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Protest, shortages, and state of emergency? What is behind the serious economic crisis in Sri Lanka? Can the country's finances be saved, what will be the political consequences? Sri Lanka is now going through its worst economic crisis in more than seven decades. The country's usable foreign exchange reserves have fallen below one billion dollars. The ability to repay loans has been limited and traders are not getting dollars to buy imports. The government imposed a curfew over the weekend following violent protests. Protesters are angry over the extraordinary shortage of food, fuel, and medicine, but opposition lawmakers marched in the capital in defiance of the curfew. Some are calling for the president to resign.
The 36-hour curfew and special curfews
failed to silence the voices and stop the protests by the people to express
their anger and frustration with the current government. the economic problems
that brought Sri Lanka to its knees has a direct impact on the ordinary citizens
of Sri Lanka for their essential commodities such as rice, pulses, milk powder
as well as cooking gas, or skyrocketing prices of fuel. Sri Lanka is trying to
deal with these issues, but they are ready for the long haul.
Let's take a look at what has turned Sri Lanka's foreign debt
burden into an unprecedented economic crisis. Its tourism sector, a major
foreign exchange earner, was hit by Easter attacks and pandemic in 2019. Russia
and Ukraine, two of the most important countries in the world, are now at war.
They were the first and third-largest source of visitors this year. Sri Lanka
has been forced to import rice and a tea crop. The country's top exports were
destroyed. Sri Lanka wants China, a major lender, to restructure its debt and
get a $1 billion aid package from India.
Factors:
This can be attributed to two factors: an unprecedented and
completely unnecessary tax deduction from December 2019. Treasury revenues fell
by about a third, or about 600 billion rupees a year in Sri Lankan currency. To
fill the gap in the treasury, the central bank began printing money and this
led to a decline in economic management. We were downplayed by global credit
rating agencies and closed the doors of international financial markets,
causing the government to go into reserves to pay off debts and create many
problems in the macro-economy. The second specific decision was to ban the
import of chemical fertilizers, which in some places resulted in up to 70% crop
failure. So the two put together, as well as the growing debt problem that Sri
Lanka has long created, a toxic combination that is now widespread in the
economy, perhaps not surprising. (De Silva, H.)
There are many combinations, but at the moment, we are in crisis.
The root cause of this crisis in Sri Lanka is purely the mismanagement of this
government. Granted, there are other reasons, but the government had a signal
that we were moving in that direction. They could take action. Let's start with one thing: the
tax deductions that occurred in December 2019. There was information at the
time that this was not a strong move. The policy regarding the ban on
fertilizers was also initially formulated and there was information from
experts that this was not a prudent move. Admittedly, we needed to move on to
organic fertilizer, but these things can't happen overnight. So in a sense that the
government promised a lot of things during the election cycles in 2019 and 2020
failed to deliver on its promises, to listen to the experts who are advising on
measures to control pandemic that could have been considered in view of the
dangers and unprecedented challenges. It is 2022 Sri Lanka is still dealing
with some of the most basic challenges. One of the other things I would say is
the government's decision to withdraw a lot of power from Parliament. Under the
20th Amendment that was enacted in 2020, it has become a very
executive-dominated government. If you had a system where both the president
and the parliament can work together which could have stopped or reduced some
of these things. So it's an executive-dominated and very powerful government. They
have failed to take the very basic steps they could have taken as the
warning signs have started so early.
The result is that we are seeing shortages of electricity,
shortages of fuel, food, and medicines. In addition, rising inflation, according to the central bank reached 17.5 percent in February. Unemployment is
also rising, meaning life is becoming unbearable for Sri Lanka. (Wijewardena)
Flawed Policies:
The main reason for the current crisis is the flaws in the policy
of the President's government. As a result of the mistakes of these policies,
Sri Lanka has now come to an explosive position and all the people of the
country have been affected, not only the common man in the streets but the
well-off. Even the rich have lost their company, factories, and various economic
activities due to deficits and their stomachs have been hurt due to rising food
prices. As a result, this type of situation provides fertile ground for people
to take to the streets and protest. They are actually affected by the rise in
prices because the current rate of inflation is 17%. The Sensory Statistics
Department has set a forecast of 7% but the real inflation is much higher as
food inflation is around 17%. Protests have not been led by any political
party. It has spread across the country and Sri Lanka is now witnessing it in
its worst condition.
IMF: A way out
We should have gone to the IMF maybe before the end of 2020. Now
just going to the IMF will not solve Srilankan problems because it is unable to
repay its debt. Its debts need to be restructured, taxes need to be raised,
expenditures need to be rationalized, budget deficits need to be reduced, and
the entire monetary board, including the central bank and the governor, needs
to be fired. New appointments are needed and money laundering needs to be
stopped. They need to regulate the exchange rate so that people can buy
imported goods. Ultimately, Sri Lanka needs to ensure that the country's
low-income poor have access to social security. All these things need to happen
to stabilize the macro-economy and then the whole effort of restructuring is
needed. (De Silva, H.)
The challenges are numerous and many. This means that the new
reality in Sri Lanka is that there are many challenges that people have to go
through, every citizen, from the daily search for essential food items to
medicines. Another important thing to remember is that Sri Lanka is now in a
state of emergency. Since an emergency means that the executive has too much
power, the question is who will decide and come up with suggestions. If you
look at the last two and a half years since the new ruler came to power,
as I mentioned earlier, every effort has been made to consolidate power in Sri
Lanka to a point of dictatorship. In addition to tackling economic challenges
and debt restructuring and structural reforms, this is now crucial. It is also
important to look at the democratic process and Institutions. Why is Sri Lanka
going back to the idea of an emergency that has to be declared all the time? If it had the systems and the experts and the executive would listen to them
and take notice, Sri Lanka would not be in this situation. Therefore, it is
looking very much at the human side of the crisis, but also at the structural
reforms that are needed and which are not going to happen immediately in the
short term. Hence, it definitely needs to be loaned. (Fonseka, B.)
Without
going to the IMF, Sri Lanka is not yet in a position to instill confidence in
the minds of foreign investors. Therefore, India and China cannot shake that
trust. India and China have provided very short term trade credit to Sri Lanka
and the trade credit will enable Sri Lanka to start an import program but if
you look at the total amount that has been lent, India has lent $1.5 billion in
trade credit, which is less than a month's import requirements. The same is
true with China, which has previously lent 10 billion yuan (US $1.5 billion)
that could only be used to import goods only from China. We have to make it very
clear now. The IMF is a necessary condition for a country to recover from an
economic catastrophe, but it is not a sufficient condition because the IMF
provides relief to the central bank to manage its balance of payments by
providing loans to the central bank. But for Sri Lanka to take it further and
achieve long-term economic stability, it must embark on a comprehensive
economic reform program that includes reforms in all types of government
institutions. (Wijewardena)
Neoliberalism is failing: Sri Lanka loaned 16 times. Why a
different outcome this time
Replace the entire monetary board with a monetary board that can
take confidence because there is a crisis of confidence and all markets will
fail In Sri Lanka. If investors are not trusted, the markets will freeze. I want
to go back to neoliberalism. I do not agree with that because, in the last 73
years when Srilanka started going to the IMF in 1965, it had different ideas
and different governments running this country. There were some socialists and
some were neoliberal. So, it can't just be said that this is the ideology of a
particular government because different governments have not been able to make
such reforms. I believe we need to build a social market economy where this is
a synthesis of economic liberalism and political liberalism. You have to agree
with the fact that no politician nor a bureaucrat can direct markets. Political
liberalism means social justice and it is most important because people cannot
survive and it is embarrassing because Sri Lanka was a high middle-income
country and it did not have to beg 250 million 500 million from different
countries.
Can the Rajapaksa government survive or the president will step
down and resign?
It's
up to the president, but there's a lot of pressure. Even today, despite the
curfew, people are on the streets demanding his resignation. There is a lot of
anger among the people. The political and the economy are led by one family and
it needs to be very clear that the fault lies with this government, but
especially with the president and the family. However, one person cannot solve
this problem alone, there must be a system and structure otherwise it will not
be able to solve this problem. (Fonseka, B.)
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Harsha
De Silva, a Member of Parliament, Represents the Main Opposition Party
Bhavani
Fonseka, a Senior Researcher and Attorney At Law in the Center for Policy
Alternatives
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