Economic Policy Convergences and Regional Interdependencies of Indian Ocean Islands

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Neoliberalism and neorealism are the two conventional doctrines in the discipline of international relations that provide a comprehensive understanding of State action.Institutionalists of neoliberalism emphasise mainly about transnational issues such as economic and environmental concerns while neorealists concentrate on security measures.Neoliberal institutionalists hold a more positive outlook about the prospects for cooperation. The neoliberalism policy model incorporates both politics and economics.

Amidst the global spread of inflation, the outlook for the global economy has deteriorated recently.Mainly due to global energy and food price hikes, inflation has accelerated to an unprecedentedly high level in recent months.Geopolitical tensions in Eastern Europe have affected global commodity markets amidst adverse development on the domestic front. Once again, Neo-liberal economic ideology is under the spotlight globally and in the Indian Ocean Region(IOR).

The vulnerability of small Island States in the Indian Ocean Region to tighter financing conditions stems in part from the prevailing pressure on their external accounts while vital expenditure continues to mount. Neoliberalism has dominated economic policymaking in the Island nations of Mauritius, Seychelles, Sri Lanka, Maldives, and Réunion for around five decades. However, these five small Island States are still   grappling with common economic challenges.

In terms of fiscal stimulus, these States enacted emergency economic measures since the coronavirus pandemic. Clearly, their financial systems need to be overhauled fundamentally. Typically, neoliberalism policies support fiscal austerity and deregulation. Moreover, monetary policy is set up to create and distribute liquidity. The fault lines lie in the interlinked structure of fiscal and monetary policies implemented in these small Island States. 

In recent years, these five States in the Indian Ocean have embraced neoliberal restructuring policies. Regional powers favour a multilateral and cooperative approach in international politics.India attempts to retain its strategic footprint on these five Indian Ocean Islands.While continuing to focus on its Security and Growth for All in the Region (SAGAR) doctrine and Neighbourhood First foreign policy,India will do everything possible to bring about stability and prove itself as a reliable economic and development partner to these neighbouring Islands. These five Indian Ocean Islands need to bring about macroeconomic stabilisation and structural reforms in conjunction.

In order to have more resilient economies in the future, the economic systems of these States are in dire need of an overhaul. Low inflation or price stability brings about sustainable long-term economic growth. The reasoning behind this approach is to pursue reform designed for reinforcing multilateralism and preserving a favourable regional balance of power.

Financial Sector Reforms and Indian Assistance to Sri Lanka

The economic instability in Sri Lanka’s contemporary history has developed as a big cause of concern for the Indian diplomatic establishment. The foreign exchange crisis has curtailed imports, creating severe shortages of food, fuel, and electricity.Sri Lanka’s foreign currency reserves have fallen to shocking figures, reducing the ability to import goods.Repayment of foreign debt due this year has also been suspended. Sri Lanka’s economic crisis with alarming inflation rates can spiral into a humanitarian emergency. Being its closest neighbour, India has come to Sri Lanka’s aid.

The Indian Ocean Island faces unsustainable debt and significant balance of payment challenges. As a condition of the rescue package being negotiated with the International Monetary Fund (IMF),the Island nation is preparing a debt restructuring plan.The processes introduced by the country’s Central Bank to establish domestic monetary stability and external stability of the Sri Lankan rupee,need to be supported by coherent and consistent actions. Currently, Sri Lanka’s monetary management is based on a monetary targeting framework. As stated in the Monetary Law Act, a primary function of the Central Bank is the determination and implementation of the country’s monetary policy. The Central Bank presently conducts its monetary policy under a system of active Open Market Operations.

During the pandemic and the current economic crisis, the importance of stronger bilateral relations were more apparent. Given Sri Lanka’s desperate calls for foreign aid to tackle its crippling debt and economic crisis, India was the first country to respond in keeping with its Neighbourhood First policy. India has been the principal source of foreign assistance to Sri Lanka this year, having extended an unprecedented support of over USD 3.8 billion.

For Sri Lanka to navigate through this impending crisis,fiscal policy reforms become fundamentally vital and a strong macroeconomic and financial regulatory structure is necessary. The severity of the economic crisis encourages strong social welfare schemes cushioning the citizens. Sri Lanka requires immediate global attention.

Maldives Building a Resilient Economy

Two years after the pandemic, compared to Sri Lanka, the economy of Maldives has bounced back and is doing extremely well.However, numerous fiscal and external imbalances persist in the economy.Compared to its small Island counterparts, the Maldives ran much larger budget deficits. While not at immediate risk of a crisis, the Maldives needs to raise revenue and implement several expenditure and debt reforms to avoid one in the future. According to the International Monetary Fund (IMF),the country’s fiscal vulnerabilities remain high. In 2022, the fiscal deficit is expected to widen and remain in double digits. The Maldives continues to be at a high risk of debt distress, which necessitates further adjustments to its policies.

Mauritius and Seychelles Towards a New Economic Approach

Mauritius strives to become a high-income nation in the current decade. Following a substantial contraction in 2020, its economy is recovering from the pandemic. The Mauritian monetary policy framework requires modernisation while it continues to adopt prudent macroeconomic management of its fiscal policies. Small- and Medium-Size Enterprises (SMEs) play a crucial role in the country’s economic development. The fiscal consolidation path needs to be carefully calibrated.

Seychelles faced severe economic and social shocks from the coronavirus pandemic. The outlook in the medium-term remains positive. In 2022,economic growth is expected to be around 4.6 per cent. As a central theme for sustainable development, Seychelles has played a key role in promoting the Blue Economy concept. Seychelles should continue to diversify its economy to decrease overdependence on tourism and lessen its vulnerability and uncertainty of growth.

Vision for a Sustainable Future

Economic activity remains weak globally.For the past few decades, the Indian Ocean Region’s Island nations of Mauritius, Seychelles, Sri Lanka, Maldives, and Réunion have undergone broad economic transformation. These reforms have helped in achieving a remarkable degree of income, converging towards the levels of advanced economies. A key driver for economic and societal transition for these Indian Ocean Island nations is to have the right balance   of multilateral and regional power support.

About the Author:

Dr. Srimal Fernando received his PhD in the area of International Affairs. He was the recipient of the prestigious O.P. Jindal Doctoral Fellowship and SAU Scholarship under the South Asian Association for Regional Cooperation (SAARC) umbrella. As a Lecturer, he focuses on comparative politics of Small Island Developing States (SIDS).Dr. Fernando is an academic specialist in International Relations and an adviser on New Regional Diplomacy. He has received accolades such as the 2018/2019 ‘Best Journalist of the Year’ in South Africa (GCA) Media Award for 2016 and the Indian Council of World Affairs (ICWA) accolade.He is the author of ‘Politics, Economics and Connectivity: In Search of the South Asian Union.’

By Dr. Srimal Fernando