Features
The road to economic recovery ahead is long, hard, and unavoidable
by Ravi Abeysuriya
Talk to anyone waiting in a long queue to get fuel for daily living, the same set of emotions are apparent: lamenting about lost livelihoods, confusion about the mess we are in, fear and trepidation about an uncertain present and future, and anger at those responsible for the mismanagement of the economy.
Along with those feelings come three questions. How did we get into this mess in the first place? What is debt restructuring and when will all this be over? and How do we get out of this crisis and who has to do what? The sense of uncertainty is almost physical. The answers will remain foggy for some time but let me attempt to briefly answer for all to understand.
Looking back, but not in anger
Start with Sri Lanka’s debt, especially its external debt. In 2000, exports of goods and services were 39 per cent of GDP; in 2020, they had declined to 20 per cent. Sri Lanka has faced a ‘twin deficit’ problem for decades: imports have consistently been higher than exports, and public expenditure has consistently been higher than revenues.
The last 20 years is the story of a series of policy blunders reducing taxes and inefficiencies in tax collection, a bloated public sector, and unaffordable subsidies. Together, they drained the exchequer.
On the external front, investing in ‘vanity’ and unproductive infrastructure projects, funded through foreign commercial borrowings at high interest rates to pay for them was the beginning of the external debt crisis, which only exacerbated thereafter due to infrastructure projects becoming a breeding ground for corruption.
The 2016 IMF programme for a three-year $1.5 billion Extended Finance Facility (EFF) proposed a series of structural reforms to rebuild tax revenues and make Sri Lanka less reliant on foreign borrowing and an export-oriented economy and reduce the budget deficit. These included, tightening monetary policy, letting the currency float, and slashing food subsidies was suspended in November 2019 for a home-grown solution. As a result, those reforms were not implemented, plunging Sri Lanka into its latest crisis.
Bad Politics, faulty policy exacerbated the situation
Four more policy mistakes accelerated Sri Lanka’s descent into bankruptcy. What does bankruptcy mean; No financial institution is willing to extend any credit to Sri Lanka to import even the most essential medicine and fuel, leading to Sri Lanka degrading itself to a hand-to-mouth existence, having exhausted all foreign exchange reserves of the country.
First, reducing taxes in November 2019, cost the Sri Lankan economy profoundly as concerns were raised about Sri Lanka’s debt sustainability, leading to the Credit Rating downgrades and resultant thwarting of the ability to tap global sovereign debt market for further foreign borrowings.
Second, attempting to maintain a fixed exchange rate leading to a 52% reduction of worker remittances from a year ago (the only country to face a reduction of remittances). Approximately, USD 5 billion of the reserves was wasted to defend the Rupee, and another USD 500 million to repay foreign debt in January 2022 leading to a further depletion of meagre foreign reserves of the country.
Third, the decision not to pre-emptively renegotiate debt restructuring with the IMF when the Covid-19 pandemic hit in 2020 while Sri Lanka’s debt was still sustainable. Lenders would have been willing for a more generous restructuring of debt, just as multilateral and bilateral lenders did in the wake of the tsunami in December 2004.
Fourth, in 2021, a misguided and inappropriate policy to implement an outright ban on import of chemical fertilisers was imposed in the name of ‘import substitution’ to conserve foreign exchange reserves. This hit the tea industry and paddy crops, impacting Sri Lanka’s export crops, and forcing Sri Lanka to import food to fight hunger.
Debt restructuring process will be tough and long drawn out
So, what happens now? Sri Lanka had no choice but to approach the IMF again, for the 17th time. Since Sri Lanka has now defaulted on its debt, it does not meet debt sustainability criteria, obtaining a facility from IMF this time will be difficult, more long drawn out and accessing the IMF’s Rapid Financing Instrument is out.
Negotiating a macroeconomic programme supported with IMF financing will be contingent on Sri Lanka undertaking accelerated structural reforms to achieve economic growth and debt sustainability. The process will require arriving at a debt restructuring agreement with bondholders, and then with Multilateral Financial Institutions (MFIs) and other bilateral borrowers. Given past failures for Sri Lanka to keep its word, they will be tougher this time.
The first stage is to reach a Staff Level Agreement (SLA) with IMF and thereafter, seek the IMF executive board approval for an Extended Fund Facility (EFF). EFF will be further supported by World Bank and ADB and friendly countries such as Japan, USA and the European Union. The earliest we could expect some funding is in 2023 and country to get back to some normalcy by 2026.
A System Change is required, all citizens will have to play their part
The people of Sri Lanka have completely lost confidence and trust in the Government’s ability to resolve the crisis. The People’s struggle “Aragalaya” will only intensify. Their demands are well justified. A “System Change” is required and those responsible must leave and an all-party interim Government needs to be established. Further, it is imperative to have a general election as soon as possible for a more competent and honest set of professionals to be appointed to properly govern the country. The costs associated with having a General Election pale into insignificance compared to the massive costs of running an incompetent government. Perhaps, donor countries should give a grant of USD 20 million to hold a general election.
What do we have to do? Sri Lanka needs a credible national policy and a plan agreed by all those who have the best interest of the Country at heart to get the country out of the crisis. The plan or reform agenda should comprise eight core focus areas. Win the credibility for the plan with IMF, that Sri Lanka is on the path to economic recovery and get the EFF facility. This is the only hope, there is no other alternative.First, Sri Lanka must stem the widespread bribery and corruption with harsh penalties, similar to penalties in countries such as Singapore. No donor or Sri Lankan expat wants to see their help to the people being scammed by the unscrupulous politicians and Government officials.
Second, government expenditure must be curtailed, the burden imposed on the people of loss-making State-Owned-Enterprises (SOE) must be removed. One option would be to restructure and list all SOEs in the Colombo Stock Exchange for better governance and accountability of SOEs. It is time, the public change their misguided mindset and realise the futility of SOEs that are sustained for the ultimate benefit of politicians such as Sri Lankan Airlines where the public had to bear Rs. 372 billion of losses since 2008. The Ceylon Petroleum Corporation (CPC) operating loss, despite price increases is Rs. 64.9 billion in the first four months of 2022.
Third, Sri Lanka will have to live within its means; The government cannot simply print money, to provide relentless relief “Sahana” to the people and continue to be a welfare state. People should pay at least the cost for Government services and utilities. All spending must be carefully thought through and planned and public spending on infrastructure should only be on projects that would generate income to pay back debt. Financial discipline of the state is imperative manage the fiscal deficit.Fourth, the government revenue at 8% of GDP remains one of the lowest in the world. The tax system will have to be overhauled to widen the tax net to increase government revenue.
Fifth, Sri Lanka should refocus on a major tourism drive to attract more tourists. In 2018, Sri Lanka Tourism generated receipts worth USD 4.5 billion, which can be swiftly achieved and surpassed. Further, a massive export drive to make Sri Lanka an export-oriented economy like Vietnam is essential (Sri Lanka’s exports grew by only 1.2 times whereas Vietnam’s exports grew over three times and Bangladesh 2 times during the period 2011 to 2021). We have an untapped opportunity in value-creating exports such as Graphite, crystal and Mineral Sand that can easily reach over USD 500 million per month. Attracting FDIs and adding even greater value should be encouraged with the appropriate policies to prioritize foreign-exchange-earning manufacturing industries, agriculture, and service exports.
Sixth, a well-designed, and properly targeted social safety net will be crucial to protect the most vulnerable and provide for them adequately, but only for as long as necessary.Seventh, despite the hardship and the pain that comes from austerity, Sri Lanka, its people, and its government – the executive and all parties in parliament must stay committed to the agreed upon reform agenda for the next ten years. Repeating the mistakes of the past is unaffordable and will inflict pain upon the generations to come.
Eight, the public is expecting restitution and those who brought economic ruin and robbed the country to be held accountable for their actions and prosecuted in a court of law also funds misappropriated to be brought back.
As the famous words of President John F. Kennedy’s “Ask not what your country can do for you, ask what you can do for your country”. It’s vital that all Sri Lankan’s be smart at the next general election and send the right people irrespective of their party affiliation to the parliament to Govern the Country and not repeat the mistakes of the past 74 years.
(The writer is a Member of the Disciplinary Review Council of the CFA Institute, USA and Advocacy Chair and Board Director of CFA Society Sri Lanka and functioned as a member of the Code of Conduct Review Committee (CoCRC) of the Central Bank of Sri Lanka 2020-2021 and can be reached at abeysuriya@hotmail.com)
Features
‘Lord Edgware Dies’
It has been some time since I read an Agatha Christie, the plot of which I cannot remember. So, I was delighted to find on the shelves of a friend Lord Edgware Dies, which I had a vague memory of, but no certainty about who had done it.
When I read it, I found that my memory of who was probably the killer was correct, but I could not be certain and the red herrings Christie threw in were so diverting that until almost the very end I wondered if I had been wrong.
The plot is very simple. Jane Wilkinson, who is married to Lord Edgware, tells him that she is desperate for a divorce since she is in love with a very proper Anglo-Catholic peer, Lord Melton, but Edgware refuses to divorce her. She asks Poirot to talk to him, which he does, and is surprised to find that Edgware has told Jane he is prepared to give her a divorce. This was, after he had categorically refused, through a letter, which Jane said she had not received.
That night Edgware is murdered, after Jane had been to see him, or so the butler said, and also Edgware’s secretary. But Jane had been that evening at a grand dinner many miles away, where a dozen fellow guests could swear to her presence.
There was a solution however to the mystery of two Jane Wilkinsons, namely a skilful impersonator called Carlotta Adams who, in the opening chapter had impersonated Jane Wilkinson, who had also been at the performance. But when Poirot goes to see her, he finds that she had been found dead on the morning after Edgware had been killed, of an overdose. And in her bag was a gold case, with a strange inscription, that contained the drug, along with a pair of pince-nez.
Her maid said she had written a letter to her sister in America and posted it the previous night. Poirot asks Inspector Japp to get the letter, and a transcript is received from America, and in it the name of Edgware’s nephew Ronald Marsh is mentioned; he had taken Carlotta to dinner after her performance, with which the book opens, and had then set her a challenge. Japp arrests Marsh, but Poirot is not happy and asks for the original of the letter, which the sister sends him. That shows that a page is missing, and the tear is obvious, though that raises the question as to why it had not simply been cut.
Matters are further complicated by the fact that Marsh had gone in a taxi to the Edgware house, along with Edgware’s daughter Geraldine, in the interval of an opera which had previously seemed to provide them with cast iron alibis. Geraldine had gone in to fetch her pearls so that Marsh could raise money he needed, and thus had an opportunity to kill Edgware, as did Marsh, for the driver said he had got out of the taxi while waiting and gone into the house.
Marsh explained why he had gone to the house on the night of the murder as having followed Bryan Martin, an American actor, who had been in love with Jane, whom he saw go into the house with a key. But there was no one visible when he entered, and Geraldine almost immediately came down and they left together. And Martin too has become an object of suspicion to Poirot, for he had been to see him before the murders were discovered with a story of being followed by a man with a gold tooth – a story Poirot immediately realized was false when he was asked how old the man was, and was told he was young, for young people did not have gold teeth.
A heap of French money Edgware had got for a trip to Paris was missing, but since Marsh had no need for it after his cousin’s offer of help, Poirot deduces that it must have been taken by the butler, who has disappeared. Christie has stressed that he is astonishingly handsome, unusual in a butler, and Poirot notes a resemblance to Martin, so he thinks the mysterious man going into the house must have been him.
Incidentally, later Poirot assumes that Edgware’s change of mind was because he was involved in some scandal, and I believe Christie intends us to see the cause of this in his handsome butler, though this is not specified.
Meanwhile, Poirot has asked Japp to find out the provenance of the case found in Carlotta’s handbag, and it turns out to have been made in Paris, specially commissioned, and collected by a woman with pince-nez.
But then another murder occurs—that of another guest at the grand dinner, which provided Jane with her alibi. The victim is an actor who had been bemused when Jane, at a lunch, thought the Judgment of Paris referred to the city. He told Hastings he wanted to see Poirot, but was killed before he could get to the appointment. Poirot had rushed there when told about his request, but it was too late.
Meanwhile, Poirot has tried out the pince-nez on Edgware’s secretary, but she could not see through these. It was only a chance remark heard outside the theatre that led him to try them out on Wilkinson’s maid Ellis, a spare pair that had been appropriated for the night of the murders.
Poirot then lays things out, having summoned Martin and told him that he probably suppressed Edgware’s letter, as he had been dropped by then and he did not want Jane to marry another. But after teasing Martin, Poirot says that Jane was in fact the murderer, and she got Carlotta to impersonate her at the dinner while she went to the house and killed her husband. After meeting Carlotta later and checking with her through a call that she had
not been rumbled, Jane had gone ahead with the murder – she put veronal into her drink and the case with veronal into the handbag. She forgot to take out the pince-nez she had used earlier to imitate an American. Carlotta had registered as the American in a hotel and Jane had gone to see her, and there they exchanged identities. After seen the letter, she made use of it by tearing off the page that referred to her, and the S of She, so that the person who had challenged Carlotta to impersonate her seemed to be a man.
There is a coda in which Jane, condemned to death, writes to Hastings, still full of pride at her ingenuity hoping she will be remembered.
Features
Desilt reservoirs, learn from our ancient irrigation systems
by Prof. O. A. Ileperuma
Silting of reservoirs is a major problem today affecting our hydropower production and irrigation systems. The main Mahaweli reservoirs are silted to a considerable extent reducing the water holding capacity of them. Due to poor soil management practices, floodwaters deposit large amounts of silt in these reservoirs. When the Polgolla reservoir was fully drained about two years back, one could see mountains of silt in the lower reaches of the reservoir. A rough estimate is that 50% of the total capacity of these reservoirs has been lost to siltation. This is a serious issue which affects not only power and agriculture but also flood control.
Our ancient irrigation systems ensured that desilting of reservoirs took place under royal decree where all users of the reservoirs were ordered to carry out desilting of reservoirs during the dry season. The clay thus collected was used in making bricks for the construction of great stupas which dot the landscape of our ancient kingdoms. This ensured that the reservoirs had their full capacity filled with water for the next cultivating season. Our ancient kings were clever enough not to construct reservoirs by blocking main rivers such as the Mahaweli. A classic example is the Minipe left canal where they tapped only the surface water of Mahaweli. Even the bigger tanks such as Nuwara Wewa and Parakrama Samudraya were fed with minor rivulets. There were also other ingenious features in the cascade irrigation systems built by the ancient kings, such as mud sluice canals and forest reservations between the reservoirs in the cascade system. These reservations helped trap silt and remove excess nutrients, which could otherwise contribute to increasing salinity as water flowed from one reservoir to another.
- Parakrama Samudraya
- Kalawewa
- Kotmale
A classic engineering marvel is the former Yoda Ela, which carries water from Kalawewa to Nuwara Wewa and Tissa Wewa. It is 87 km long although the straight distance between these points is only about 40 km. The gradient of this canal is about 10 cm per km or 6 inches per mile. Yodha Ela functions as a moving reservoir and feeds about 4,600 hectares of paddy lands. It is a winding canal with about 120 smaller reservoirs on its way. It was constructed during the reign of King Dhatusena around 459 AD and later expanded by King Parakramabahu by connecting more reservoirs to the network. Unfortunately, during the Mahaweli project our modern-day engineers constructed a concrete canal replacing the winding path of this Yoda Ela also called Jaya Ganga. This effectively removed the ability of the old Yoda Ela to remove silt and nutrients. The bank of this Ela has wet zone trees such as jak and areca nut growing well. They take up the nutrients from the flowing stream making the water suitable for irrigation later.
Ancient Mesopotamian civilisations depended on dams constructed along the two main rivers, Euphrates and Tigris. After continuous irrigation of their fields over several thousand years, salinity of the irrigated lands increased making them unsuitable for agriculture. People died due to famine and this clearly illustrates the danger of blocking main rivers for agriculture. There is scientific evidence that the salinity of paddy soils in the Mahaweli C area is increasing.
We saw the devastation caused by Cyclone Ditwah. The sluice gates of the Kotmale Reservoir were opened, and Kandy and Peradeniya were flooded. If the reservoir had had greater storage capacity, couldn’t the opening of the gates have been delayed? This may not be an argument that modern-day engineers would readily accept, and I am not an irrigation expert. These ideas may well be naïve. But most of us tend to think of reservoirs mainly in terms of hydropower generation and irrigation, while their role in flood control receives much less attention. The question therefore deserves serious consideration. Could restoring lost reservoir capacity through desilting help improve our ability to manage extreme rainfall and reduce flood risks?
Desilting our reservoirs should be considered a national priority.
Features
Losing out to Ethiopia
Export diversification – Missing the wood for the trees – Part III
by Gomi Senadhira
In Sri Lanka, the word “Ethiopia” is often used as disparaging slang to describe individuals or areas experiencing extreme poverty, starvation, or severe economic hardship. This linguistic habit originated in the 1980s with the Western media coverage of the devastating Ethiopian famine of 1983-85. That media coverage shocked the world but also left an outdated and offensive global stereotype that the country is permanently starving. Much has changed since then. By now, with an annual growth rate of around 9%, it is the fastest-growing economy in sub-Saharan Africa. Ethiopia has also emerged as a highly competitive exporter and is challenging not only its competitors in the region but also countries like Sri Lanka. This article is on how Sri Lanka has lost ground to Ethiopia (and a few other countries) in the GCC markets for agricultural and floricultural products.
Sri Lanka – A Pioneer in the Agriculture and Floricultural Market in the GCC
As discussed in Part II of this article, by the mid-1980s Sri Lanka had established a strong foothold in the GCC’s fruit, vegetable, and floricultural market. Geographical proximity and well-established shipping and air links gave Sri Lanka a strong comparative advantage over Southeast Asian and African nations. Thailand, Vietnam, and Kenya were not even in the market. At that time, Ethiopia was experiencing (as BBC news reports described) “a biblical famine”.
The market was not very large, but it was lucrative and growing. Trade Minister Lalith Athulathmudali as well as the Chairman of the Export Development Board, Victor Santiapillai, who visited Kuwait (and the GCC countries), recognised the market potential for these products and encouraged us to continue with our work. The minister was particularly keen to further develop links between the market for these products, exporters, and his Export Production Villages (EPVs). So, it was becoming a successful case not only for export diversification but also for transferring gains from exports directly to rural households.
From Trailblazer to Tailender
As a result, even by the beginning of this century Sri Lanka had a larger market share than most of its competitors from Asia or Africa. But since then, our competitiveness has weakened significantly. The tables below provide a comparative snapshot of Sri Lanka’s performance vis-à-vis Thailand, Vietnam, Kenya and Ethiopia in the GCC market for vegetables, fruits and floricultural products. As illustrated therein, in 2001 Sri Lanka was ahead of Thailand, Kenya and Ethiopia in this small but rapidly growing market. Since then, we have fallen behind Thailand, Kenya and many other countries in that lucrative market. If this trend continues, Sri Lanka will fall behind Ethiopia within the next few years. (See Table 1)
In the GCC market for vegetables (covered in HS chapter 07), Sri Lanka was ahead of most other competitors in 2001. As illustrated in Table 1 , Sri Lanka had failed to develop this market, while Thailand, Kenya, and even Ethiopia had very efficiently increased their market shares. The GCC is a market to which Sri Lanka can supply some vegetables, like cabbages, by sea. It appears Sri Lanka had also failed to exploit this mode of supply.
We can see a similar trend in the market for fruits. Vietnam, Kenya, and Thailand have emerged as major players, while exports from Sri Lanka have staggered on slowly. In this segment, Vietnam has emerged as a leading player during the last twenty years and the GCC imports from Viet Nam have shot up from US$44 thousand in 2001 to US$346 million by 2024. In part one of these articles, I discussed the remarkable increase of jackfruit exports from Vietnam “…just $3 million in 2015 to an impressive $236.8 million in 2023” while most of our jackfruit production rots under the trees. This explains how countries develop their markets, geographically and product-wise. (See Table 2)
Sri Lanka’s performance has been weakest in the market for floricultural products (HS Chapter 06), which groups live trees, cut flowers, and ornamental foliage. When we first entered the market in the 1980s, the market was dominated by the Netherlands, and Kenya and Ethiopia were not even in the market. At that time, we identified the Gulf states as a market where Sri Lanka could have a dominant presence due to geographical proximity. Even in 2001, Sri Lanka was ahead of Kenya, Ethiopia, and Thailand. But by now, Kenya has emerged as the dominant supplier. Ethiopia is also expanding its market share and is the third-largest exporter. (See Table 3)
Missing the Wood for the Trees
In the mid-1980s, Sri Lanka first established its foothold in the GCC market. Since then, Thailand, Vietnam, Kenya, and even Ethiopia have moved well ahead of us and have become leading players. Why did we lag behind in our export diversification efforts in general and, more particularly, in the GCC market?
The reasons are very clear. After the initial attempts in the 1980s and early 1990s, Sri Lanka has not been proactively involved in identifying, developing, and promoting new products and markets, or protecting and further developing new markets already established. The focus has simply been on traditional exports: tea, coconut, cinnamon, and garments, while other products were almost ignored. In essence, we have been and continue to focus intensely on a narrow group of products and markets, and we have lost sight of the bigger picture.
(The writer can be reached at senadhiragomi@gmail.com)
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