degradation.


The President emphasised “fostering greater accountability, restorative justice and meaningful reconciliation through domestic institutions was essential to achieve lasting peace. So too is ensuring more equitable participation in the fruits of economic development.” He further added that his government was focusing on extensive legal, regulatory, administrative and educational reforms to facilitate and deliver prosperity to the people.


In fact, he has identified accountability in governance, fidelity of domestic institutions, delivery of equitable justice and ethnic reconciliation as the four essentials for economic development. What he has left out is the need for his government to regain international credibility.  Sri Lanka needs the good will of the international community, particularly when the country is passing through critical times.


Three months ago, the European Parliament passed a resolution that the GSP Plus concession of duty-free exports granted to Sri Lanka should be withdrawn if it did not show signs of progress in its protection of human rights. The resolution expressed “deep concerns over Sri Lanka’s alarming path towards recurrence of grave human rights violations as described by the most recent UN report on the country, which lists among the early warning signals the accelerating militarisation of civilian governmental functions, reversal of important constitutional safeguards, political obstruction of accountability, exclusionary rhetoric, intimidation of civil society, and the use of anti-terrorism laws.”


Many in Sri Lanka would also concur with the EU parliament's perception of the Rajapaksa government. Probably, the resolution was triggered by Sri Lanka’s use of Prevention of Terrorism Act (PTA) to ban 11 organisations in March 2021, ill timed to coincide with the UN Human Rights Commissioner Council (UNHCRC) meeting. 


Many international investors would agree with the US State Department report on investment that Sri Lanka is a challenging place to do business “with high transaction costs, aggravated by an unpredictable economic policy environment, inefficient delivery of government services, and opaque government procurement practices.” Public sector corruption is a significant challenge in Sri Lanka and a constraint on foreign investment, it adds. While the country generally has adequate laws and regulations to combat corruption, enforcement was weak, inconsistent, and selective.


Almost every project is mired in controversy, whether it is Colombo Eastern Carrier terminal or the latest project on the block - US corporate giant New Fortress Energy (NEF)’s proposal to build a new offshore LNG terminal in Colombo for receiving, storing and re-gasification. There are widespread allegations that a framework agreement on NEF project has been signed though details are shrouded in secrecy.


This has created a climate of mistrust in the government processes, because lack of transparency has been a hallmark of almost all governments – past and present. Militarisation of bureaucracy has further aggravated the trust deficit in the government's handling of issues.

Is President Rajapaksa prepared to clean up his act and adopt more democratic ways of operation? That would mean reviewing wide powers the executive presidency has acquired, more accountability to the people, crackdown on corruption, tone down militarisation, snuff out cronyism and kickstart transitional justice process and get ready for ethnic reconciliation talks. If he can do all these, he can be truly the terminator, as hailed by his admirers.


Courtesy Col R Hariharan

South Asia Security Trends Oct 2021 | 

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