Features

Amidst the Delta scare and Labour strife, will China become Sri Lanka’s new IMF?

Published

4 years ago

2021/08/8

by Rajan Philips

The government, rather the country, is in the grip of three mutually aggravating crises – involving public health, people’s lives and the economy. And every one of them has gotten critical. Covid-19 has morphed or mutated into a dreadful Delta scare. Even the suddenly impressive vaccine rollout is being outrun by surges in infections and deaths. If vaccination is picking up four paces, Delta is overtaking by eight paces and more. That is the reality.

Last Thursday, two major hospitals, the Ratnapura General Hospital and the Karapitiya Teaching Hospital, “declared emergency,” apparently a rare occurrence in Sri Lanka’s medical history. The emergency situation is due to increases in Covid-19 patients, technically bordering on “a situation of Mass Casualty Incidents” and warranting emergency responses, according to the Deputy Director-general of Health Services, Dr. Hemantha Herath. Hospitals in the Western Province are also getting filled up even as they are running short of oxygen supply. For some time now, the Lady Ridgeway Hospital in Colombo has been struggling to cope with the influx of children infected by Covid-19.

The second crisis is the unrest among working people. This is more than a labour or trade union problem. The widespread unrest and ubiquitous protests are not part of the usual political muscle flexing. They are desperate signs of vast sections of people finding it impossible to get on with life. No one is suggesting that the government should creatively find ways to immediately restore normal economic life in the country. But everyone, except those who are close to the perks and fringes of power, is aghast that government leaders are pretending that they are in control of everything and that normality is just round the corner. Nothing can be more distant from the truth. And the truth is about the third crisis, which is the economic crisis. What the people are helplessly experiencing is the symptom of an economy that is in severe crisis. There is no point trying to hide it or to pretend otherwise.

Just like the crises, the government’s responses to them are also mutually aggravating. On the pandemic front, the President and the government have so failed to put together a permanent team of experts who will publicly tell the government and the people the unvarnished truth about the Covid-19 situation in Sri Lanka, and offer their advice on what everyone should be doing to control and contain the Delta spread as much as possible.

Friday’s news reports announced that President Gotabaya Rajapaksa convened a special meeting to discuss the current COVID-19 situation. Head of the COVID-19 task force Army Commander General Shavendra Silva, minsters, Director General of Health Services and several other experts reportedly took part in the meeting. Nothing much came out of it. The point is this is more political ad-hocism, and not a substitute for putting in charge a permanent body of experts.

The government after initially downplaying the severity of the pandemic crisis and prematurely celebrating victory over the virus, is now trying to use Covid-19 as reason to stop public protesting. At the same time, the government is ignoring universal medical opinion that has been pleading for the continuation of Covid-19 restrictions. People can see through when the government uses medical opinion as grounds for arresting protesters, but will not listen to medical opinion that calls for generally restrictive measures to contain the spread of Covid-19. People can also see that protesters are not flouting Covid-19 precautions and they are not ignoring social distance requirements.

People know that they are experiencing the same helplessness and frustrations that are driving protesters to picket lines. They expect empathy from the government. And they want the government to honestly engage with the protesters and establish a consensual framework for work and welfare in the middle of an out-of-control pandemic with no quick ending in sight.

The government’s economic management and messaging have been as bad as, or even worse than, its responses to the pandemic and to the people’s plights. The country is facing its worst economic crisis since independence in terms of self-inflicted revenue losses and diminishing foreign reserves, a falling rupee and mounting debt (domestic and foreign), and onerous debt repayment obligations. The people are going through the worst spell of severe hardships in living memory. In the midst of them all the government is stubbornly talking about some alternative way of economic management. What is being touted as the alternative way is not the outcome of any collective thought process and any co-ordinated implementation plan. Instead, it is a catch-all phrase to give context to knee jerk and uncoordinated responses to different problems as and when they arise.

Chinese alternative to IMF?

The abrupt switch from chemical to organic fertilizers in agriculture by presidential fiat is by far the most glaring case in point. A second, politically less dramatic but economically more consequential instance is the government’s stubborn reluctance to seek IMF help to tide over the current balance of payment (BOP) crisis. In vaccine parlance, this reluctance is a severe form of IMF hesitancy. No one knows if this hesitancy is backed up by any hope of getting a full BOP bailout from Beijing. Even less is known if the government has approached Beijing for a fully-fledged BOP help beyond periodical swaps. Known lesser still is what would be China’s response.

It would be rationally worthwhile for the government to at least consider Chinese help as an alternative to seeking IMF help. Although rational, it is not necessarily a prudent choice. The gossipy question is if there is any thinking at all within the government along these lines, assuming of course that thinking is going on in government circles. Equally, there has been no serious speculation among government critics that the government might be looking to China as a potential alternative to the IMF.

Ever since China started providing development assistance to emerging economies and developing countries, global watchers have become interested in China’s role as a counter to western hegemony over development assistance through the agencies of the World Bank (providing development assistance) and the IMF (securing financial stability and lending to tide over balance of payment difficulties). Although China’s development assistance (through the China Development Bank and the China Export-Import Bank) is more comparable to the activities of the World Bank, in recent years there has been growing “journalistic interest” in viewing Beijing as an alternative source to the IMF for providing financial support to developing countries.

James Sundquist, a Yale University doctoral researcher, has summed up this interest in posing the question: “Does Chinese finance in the form of loans and currency swaps substitute for assistance from the International Monetary Fund (IMF), reducing that institution’s influence and opening more ‘policy space’ for developing countries?” His study based on data for 104 countries between 2001 and 2017 would seem to suggest that mostly countries that are “able to compensate China in means other than cash” are likely to consider turning to China to avoid the IMF. Non-cash compensation can be “repayment-in-kind with natural resource exports and geopolitical concessions.”

Sundquist selected four countries “for closer examination” to test his hypothesis. Sri Lanka is one of them. Angola, Zimbabwe and Mongolia are the other three. Angola is a resource rich country that received Chinese bailout and avoided the IMF. Zimbabwe, though nominally resource rich is practically resource poor because of its neglected and atrophied extraction infrastructure. China has not lent money to Zimbabwe because it is not credit worthy. Mongolia is resource-rich and China has been keen on offering assistance, but the Mongolian government opted to go along with IMF financial assistance and stabilization program. The apparent reason was to avoid too much bilateral reliance on China.

Sri Lanka is seen as a country that has received both development assistance and BOP assistance from China without possessing “resource guarantees,” because of its geopolitical assets. It would seem Sundquist’s research period preceded the Sri Lankan government’s current IMF hesitancy and did not quite assess the potential of Beijing becoming a total or the primary alternative to the IMF. But Sri Lanka’s current situation is more than a subject matter for research. It would be odd if looking to Beijing as an alternative to the IMF has not crossed the mind in the Rajapaksa government. The government speaks its mind on economic matters through half a dozen people. Everyone of them is dead set against the IMF. Six months ago, they were conventional IMF followers. But no one is mentioning Beijing as an alternative.

There are many factors at play. Until 20 years ago, there was no China and developing countries had only one place to go to, namely, the West and institutions dominated by the West. The entry of China has provided an alternative source and somewhat levelled the playing field. But only ‘somewhat.’ A part of that ‘levelling’ also includes the potential for ‘democratizing’ the operations of the World Bank and the IMF which are dominated by the US and its European allies. But China may not be all too keen about ‘democratizing’ anything anywhere. China’s development assistance and lending patterns are also totally driven by domestic reasons and for domestic purposes.

China’s external financial relations and operations are always “rooted in central government decisions” and are implemented only by “state-affiliated institutions.” China is not an incubator of private investors or a source of foreign direct investments. At the same time, China is not the inventor of financial diplomacy. The US and France, for example, have provided direct emergency financial assistance, bypassing the IMF, to countries in the Middle East and Africa, respectively.

Sundquist lists three key decisions taken at different times by the Chinese government, that apparently have influenced the ebb and flow of Chinese financial activities overseas. First, in 2006, came the decision to extend externally the hitherto domestic operations of the China Development Bank as a parallel to the World Bank. This decision was made “at a time of fractured political power in China,” according to Sundquist. The second was the Belt and Road Initiative (BRI) launched by President Xi Jinping even as he concentrated the powers of the state in the office of the President. The third key decision so far has been the roll back of the BRI initiative in 2018 to concentrate on the domestic economic situation in China.

Put another way, the rest of the world, especially countries that may want to look to China to avoid the west or the IMF, have no certainty whether or when China is going to keep its lending window open, and to what levels. There is also the concern over the lack transparency involving China’s assistance, that it ignores issues of domestic corruption and money laundering, and that it is more short-term oriented without long term sustainability.

Among Sundquist’s assertions based on his research are that “Chinese loans have indeed enabled some countries to avoid turning to the IMF and enabled others to negotiate deals with fewer attached conditions.” As his Zimbabwe case study has shown, “China has typically denied bailouts to countries without reliable sources of foreign exchange,” and has paid “attention to debt sustainability rather than trying to ensnare them in debt traps.” Overall, says Sundquist, “Borrowing governments will have to weigh the respective benefits of IMF and Chinese loans diligently. They will, however, be happy to have the choice.”

He further notes that “Since 2017, the pace of new loans has slowed, and China has begun to confront the problem of borrowers unable to meet their debt service obligations. It is entirely possible that as China’s position begins to resemble that of traditional Western creditors, it will begin to behave in a more similar manner to them and work more closely with the IMF.” Where does all this leave Sri Lanka? Is there a third way, that avoids both the IMF and China, to overcome the current balance of payment crisis? It is up to the government to clarify.

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Features

High govt. revenue and low foreign exchange reserves High foreign exchange reserves and low govt. revenue!

Published

22 hours ago

2025/03/21

Thilina Walpola

First shipment of vehicles imported to Sir Lank after the lifting the ban on automobile imports

Government has permitted, after several years, the import of motor cars. Imports, including cars, were cut off because the government then wisely prioritised importing other commodities vital to the everyday life of the general public. It is fair to expect that some pent-up demand for motor vehicles has developed. But at what prices? Government seems to have expected that consumers would pay much higher prices than had prevailed earlier.

The rupee price of foreign exchange had risen by about half from Rs.200 per US$ to Rs.300. In those years, the cost of production of cars also had risen. The government dearly wanted more revenue to meet increasing government expenditure. Usually, motor cars are bought by those with higher incomes or larger amounts of wealth. Taxes on the purchase of cars probably promote equity in the distribution of incomes. The collection of tax on motor cars is convenient. What better commodity to tax?

The announced price of a Toyota Camry is about Rs.34 million. Among us, a Camry is usually bought by those with a substantially higher income than the average middle-income earner. It is not a luxury car like a Mercedes Benz 500/ BMW 700i. Yes, there are some Ferrari drivers. When converted into US dollars, the market price of a Camry 2025 in Sri Lankan amounts to about $110,000. The market price of a Camry in US is about $34,000, where it is usually bought by income earners in the middle-middle class: typically assistant professors in state universities or young executives. Who in Lanka will buy a Camry at Rs.34 million or $110,000 a piece?

How did Treasury experts expect high revenue from the import of motor cars? The price of a Toyota Camry in US markets is about $34,000. GDP per person, a rough measure of income per person in US, was about $ 88,000 in 2024. That mythical ‘average person’ in US in 2024, could spend about 2.5 month’s income and buy a Toyota Camry. Income per person, in Lanka in 2024, was about $ 4,000. The market price of a Camry in Lanka is about $ 133,000. A person in Lanka must pay 33 years of annual income to buy a Toyota Camry in 2025.

Whoever imagined that with those incomes and prices, there would be any sales of Camry in Lanka? After making necessary adjustments (mutatis mutandis), Toyota Camry’s example applies to all import dues increases. Higher import duties will yield some additional revenue to government. How much they will yield cannot be answered without much more work. High import duties will deter people from buying imported goods. There will be no large drawdown of foreign exchange; nor will there be additional government revenue: result, high government foreign exchange reserves and low government revenue.

For people to buy cars at such higher prices in 2025, their incomes must rise substantially (unlikely) or they must shift their preferences for motor cars and drop their demand for other goods and services. There is no reason to believe that any of those changes have taken place. In the 2025 budget, government has an ambitious programme of expenditure. For government to implement that programme, they need high government revenue. If the high rates of duties on imports do not yield higher government revenue as hypothesised earlier, government must borrow in the domestic market. The economy is not worthy of raising funds in international capital markets yet.

If government sells large amounts of bonds, the price of all bonds will fall, i.e. interest rates will rise, with two consequences. First, expenditure on interest payments by government will rise for which they would need more revenue. Second, high interest rates may send money to banks rather than to industry. Finding out how these complexities will work out needs careful, methodically satisfactory work. It is probable that if government borrows heavily to pay for budgetary allocations, the fundamental problem arising out of heavy public debt will not be solved.

The congratulatory comments made by the Manager of IMF applied to the recent limited exercise of handling the severity of balance of payments and public debt problems. The fundamental problem of paying back debt can be solved only when the economy grows fast enough (perhaps 7.5 % annually) for several years. Of that growth, perhaps, half (say 4 % points) need to be paid back for many years to reduce the burden of external debt.

Domestic use of additional resources can increase annually by no more than 3.5 percent, even if the economy grows at 7.5 percent per year. Leaders in society, including scholars in the JJB government, university teachers and others must highlight the problems and seek solutions therefor, rather than repeat over and over again accounts of the problem itself.

Growth must not only be fast and sustained but also exports heavy. The reasoning is as follows. This economy is highly import-dependent. One percent growth in the economy required 0.31% percent increase in imports in 2012 and 0. 21 percent increase in 2024. The scarcity of imports cut down the rate of growth of the economy in 2024. Total GDP will not catch up with what it was in (say) 2017, until the ratio of imports to GDP rises above 30 percent.

The availability of imports is a binding constraint on the rate of growth of the economy. An economy that is free to grow will require much more imports (not only cement and structural steel but also intermediate imports of many kinds). I guess that the required ratio will exceed 35 percent. Import capacity is determined by the value of exports reduced by debt repayments to the rest of the world. The most important structural change in the economy is producing exports to provide adequate import capacity. (The constant chatter by IMF and the Treasury officials about another kind of structural change confuses the issue.) An annual 7.5 percent growth in the economy requires import capacity to grow by about 2.6 percent annually.

This economy needs, besides, resources to pay back accumulated foreign debt. If servicing that accumulation requires, takes 4% points of GDP, import capacity needs to grow by (about) 6.6 percent per year, for many years. Import capacity is created when the economy exports to earn foreign exchange and when persons working overseas remit substantial parts of their earnings to persons in Lanka. Both tourism and remittances from overseas have begun to grow robustly. They must continue to flow in persistently.

There are darkening clouds raised by fires in prominent markets for exports from all countries including those poor. This is a form of race to the bottom, which a prominent economist once called ‘a policy to beggar thy neighbour (even across the wide Pacific)’. Unlike the thirty years from 1995, the next 30 years now seem fraught with much danger to processes of growth aided by open international trade. East Asian economies grew phenomenally by selling in booming rich markets, using technology developed in rich countries.

Lanka weighed down with 2,500 years of high culture ignored that reality. The United States of America now is swinging with might and main a wrecking ball to destroy that structure which they had put up, one thought foolishly, with conviction. Among those storms, many container ships would rather be put to port than brave choppy seas. High rates of growth in export earnings seem a bleak prospect. There yet may be some room in the massive economies of China and India.

Consequently, it is fanciful to expect that living conditions will improve rapidly, beginning with the implementation of the 2025 budget. It will be a major achievement if the 2025 budget is fully implemented, as I have argued earlier. Remarkable efforts to cut down on extravagance, waste and the plunder of public funds will help, somewhat; but not enough. IMF or not, there is no way of paying back accumulated debt without running an export surplus sufficient to service debt obligations.

Exports are necessary to permit the economy to pay off accumulated debt and permit some increase in the standard of living. Austerity will be the order of the day for many years to come. It is most unlikely that the next five years will usher in prosperity.

By Usvatte-aratchi

Features

BLOSSOMS OF HOPE 2025

Published

22 hours ago

2025/03/21

Thilina Walpola

An Ikebana exhibition in aid of pediatric cancer patients

This Ikebana exhibition by the members of Ikebana International Sri Lanka Chapter #262, brings this ancient art form to life in support of a deeply meaningful cause: aiding the Pediatric Cancer ward of the Apeksha Cancer Hospital, Maharagama and offering hope to young warriors in their fight against illness.

Graceful, delicate, and filled with meaning—Ikebana, the Japanese art of floral arrangement, is more than just an expression of beauty; it is a reflection of life’s resilience and harmony. “Blossoms of Hope”, is a special Ikebana exhibition, on 29th March from 11a.m. to 7p.m. and 30th March from 10a.m. to 6p.m. at the Ivy Room, Cinnamon Grand Hotel and demonstrations will be from 4p.m. to 5p.m. on both days.

Each floral arrangement in this exhibition is a tribute to strength, renewal, and love. Carefully crafted by skilled Ikebana artists, who are members of the Chapter. These breathtaking displays symbolize the courage of children battling cancer, reminding us that even in adversity, beauty can bloom. The graceful lines, vibrant hues, and thoughtful compositions of Ikebana echo the journey of resilience, inspiring both reflection and compassion.

Visitors will not only experience the tranquility and elegance of Japanese floral art but will also have the opportunity to make a difference. Proceeds from “Blossoms of Hope” will go towards enhancing medical care, providing essential resources, and creating a more comforting environment for young patients and their families.

This exhibition is more than an artistic showcase—it is a gesture of kindness, a symbol of solidarity, and a reminder that hope, like a flower, can grow even in the most unexpected places. By attending and supporting “Blossoms of Hope”, you become a part of this journey, helping to bring light and joy into the lives of children who need it most.

Join in celebrating art, compassion, and the Power of Hope—one flower at a time.

Features

St. Anthony’s Church feast at Kachchativu island

Published

22 hours ago

2025/03/21

Thilina Walpola

Fort Hammenhiel

The famous St. Anthony’s Church feast this year was held on 14 and 15 March. St. Anthony, as per Catholic belief, gives protection and looks after fishermen and seafarers like me. Many Buddhist seafarers are believers in St. Anthony and they usually keep a statue of the saint in their cabins in the ship or craft.

St. Anthony died on 13th June 1231 at age of 35 years, at Padua in Holy Roman Empire and was canonized on 30 May 1232 by Pope Gregory IX.

I was unable to attend last year’s feast as I was away in Pakistan as Sri Lanka’s High Commissioner. I was more than happy to learn that Indians were also attending the feast this year and there would be 4,000 devotees.

I decided to travel to Kankesanturai (KKS) Jaffna by train and stay at my usual resting place, Fort Hammenhiel Resort, a Navy-run boutique hotel, which was once a prison, where JVP leaders, including Rohana Wijeweera were held during the 1971 insurrection. I was fortunate to turn this fort on a tiny islet in Kytes lagoon into a four-star boutique hotel and preserve Wijeweera’s handwriting in 2012, when I was the Commander Northern Naval Area.

I invite you to visit Fort Hammenhiel during your next trip to Jaffna and see Wijeweera’s handwriting.

The train left Colombo Fort Railway Station on time (0530 hrs/14th) and reached KKS at 1410 hrs. I was highly impressed with the cleanliness and quality of railway compartments and toilets. When I sent a photograph of my railway compartment to my son, he texted me asking “Dad, are you in an aircraft or in a train compartment? “

Well done Sri Lanka Railways! Please keep up your good work. No wonder foreign tourists love train rides, including the famous Ella Odyssey.

Travelling on board a train is comfortable, relaxed and stress free! As a frequent traveller on A 9 road to Jaffna, which is stressful due to oncoming heavy vehicles on. This was a new experience and I enjoyed the ride, sitting comfortably and reading a book received from my friend in New York- Senaka Senaviratne—’Hillbilly Elegy’ by US Vice President JD Vance. The book is an international best seller.

My buddy, Commodore (E) Dissanayake (Dissa), a brilliant engineer who built Reverse Osmosis Water Purification Plants for North, North Central and North Western provinces to help prevent chronic kidney disease is the Commodore Superintendent Engineering in the Northern Naval Area. He was waiting at the KKS railway station to receive me.

I enjoyed a cup of tea at Dissa’s chalet at our Northern Naval Command Headquarters in KKS and proceeded to Fort Hammenhiel at Karainagar, a 35-minute drive from KKS.

The acting Commanding Officer of Karainagar Naval Base (SLNS ELARA) Commander Jayawardena (Jaye) was there at Fort Hammenhiel Restaurant to have late lunch with me.

Jaye was a cadet at Naval and Maritime Academy, (NMA) Trincomalee, when I was Commandant in 2006, NMA was under artillery fire from LTTE twice, when those officers were cadets and until we destroyed enemy gun positions, and the army occupied Sampoor south of the Trincomalee harbour. I feel very proud of Jaye, who is a Commander now (equal to Army rank Lieutenant Colonel) and Commanding a very important Naval Base in Jaffna.

The present Navy Commander Vice Admiral Kanchana Banagoda had been in SLNS ELARA a few hours before me and he had left for the Delft Island on an inspection tour.

Commander Jaye was very happy because his Divisional Officer, when he was a cadet, was Vice Admiral Kanchana (then Lieutenant Commander). I had lunch and rested for a few hours before leaving Karainagar in an Inshore Patrol Craft heading to Kachchativu Island by1730 hrs.

The sea was very calm due to inter-monsoon weather and we reached Kachchativu Island by 1845 hrs. Devotees from both Sri Lanka and India had already reached the island. The Catholic Bishop of Sivagangai Diocese, Tamil Nadu India His Eminence Lourdu Anandam and Vicar General of Jaffna Diocese Very Rev Fr. PJ Jabaratnam were already there in Kachchativu together with more than 100 priests and nuns from Sri Lanka and India. It was a solid display of brotherhood of two neighbouring nations united together at this tiny island to worship God. They were joined by 8,000 devotees, with 4,000 from each country).

The church

All logistics—food, fresh water, medical facilities—were provided by the Sri Lanka Navy. Now, this festival has become a major annual amphibious operation for Navy’s Landing Craft fleet, led by SLNS Shakthi (Landing Ship tanks). The Navy establishes a temporary base in a remote island which does not have a drop of drinking water, and provides food and water to 8,000 persons. The event is planned and executed commendably well under Commander Northern Naval Area, Rear Admiral Thusara Karunathilake. The Sri Lankan government allocates Rs 30 million from the annual national budget for this festival, which is now considered a national religious festival.

The Indian devotees enjoy food provided by SLN. They have the highest regard for our Navy. The local devotees are from the Jaffna Diocese, mainly from the Delft Island and helped SLN. Delft Pradeshiya Sabha and AGA Delft Island. A very efficient lady supervised all administrative functions on the Island. Sri Lanka Police established a temporary police station with both male and female officers.

As usual, the Sinhalese devotees came from Negombo, Chilaw, Kurunegala and other areas, bringing food enough for them and their Catholic brothers and sisters from India! Children brought biscuits, milk toffee, kalu dodol and cakes to share with Indian and Jaffna devotees.

In his sermon on 22nd December 2016, when he declared open the new Church built by SLN from financial contributions from Navy officers and sailors, Jaffna Bishop Rt Rev Dr Justin Bernard Ganapragasam said that day “the new Church would be the Church of Reconciliation”.

The church was magnificent at night. Sitting on the beach and looking at the beautiful moon-lit sea, light breeze coming from the North East direction and listening to beautiful hymns sung by devotees praising Saint Anthony, I thanked God and remembered all my friends who patrolled those seas and were no more with us. Their dedication, and bravery out at sea brought lasting peace to our beloved country. But today WHO REMEMBERS THEM?

The rituals continued until midnight. Navy Commander and the Indian Consul General in Jaffna Sai Murali attended the Main Mass.

The following morning (15) the Main Mass was attended by Vice Admiral Kanchana Banagoda and his family. It was a great gesture by the Navy Commander to attend the feast with his family. I had a long discussion with Indian Consul General Jaffna Sai Mulari about frequent incidents of Indian trawlers engaging in bottom trawling in Sri Lankan waters and what we should do as diplomats to bring a lasting solution to this issue, as I was highly impressed with this young Indian diplomat.

The Vicar General of the Jaffna Diocese, my dear friend, Very Rev Father P J Jabarathnam also made an open appeal to all Indian and Sri Lankan fishermen to protect the environment. I was fortunate to attend yet another St. Anthony’s Church feast in Kachchativu.

By Admiral Ravindra C Wijegunaratne WV,

RWP& Bar, RSP, VSV, USP, NI (M) (Pakistan), ndc, psn,
Bsc (Hons) (War Studies) (Karachi) MPhil (Madras)
Former Navy Commander and Former Chief of Defense Staff
Former Chairman, Trincomalee Petroleum Terminals Ltd
Former Managing Director Ceylon Petroleum Corporation
Former High Commissioner to Pakistan