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The economy of Sri Lanka: Is there a way out?

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by Prof. Arusha Cooray

Sri Lanka is currently facing an unprecedented set of economic challenges: a large and increasing public debt, rising fiscal and current account deficits, foreign exchange shortages and declining investor confidence. The collapse of tourist revenues and remittances due to the pandemic, have compounded the situation. Sri Lanka’s foreign exchange reserves are at an all-time low, currently sufficient to cover two months of imports. As a rule of thumb, a country’s foreign exchange reserves should be sufficient for at least three months of imports.

The fall in foreign exchange reserves has led to a depreciation of the rupee against the US dollar, making it more difficult to service the debt denominated in foreign currency. Sri Lanka’s debt to GDP ratio currently stands at 101%. Businesses relying on imports are struggling to meet foreign currency payables. Prices of essential food items have risen, leading to hoarding and black markets. The government’s ban on the use of chemical fertilizer for farming and the printing of money by the Central Bank, has aggravated the situation.

Sri Lanka has responded to these challenges hereto, by imposing capital controls, restricting imports, and engaging in currency swaps. Import controls have led to a shortage of essential goods. Currency swaps and capital controls are short terms measures. There is no strong evidence to show that import and capital controls succeed during a foreign exchange crisis.

Is there a way out? It is imperative that the government undertakes a reform plan that addresses key priority areas to salvage the economy.

Fiscal consolidation: One, is fiscal consolidation. Sri Lanka’s government finances are dominated by expenditure on public wages and government transfers, subsidies, and interest payments on rising debt. Greater effort needs to be made in curtailing current expenditure and channelling these expenditures into more productive use. Cutting down on public sector spending will reduce the large and persistent budget deficits. Continuing budget deficits can undermine investor confidence and crowd out private sector investment.

A concerted effort also needs to be made to reduce the size of the public sector. Sri Lanka’s inflated public sector is in serious need of restructuring. Re-assessment and reform of the number of ministries and government agencies will reduce the wasteful and inefficient use of government funds and increase productivity.

On the tax front, Sri Lanka needs to address structural weaknesses in the tax system. Sri Lanka’s tax burden as a percentage of GDP is 12.6%. The low tax revenue to GDP ratio has meant that Sri Lanka has faced difficulties in meeting its expenditures which have consistently exceeded tax revenues. A large proportion of government revenue has been generated through indirect taxes which are regressive. Tax evasion, moreover, is high. Rather than introduce new taxes which will further burden low-income groups and undermine economic growth, tax management and collection can be improved by focusing on reducing loopholes for tax avoidance and evasion.

Monetary policy: The success of monetary policy in achieving goals has been severely constrained by to the government’s policy of deficit financing. To the degree that the government is induced to run debt financed fiscal deficits, the main function of the money market would be to engage in the sale of government securities to finance the servicing requirements of the government debt. Fiscal consolidation would help raise public savings, contain price rises and enhance the effectiveness of monetary policy. There are concerns further about the Central Bank’s lack of independence. Increasing Central Bank autonomy will assist in insulating monetary policy from the pressures created by the government to finance budget deficits.

The banking sector: The continued dependence of the government on the state-owned commercial banks has not only inhibited their efficient functioning, but also constrained the competition and efficiency of the entire banking system. Political pressures to finance unviable projects and limited incentives for screening and monitoring projects has led to a rising volume of non-performing loans by these banks. Therefore, the government should reduce reliance on these two banks for funding.

The External Sector and GDP Growth: Higher GDP growth can be promoted by diversifying export markets and export sectors and encouraging foreign direct investment (FDI), all of which will help relieve Sri Lanka’s foreign exchange position and rising debt levels. Sri Lanka attracts disproportionately very little FDI compared to its South Asian counterparts. Increased FDI inflows and trade will generate new employment opportunities and increase the tax base. Economic policy, therefore, should focus on developing comparative advantage in a broader range of sectors, rather than relying on a few areas. Entering into trade agreements with countries will also help.

Skill Development: Policy aimed at promoting investment in infrastructure, research and development, learning, competencies and skill development through education and on-the job training will encourage FDI in high-skill industries. This would give local firms the capacity to absorb the technologies and skills that come with FDI. A large proportion of jobs created by FDI in Sri Lanka, are in low paid, low skilled areas. Sri Lanka possess a highly literate population. It has however, not succeeded in harnessing this stock of human capital to foster comparative advantages.

Policy Consistency and Domestic Savings: The sustainability of economic policies will reduce not only private sector concerns about policy reversals and the lack of policy consistency, but also that of foreign investors. Incentives can be introduced to stimulate domestic savings and promote greater participation in economic activity by the corporate sector.

Getting the economy out of this state will not be easy. Sri Lanka possesses several underlying strengths such as a well-developed stock of human capital and resources, which can be built upon, but have not been harnessed to their full potential to foster comparative advantage. Unless policymakers make a concerted effort to ensure macroeconomic stability through a sustainable and coherent reform plan that addresses structural shortcomings in the economy, Sri Lanka will be trapped in a vicious cycle out of which it will find difficult to get out.

Arusha Cooray is a Professor of Finance at James Cook University, Australia. She served as Sri Lanka’s Ambassador to Norway, Finland and Iceland.



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Enduring nexus between poverty and violent identity politics

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Taliban fighters in Afghanistan

The enduring nexus between poverty or economic deprivation and violent identity politics could not be stressed enough. The lingering identity-based violence in some parts of India’s North-East, to consider one example, graphically bears out this causative link.

At first blush the continuing violence in India’s Manipur state is traceable to inter-tribal hostilities but when the observer penetrates below surface appearances she would find that the root causes of the violence are economic in nature. On the face of it, plans by the state authorities to go ahead with extended economic quotas for the majority Meitei tribal group, for instance, who are considered the economic underdogs in Manipur, have intensified hostilities between the rest of the tribal groups and the Meitei.

It is plain that perceptions among the rest of the tribal communities that they are being unfairly treated by the state are accounting in considerable measure for the continuing ethnic tensions in Manipur. That is, the fear of being deprived of their life-chances on the part of the rest of the communities as a consequence of the new economic empowerment measures being initiated for the Meitei is to a considerable degree driving the ethnic violence in Manipur. It would be reasonable to take the position that economics, in the main, are driving politics in the state.

Sri Lanka, of course, is no exception to the rule. There is no doubt that identity issues propelled to some extent the LTTE’s war against the Sri Lankan state and its armed forces over three long decades.

However, it was perceived economic deprivation on the part of sections of the Tamil community, particularly among its youthful sections, that prompted the relevant disaffected sections to interpret the conflict in ethnic identity terms. In the final analysis, economic issues drove the conflict. If Lankan governments had, from the inception, ensured economic equity and justice in all parts of the country the possibility of ethnic tensions taking root in Sri Lanka could have been guarded against.

Even in contemporary Sudan, the seeming power struggle between two army generals, which has sowed destruction in the country, is showing signs of taking on an ethnic complexion. Reports indicate that the years-long confrontation between the Arab and black African communities over land and water rights is resurfacing amid the main power contest. Economic issues, that is, are coming to the fore. Equitable resource-sharing among the main communities could have perhaps minimized the destructive nature of the current crisis in the Sudan.

Sections of the international community have, over years, seen the majority of conflicts and wars in the post-Cold War decades as being triggered in the main by identity questions. Identity politics are also seen as bound up with an upswing in terrorism. In order to understand the totality of the reasons behind this substantive change one may need to factor in the destabilizing consequences of economic globalization.

The gradual dissolving of barriers to international economic interactions that came in the wake of globalization in the eighties and nineties brought numerous material benefits to countries but in the case of the more traditional societies of the South, there were deeply destabilizing and disorienting results. This was particularly so in those societies where the clergy of particularly theistic religions, such as Islam, held sway over communities.

In these comparatively insulated societies of the South, unprecedented exposure to Western culture, which came in the wake of globalization, was seen as mainly inimical. Besides, perceived alien Western cultural and religious influences were seen by the more conservative Southern clergy as undermining their influence among their communities.

A Southern country that reacted quite early against the above forces of perceived decadence was Iran. Iran’s problems were compounded by the fact that the Shah of the times was following a staunchly pro-US foreign policy. It was only a matter of time before there was an eruption of militant religious fervour in the country, which ultimately helped in ushering an Islamic theocracy in the country. Needless to say, this revolutionary change in Iran impacted drastically the politics of the Middle East and beyond.

Militant Islam was showing signs of spreading in Central Asia when the Soviet military intervention in Afghanistan occurred in 1979. This military incursion could have been seen as an attempt by the Soviet authorities to prevent the spread of militant Islam to Afghanistan, a state which was seen as playing a principal role in the USSR’s security.

However, radical Islamic opposition to the Soviet presence in Afghanistan came in the form of the Mujahedin, who eventually morphed into the present day Taliban. However, as could be seen, the Taliban presence has led to the spread militant religious sentiment in South and South-West Asia.

Fortunately, there is substantive political science scholarship in South Asia currently which helps the observer to understand better the role poverty and material backwardness play in sowing the seeds of religious fundamentalism, or identity politics, among the youth of the region in particular. A collection of papers which would prove helpful in this regard is titled, ‘Civil Wars in South Asia – State, Sovereignty, Development’, edited by Aparna Sundar and Nandini Sundar, (SAGE Publications India Pvt. Ltd.) In some of its papers are outlined, among other things, the role religious institutions of the region play in enticing impoverished youth to radical identity-based violent politics.

While there is no questioning the lead role domestic poverty plays in the heightening and spread of identity politics and the violence that goes hand-in-hand with it, one’s analysis of these questions would not be complete without factoring into the situation external military interventions, such as those of the US in Afghanistan and Iraq, which have aggravated the economic miseries of the ordinary people of those countries. There is an urgent need for in-depth impartial studies of this kind, going forward.

Russian ambassador’s comments

The Russian ambassador to Sri Lanka in a response to my column of May 18th , 2023 titled, ‘Containment Theory returns to West’s ties with East’, takes up the position that the Soviet military presence in Afghanistan, beginning 1979, was not an invasion but an operation that was undertaken by the Soviets on the invitation of the then government of Afghanistan. This amounts to contradicting the well-founded position of the majority of international authorities on the subject that the Soviet push into Afghanistan was indeed a military invasion of the country. This is the position that I have taken over the years and I do not have any reason to back down from it.

The subsequent comments made by the ambassador on my column are quite irrelevant to its thematic substance and do not warrant any replies by me.

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Man of the Globe International …branching out

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Chit-Chat

Kalum Samarathunga came into the spotlight when he won the title Man of the Globe International (Charity Ambassador) 2022, held in Malaysia, last year, and also Mr. Sri Lanka 2022.

A former sales and marketing co-coordinator, in Kuwait, Kalum is now into modelling (stepping into the local modelling world in 2021, when he returned to Sri Lanka), and is also focusing on becoming a professional presenter, and an actor, as well.

Kalum made his debut, as a presenter, at the ‘Ramp Comes’ Alive’ fashion show, held in April.

He also mentioned that he has been involved in music, since he was a kid…and this is how our chit-chat went:

1. How would you describe yourself?

I’m just an ordinary guy on the road to achieve my humongous dreams.

2. If you could change one thing about yourself, what would it be?

There was a time where I was very insecure about myself, but everything is fine with me now, so I wouldn’t consider making any changes.

3. If you could change one thing about your family, what would it be?

Nothing at all, because I’m blessed with an amazing family.

4. School?

Indian Public School, in Kuwait, where I was the leader of the school band, playing the keyboards, and a member of the school dance team, as well. In sports – under 19 long distance runner (800m, 1500m and 5000m), and came second in the inter-school Kuwait clusters, in 2012,

5. Happiest moment?

My happiest moment is that moment when my parents teared up with joy after I called them, from Malaysia, after winning Man Of The Globe International Charity 2022. Seeing my parents crying out of joy was the happiest moment, more than winning the title.

6. What is your idea of perfect happiness?

It doesn’t matter what you do in life as long as it makes you happy. For example, I was born in Kuwait, living a lavish life, a great job and an awesome salary, but I was still unhappy and that’s because I wasn’t doing what I wanted to.

7. Are you religious?

Let’s just say that I’m a God loving person and I live my life according to that. I believe that I’m nothing without God and I have experienced God’s blessings in my life

8. Are you superstitious?

No, because I have never experienced luck in my life. All that I have achieved, in my life, is purely out of hard work.

9. Your ideal girl?

There no points looking beautiful if you can’t keep up a conversation, so “communication” comes first for me; a woman who respects and loves my parents; loyalty and understanding; her voice should be attractive, and she doesn’t have to be someone in the same field I’m in, as long as she trusts me and respects the work I do.

10. Which living person do you most admire?

My mom and dad are my role models, because the man I’m today is because of them. They went through a lot in life to raise me and my siblings.

11. Which is your most treasured possession?

My piano, my first and only friend that was there for me, to make my day. I was a bullied kid in school, until Grade 10, so playing the piano was the only thing that kept me going, and made me happy.

12. If you were marooned on a desert island, who would you like as your companion?

Sri Lankan actress Rashiprabha Sandeepani. I admire her qualities and principles. And, most of all, she was unknowingly there for me during a bad storm in my life.

13. Your most embarrassing moment?

My ex-girlfriend’s mother catching us kissing, and I also got slapped.

14. Done anything daring?

Taking a major risk, during Covid (2021), by leaving everything behind, in Kuwait, and travelling to Sri Lanka, for good, to finally follow my dreams .

15. Your ideal vacation?

I’ve actually forgotten what a vacation feels like because I’ve been so focused on my goals, back-to-back, since 2020.

16. What kind of music are you into?

I don’t stick to a single genre…it depends on my mood.

17. Favourite radio station?

No special liking for any station in particular.

18. Favourite TV station?

I do not watch TV but I do watch TV series, and movies, on my laptop, whenever I can. And, thanks to Sinhala teledramas, on YouTube, I’m able to brush up my Sinhala.

19 What would you like to be born as in your next life?

If this ‘next life’ is actually true, I wouldn’t mind being born as anything, but, most importantly, with “Luck” on my side.

20. Any major plans for the future?

I am planning to invade and destroy Earth…just kidding! I don’t want a top seat in my industry – just the seat I deserve, would be fine.

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Anti-ageing foods for younger-looking skin

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Broccoli:

It is a rich source of quercetin, a powerful antioxidant, which helps in the removal of harmful free radicals from your system. Broccoli is also a natural anti-inflammatory agent, and hence, it prevents your skin from looking tired and dull. So, do not forget to pick some broccolis the next time you go grocery shopping.

* Spinach:

Rich in vitamins A and C, spinach keeps your skin healthy and also helps to repair damaged skin cells. It is also rich in lutein, a biomolecule that improves the hydration, as well as elasticity of the skin. So, add this super-food in your diet for a healthy and soft skin.

*  Fish:

It is rich source of omega-3 fatty acids that help in improving the elasticity of the skin and in providing wrinkle-free skin. It also add natural glow to your skin and make you look vibrant.

*  Tomatoes:

This super-food is loaded with an age-defying ingredient called lycopene. Lycopene shields your skin from environmental damage, prevents wrinkle formation by neutralising free radicals, and also improves its texture. So, consume tomatoes in the form of salad, juice, soup, or anything else. Just do not forget to make them an essential part of your diet.

*  Mushrooms:

These tiny powerhouses are rich source of selenium, which protects newly-formed skin cells from damage, caused by pollutants, as well as harsh UV radiation. Selenium is also believed to be helpful in preventing skin cancer. Furthermore, mushrooms are also packed with vitamins B1, B2, B3, B5, and B6. All these vitamins facilitate the growth of new skin cells. Also, our body requires copper to produce collagen and elastin, which are important for maintaining the strength of skin. And, mushrooms are one of the best sources of it. So, to have a youthful skin, make sure you add this plain-looking food in your colourful diet.

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