Sri Lanka’s quick descent from glory to a horrific financial catastrophe stunned the globe, especially the South Asian region. Many countries believe Sri Lanka is an “eye-opener” for how not to run a country and conduct business, as the country has sunk rather than developed, to the point where Indian Finance Minister N. Sitharaman has asked the IMF and the World Bank to label Sri Lanka as a low-income country, when it was on the verge of becoming a middle-income country.
Sri Lanka was recently lowered from higher middle income to lower middle income in the World Bank’s newest nation classification by earnings. Sri Lanka was upgraded to the category of an upper middle-income country in 2019.
Although the Government claims that the financial crisis stems from old debts that collapsed as the Covid-19 pandemic disrupted businesses, Sri Lanka’s present situation is unique that it is tangled in long-running corruption, a lack of judgment and insight in running the country by the present regime, and the politicisation of local and foreign businesses at every turn.
The international Media gathers information about Sri Lanka’s present status and broadcasts it on a regular basis. In addition, there are a good number of international Media professionals in Sri Lanka today covering the country’s fragile political scene and ongoing protests over the people’s predicament.
This has also led to many conducting webinar discussions on the present situation in the country.
One such discussion was the ‘Current Sri Lankan Economic Crisis: Lessons for other South Asian Countries’ held on 24 April 2022, organised by South Asian Institute of Policy and Governance, North South University (SIPG, NSU) of Bangladesh.
The panellists, Chairman, Sarvodaya Development Finance, Channa de Silva spoke for Sri Lanka on ‘Root causes of the current Sri Lankan economic crisis,’ Dr. Nazneen Ahmed, Country Economist, UNDP Bangladesh on ‘Lessons for South Asia and Bangladesh from the Sri Lankan economic crisis,’ ‘Political economy and governance aspects of the Sri Lankan economic crisis’ by a Ceylon Today Senior Journalist, while Ambassador Shahidul Haque, Professorial Fellow, SIPG, NSU spoke on ‘Lessons for other South Asian countries from the Sri Lankan economic crisis.’
The moderator of the webinar was Dr. Gour Gobinda Goswami, Professor, Department of Economics, NSU. Academics, researchers, diplomats, journalists, and students from home and abroad participated in the webinar.
SL economy slump
Dr. Goswami also offered an overview of Sri Lanka’s economic position. Sri Lanka was formerly regarded as a role model for South Asia, he said, due to the war that was eventually settled. “Even before Covid-19, the country was rocked by instability in GDP growth. Sri Lanka currently has a GDP of less than 10 per cent. It was only 2.5 per cent.” He went on to discuss Sri Lanka’s medium-term debt strategy, stating that the country’s national debt is currently at 83 per cent of GDP, with a goal of cutting it to 71.2 per cent by 2023. Sri Lanka, on the other hand, was unable to attain it.
Unfortunately, it’s still under 10 per cent of GDP, which he said is well above a tolerable ratio. The country’s sovereign bond came to CCC, which is a state of risk. The county has missed its payment of instalments and is seeking an IMF bailout by replacing its Finance Minister, who is the brother of the incumbent president, to a fresher Ali Sabry, he pointed out.
He further said Sri Lanka has sought soft loans from India, China, Bangladesh, the ADB and the World Bank to bail out the country from the present crisis. The pandemic hit the tourism sector severely. He pointed out that the rate stands, where 79% got at least one jab, while 67.2% are fully-vaccinated in Sri Lanka. He said the budget deficit was 7.97% in 2019 and raised to an alarming 9.8% presently.
“The current account deficit is at 3.18% to the GDP in 2018, but the country is facing serious difficulties due to the US$ 15 billion denominated sovereign bond, whereas the total long-term debt is US$ 45 billion.”
He also said the market borrowing or the commercial loan stands at 47% of Sri Lanka’s foreign debt, followed by 13% to ADB, China and Japan 10% each.
“The sources of growth in Sri Lanka and their debt financing is largely on infrastructure. Also, the Government took a step in the wrong direction when it introduced organic fertiliser, when her main source of export revenue is tea.”
He also added that it is only India in the South Asian Region that has received an investment rating of BAA 3 and BBB- among South Asian countries, while Bangladesh, Pakistan and Maldives belong to speculative rates and Nepal, Bhutan and Afghanistan have no ratings. This is the current status of South Asia, Dr. Goswami summed up.
Channa de Silva highlighted the root causes of the present economic crisis in Sri Lanka such as, huge investments in unproductive development projects, governance issues, corruption, mismanagements of funds, a huge tax cut in 2019 which resulted in a loss of US$ 3 billion, a 90% drop in tourist income due to the terrorist attack and the pandemic, drop in remittances, inflation and currency depreciation due to money printing rather than seeking help from the International Monetary Fund (IMF), and loosing 3 billion in Chinese investment, among others.
De Silva spoke about the current status quo of the country and the queues and the rage of the people that led to the protests. He said most of the borrowing was for unproductive projects. He stressed that the Government has built flyovers, ports, airports, and cricket stadiums in remote places like Hambantota, where there is a scarcity of water and essentials, spending a sum of almost US$ 4 billion.
Ceylon Today focused on the political economy and governance aspects of the Sri Lankan economic crisis. The writer said the populist policies like banning chemical fertilisers resulted in declined food production and tax cuts have reduced the revenue collection. And so many large projects without any return on investment, increased foreign debts. The focus was on the Interim Government and mitigating the present crisis and this is what the people are looking for.
Dr. Nazneen Ahmed spoke on the lessons for South Asia and Bangladesh from this crisis. She underlined the need of accurately estimating demand for development projects as well as the projects and the gestation period. She also opined that Bangladesh must also consider the possibility of a future increase in the borrowing rate as the country’s Per Capita Income (PCI) rises to maintain economic growth.
She spoke on the lessons Bangladesh can learn from Sri Lanka’s present crisis.
She concentrated on policies, debts, and inflation, as well as policymaking, revenue collection, and spending quality on the development budget, to determine how we might save and avoid projects that would result in a large debt burden.
For Sri Lankans, the revenue drop was before the pandemic, after the Easter Sunday bombings, and it downturned the tourism sector, she added.
“In Bangladesh, we depend on readymade garments and Sri Lanka mainly on tourism,” she said, and urged not to depend on a few industries and to be cautious.
“We have to learn lessons about depending on a few sectors and Sri Lanka has had massive tax cuts like the VAT reduction from 15% to 8%. Also, the fertiliser ban.”
She pointed that the national budget of Bangladesh is approaching and they already hear from different sources about tax reduction. She said “giving tax holidays and subsidies and those are the kind of polices that are demanded in Bangladesh. These policies can be popular, but we will have to think really. Sometimes, it may feel like it is important for the poor people and this would support them. I think a more improved social protection system and less focus on tax holidays can help the poor.”
According to her, populist policy can hamper revenue earning for Bangladesh and the tax cut is a very good lesson for Bangladesh too, “because tax to GDP ratio is very low in Bangladesh and we give energy subsidies and that goes to the rich people too,” she pointed out.
“So we have to really think how we justify those subsidies and tax holidays in support of big industries and enterprises and how we can shape our policies.”
Investment in large project in Sri Lanka has hampered the revenue too, she added. “We need them, but we need to think of the gestation period and when we can reap the benefits from those projects.” In Bangladesh, she added that “some of the development projects get delayed, increasing not only the cost, but also increasing the debt burden. We are proud of the Padma Bridge, but we know the delay is increasing the cost. If the project does not run immediately, we cannot reap the investment we made,” she emphasised.
Another area is to project the demand for these projects. In the case of Sri Lanka, Dr Ahmed said there is demand for the Hambantota Port and the Colombo Port City and they did not get the immediate benefit. The deep sea port was built when Colombo Port had an overcapacity issue. So, making investment decisions for large projects is key, she said.
She elaborated that Bangladesh’s electrical supply was met, adding that the country’s capacity to create electricity is far greater than the demand. There are several investments in the pipeline to generate electricity, but the focus on the demand should be precise. It will generate capacity that will be unused in the near term. As a result, the project of computation and forecasting should be crucial.
Sri Lanka was ahead of us
Ambassador Shahidul Haque, who spoke on ‘Current Sri Lankan Economic Crisis: Lessons for other South Asian Countries,’ focused on the foreign policy aspects and lessons for other South Asian countries from this crisis. He opined that Sri Lanka has traditionally been a “theatre of geopolitics in the region.” He also said a government should not experiment too much with foreign policy during volatile times such as pandemics, which may have contributed to Sri Lanka’s present crisis.
“I had the privilege to serve in Sri Lanka as an international civil servant and from my experience I can say that I have huge respect, confidence, faith in the people of Sri Lanka, as I have seen Sri Lanka going through difficult phases but always coming out with flying colours and I am sure, this time too Sri Lanka will come out from this crisis with flying colours. The situation in Sri Lanka only can be described as unbelievable. Those who have observed and followed Sri Lanka, to them it came as an absolute surprise. Today, I will be speaking on the political aspects of the crisis and the lessons for South Asian countries.”
His view was that politics and economics go hand in hand. The other was geopolitics and economics.
He also praised President Gotabaya Rajapaksa, because it takes courage to admit that a government has erred and he owned up to that, “yes, we have done something wrong in terms of policies and also people have the right to come out and protest because it’s hurting them.” He opined that there is a need to keep his approach in mind, as this also shows the strength of democracy.
“Sri Lanka has always been a centre of geopolitics, maybe because it sits in the middle of the Indian Ocean and because of their various policies. And very lately, when things are extremely upsetting whether in Afghanistan or next-door neighbour Myanmar or Eastern Europe like Ukraine and Russia, we see that Sri Lanka is sort of in the midst of all these like Bangladesh and other South Asian countries. So that’s something very important. In our international relations, we say that Sri Lanka has always been a theatre of geopolitics. This present economic situation has had a ripple effect all over South Asia and beyond whether it’s in Delhi, or in Dhaka, or Islamabad, or Kathmandu, everybody is looking at their ledger to see how much money is still there and likelihood of not flying out of that. And some governments are proactively taking steps to avoid the crisis Sri Lanka is going through, which is a good factor in many ways for those countries.”
On foreign policy, he added that Sri Lanka has been a promoter and very strong supporter of the non-aligned movement. It has served Sri Lanka quite well in terms of foreign policy, in terms of navigating in between the big powers. But we also see the current government of Sri Lanka has tried to fine tune, rebalance, or shift from the then policies, as they have tried to move out from the Non-Aligned Movement and go towards full neutrality kind of a posture in foreign policy. Some recent articles showed that President Gotabaya has continuously said Sri Lanka is committed to follow a neutral foreign policy and no affiliation to any particular country or power bloc. That’s something new, as there’s a difference between neutrality and Non-Aligned Movement. That created a little bit of geopolitical tension in the region between India, China, the United States and others.
In 2019-20, when the Rajapaksa family was taking over, people saw a tilt in their policies or projects. Giving projects to China was neither a manifestation of policy of neutrality, nor Non-Aligned Movement, he added.
“I am not saying that it was collectively the reason for the situation that Sri Lanka is currently in, but it did play a role. Because when the country needed to go to the IMF and seek redress, it did not. And that has really put Sri Lanka in a situation where they are facing difficulties to have a discussion with the IMF right now. Although the IMF has been generous because India has been a slow supporter within the IMF and World Bank to reschedule loans and also Sri Lanka secured a billion-dollar package of support from India.”
But in this whole process, it is the people who have suffered, and de Silva has vividly raised it. The situation in Sri Lanka is very difficult to comprehend, as when Bangladesh looked at Sri Lanka, we always found Sri Lanka was way ahead of us. So, it’s a lesson for Bangladesh as well. The Rajapaksa family’s actions had an impact and the President tried to rebalance that. And in the process of rebalancing, I think the Government ended up being too far away from both parties, China and India. It created a situation where they needed most of the support, none of them were there except India, which came in very strongly and now we are talking about a US$ 2 billion support package.
In fact, I think Bangladesh was very generous in terms of coming forward to help Sri Lanka in this crisis and that’s what we should be doing in South Asia, we should stand beside each other when there’s a hit, he added.
By Sulochana Ramiah Mohan