Sri Lanka concluded her sixteenth Parliamentary Poll peacefully, Wednesday (5).The primary challenge before the new Government is to revive the economy. This is in the context that the economy contracted for the first time after 73 quarters, i.e. in the last completed quarter, the first quarter of 2020 ended 31 March, 2020.
The economy contracted by 1.6 per cent in the first quarter of 2020.
Prior to this, the last time the economy contracted was in the fourth quarter of 2001, where the economy contracted by 3.6 per cent, while for the totality of 2001, the economy contracted by 1.5 per cent, the first time the economy contracted for a calendar year, since Central Bank of Sri Lanka started collecting such data 70 years ago in 1950.
In the year 2001, three significant events took place which impacted the economy. The first was in July of that year, where the LTTE attacked the Colombo Airport. That affected tourism in particular, which became Sri Lanka’s third largest foreign exchange earner soon after Sri Lanka’s Tamil terrorist war ended in May 2009. The attack on the Airport also resulted in international insurance rates rising, thereby impacting trade, in particular exports.
The attack on the Airport was followed by ‘9/11’, further impacting Sri Lanka’s exports, as ‘9/11’ directly affected the island’s single largest export market, the USA. The Airport attack and ‘9/11’ was followed by the country holding its twelfth Parliamentary Poll in December 2001, where the uncertainty caused in the days, weeks and months immediately preceding this Poll, also affected the economy.
Post-December 2001 Parliamentary Poll, a significant event took place, where, for the first time, a Government of Cohabitation evolved in the country. This is in the context that the President was from one Party and the Prime Minister and the Cabinet was from another Party post-December 2001 Parliamentary Poll.
A ‘Government of Cohabitation’ being formed was repeated 13 years and one month later in January 2015. But on both occasions these Governments of Cohabitation didn’t work, primarily because the Prime Minister elected/nominated on both occasions was one and the same person who was weak in character, lacking in political wisdom, astuteness, far-sightedness, firmness, shrewdness, bravery and toughness, resulting in the collapse of such Governments.
But the single different differentiator in 2001, when the economy for the first time recorded a contraction and in 2020 and repeated in the first quarter of this year (2020), where the economy for the first time contracted after contracting in the fourth quarter of 2001 is the state of Sri Lanka’s external commercial debt.
External non-concessional commercial debt which was virtually zero as a percentage of total foreign debt in 2001 has since zoomed to over 50 per cent. This debt, other than being expensive, unlike concessional debt, is also short-term and has to be repaid quickly. On top of these developments, Sri Lanka has to honour a maturing commercial debt, in the form of a sovereign bond of US$ one billion, where repayment is due in another two months time in October 2020.
In the light of these developments, Sri Lanka imposed exchange controls earlier on this year, where, virtually other than pharmaceuticals and petroleum imports, other imports have either been banned or are subjected to heavy import taxes, to dissuade such imports.
However, such measures will further stultify growth, in the backdrop that the economy is already reeling, having seen a contraction in growth in first quarter of 2020, complemented by foreign direct investments (FDI) falling by 26.7 per cent year on year to US$ 192 million also in the first quarter of 2020.
Boosting exports, aided by FDI, is the panacea for Sri Lanka’s economic ills. This will have to be the priority of the new Government.