As experts are on the same page on the economic repercussions of Covid-19 assault which triggered a new phase of global slump, for Sri Lanka, some blame it to decisive policies of the Rajapaksa clan sidelining Tamils and Muslims, others strongly believe that the loan that Sri Lanka took from China sowed the seeds of the economic collapse
After months of massive protests by Sri Lankans over country’s worst economic crisis leading to the departure and dethroning of the Rajapaksa clan and taking over of Ranil Wickremesinghe as the 8th President and Dinesh Gunawardena as the new Prime Minister of the crisis-hit Island nation, what begs the question is: Will this transition of power also see the recovery of its bleeding economy?
Sound economics make nations great. When countries commit blunder on financial principles, mismanage their finances, nations fall apart as is evident in Sri Lanka where people facing a financial turmoil of unimaginable proportion struggle to make both ends meet.
Food has become unaffordable for most of the people of the island as inflation has spiked to over 40 per cent; fuel shortage make people stand in mile-long queues the whole day and return without getting any pint of it; medicines are not available and jobs disappear as all engines of economic growth have come to a screeching halt.
Moreover, the election of the new President and the Prime Minister has failed to smooth the protesters’ ruffled feathers as uncertainty and chaos prevail in the want of a concrete economic solution.
The worst economic crisis since decades with the powerful Rajapaksa clan being sidelined and angry Lankans venting their anger through protests is yet not over but there are some positive signs, albeit from outside — with the international community rushing to give helping hand to the debt-hit island. India, along with other nations, has extended Lanka credit line on favourable terms apart from supplying millions of dollars worth of rice, milk powder, medicine and other humanitarian aid, as well as diesel fuel and gasoline.
But there are lessons to be learnt by other countries from the crisis to keep their economy afloat. On a closer look, Lanka has emerged as the rarest of rare examples in post-Covid nation whose economy collapsed, plunging the whole country into the darkness because of lack of economic foresight and utter mismanagement.
Experts and economists have been talking about what triggered the economic collapse of a well-to-do democratic country with its President and Prime Minister, both brothers and from the family, running away for safety and taking shelter in another country. As experts are on the same page on the economic repercussions of Covid-19 assault which triggered a new phase of global slump, for Sri Lanka, some blame it to decisive policies of the Rajapaksa clan sidelining Tamils and Muslims, others strongly believe that the loan that Sri Lanka took from China sowed the seeds of the economic collapse.
It is a known fact that many imperial and expanding powers have used loans as a tool to indirectly control the borrowing nation, and there are several examples, like Pakistan surrendering to China by taking unmanageably huge loans. Lankan crisis has set off the alarm for other nations who are reeling under similar situations after falling victim to the predators’ debt-trap.
The lessons to be learned from the Lankan crisis for small economy countries is to avoid taking huge loans that too from nations like China, which has been accused of using “debt trap” policy to acquire assets of strategic importance without helping the country with plans to come out of their financial crisis.
IMF Managing Director Kristalina Georgieva in a meeting of the Group of 20 finance ministers earlier last week said, “Countries with high debt levels and limited policy space will face additional strains. Look no further than Sri Lanka as a warning sign.”
But as any crisis of this nature cannot be because of one “bad” reason or policy, it’s about time countries took steps to save themselves from getting into the quagmire or cesspit of financial debt. China has rejected the debt-trap theory as a smear campaign against it by the western media to derail its collaborations with countries and the West’s own inability to forge such kinds of alliances.
However, it would be unjust to blame only China for the economic collapse of Sri Lanka, whose leadership’s blinkered approach to revive the Covid-hit economy failed miserably.
It was a kind of hara-kiri with no strong fundamentals. Lanka’s economy started deteriorating for several years before the present crisis hit the nation. The Easter suicide bombing in 2019, Covid pandemic and Ukraine crisis exacerbated the crisis as a result of collapse of tourism and sharp drop in foreign exchange reserve.
In 2019, the Gotabaya Government pushed through the largest tax cuts in Sri Lankan history which downgraded the country’s ratings, blocking it from borrowing more as its foreign reserves went down. In a populist move, the Cabinet cut the value added tax to eight per cent from 15 per cent and also abolished seven other taxes, including a two per cent nation building tax paid by businesses.
In April last year, then President Gotabaya suddenly banned imports of chemical fertilisers in a push for organic farming which decimated rice cultivation in the country. To save on foreign exchange, the Government banned imports of other items deemed to be luxuries.
The country instead of going for restructuring its debt, started dipping into its foreign reserves to meet its debt obligations. This resulted in foreign reserves declining from 8,864 million dollar in June 2019 to 2,361 million dollar in January 2022 and it further crashed to 50 million dollar in May this year.
The moot point for the new political dispensation is how to turn around an economy so deep in crisis.
The need of the hour is the fiscal reforms but it is not possible until political stability returns.
(The writer is a Deputy News Editor, The Pioneer)