By R Ramakumar, Professor of Economics, Tata Institute of Social Sciences
The island nation of Sri Lanka is in the midst of one of the worst economic crises it’s ever seen. It has just defaulted on its foreign debts for the first time since its independence, and the country’s 22 million people are facing crippling 12-hour power cuts, and an extreme scarcity of food, fuel and other essential items such as medicines.
Inflation is at an all-time high of 17.5%, with prices of food items such as a kilogram of rice soaring to 500 Sri Lankan rupees when it would normally cost around 80 rupees. Amid shortages, one 400g packet of milk powder is reported to cost over 250 rupees, when it usually costs around 60 rupees.
On April 1, President Gotabaya Rajpaksa declared a state of emergency. In less than a week, he withdrew it following massive protests by angry citizens over the government’s handling of the crisis.
The country relies on the import of many essential items including petrol, food items and medicines. Most countries will keep foreign currencies on hand in order to trade for these items, but a shortage of foreign exchange in Sri Lanka is being blamed for the sky-high prices.
Many believe Sri Lanka’s economic relations with China are a main driver behind the crisis. The United States has called this phenomenon debt-trap diplomacy . This is where a creditor country or institution extends debt to a borrowing nation to increase the lender’s political leverage if the borrower extends itself and cannot pay the money back, they are at the creditor’s mercy.
However, loans from China accounted for only about 10% of Sri Lanka’s total foreign debt in 2020. The largest portion about 30% can be attributed to international sovereign bonds. Japan actually accounts for a higher proportion of their foreign debt, at 11%.
Defaults over China’s infrastructure-related loans to Sri Lanka, especially the financing of the Hambantota port, are being cited as factors contributing to the crisis.
But these facts don’t add up. The construction of the Hambantota port was financed by the Chinese Exim Bank. The port was running losses, so Sri Lanka leased out the port for 99 years to the Chinese Merchant’s Group, which paid Sri Lanka US 1.12 billion.
So the Hambantota port fiasco did not lead to a balance of payments crisis (where more money or exports are going out than coming in), it actually bolstered Sri Lanka’s foreign exchange reserves by US 1.12 billion.
Post-independence from the British in 1948, Sri Lanka’s agriculture was dominated by export-oriented crops such as tea, coffee, rubber and spices. A large share of its gross domestic product came from the foreign exchange earned from exporting these crops. That money was used to import essential food items.
Over the years, the country also began exporting garments, and earning foreign exchange from tourism and remittances (money sent into Sri Lanka from abroad, perhaps by family members). Any decline in exports would come as an economic shock, and put foreign exchange reserves under strain.
For this reason, Sri Lanka frequently encountered balance of payments crises. From 1965 onwards, it obtained 16 loans from the International Monetary Fund (IMF). Each of these loans came with conditions including that once Sri Lanka received the loan they had to reduce their budget deficit, maintain a tight monetary policy, cut government subsidies for food for the people of Sri Lanka, and depreciate the currency (so exports would become more viable).
But usually in periods of economic downturns, good fiscal policy dictates governments should spend more to inject stimulus into the economy. This becomes impossible with the IMF conditions. Despite this situation, the IMF loans kept coming, and a beleaguered economy soaked up more and more debt.
The last IMF loan to Sri Lanka was in 2016. The country received US 1.5 billion for three years from 2016 to 2019. The conditions were familiar, and the economy’s health nosedived over this period. Growth, investments, savings and revenues fell, while the debt burden rose.
A bad situation turned worse with two economic shocks in 2019. First, there was a series of bomb blasts in churches and luxury hotels in Colombo in April 2019. The blasts led to a steep decline in tourist arrivals with some reports stating up to an 80% drop and drained foreign exchange reserves. Second, the new government under President Gotabaya Rajapaksa irrationally cut taxes.
Value-added tax rates (akin to some nations’ goods and services taxes) were cut from 15% to 8%. Other indirect taxes such as the nation building tax, the pay-as-you-earn tax and economic service charges were abolished. Corporate tax rates were reduced from 28% to 24%. About 2% of the gross domestic product was lost in revenues because of these tax cuts.
In March 2020, the COVID-19 pandemic struck. In April 2021, the Rajapaksa government made another fatal mistake. To prevent the drain of foreign exchange reserves, all fertiliser imports were completely banned. Sri Lanka was declared a 100% organic farming nation. This policy, which was withdrawn in November 2021, led to a drastic fall in agricultural production and more imports became necessary.
But foreign exchange reserves remained under strain. A fall in the productivity of tea and rubber due to the ban on fertiliser also led to lower export incomes. Due to lower export incomes, there was less money available to import food and food shortages arose.
Because there is less food and other items to buy, but no decrease in demand, the prices for these goods rise. In February 2022, inflation rose to 17.5%.
n all probability, Sri Lanka will now obtain a 17th IMF loan to tide over the present crisis, which will come with fresh conditions.
A deflationary fiscal policy will be followed, which will further limit the prospects of economic revival and exacerbate the sufferings of the Sri Lankan people. (PTI)
Lanka on the brink of economic collapse: Prez seeks international help to overcome crisis
President Gotabaya Rajapaksa, addressing the 27th International conference on ‘Future of Asia’, yesterday, called upon the international community to help Sri Lanka overcome its economic crisis.
Addressing the virtual summit, the President said that it was no secret that the last several months had been extremely difficult for Sri Lanka.
“We are currently undergoing a severe economic crisis, which has profoundly impacted the lives of all Sri Lankans, resulting in social unrest. The virtual shutting down of the tourism industry and the sharp decline in inward remittances from expatriate workers due to COVID19 in the past two years and increasing inflation due to other events combined with Sri Lanka’s high outstanding debt obligations to cause a severe financial crisis,” he said.
President Rajapaksa said that in April, Sri Lanka announced a ‘Debt Standstill’ with the intention of restructuring this external public debt through negotiations with our creditors, whilst simultaneously approaching the International Monetary Fund for a suitable programme.
“In parallel to these efforts, we have appointed a new Prime Minister and a Cabinet of Ministers with representation from multiple political parties, and we are fostering ongoing discussions in Parliament towards forming a national consensus on the way forward,” he said.
Given below are excerpts of his speech: “Sri Lanka is Asia’s oldest democracy. It is crucial that the solutions to our present national crisis are supported through our nation’s democratic framework.
“As we work through such solutions, however, we urgently require the assistance of our friends in the international community to ensure that our immediate needs in terms of the importation of essential medicines, food supplies, and fuel are met.
We are also in urgent need of bridging financing to restore confidence in our external sector and stabilise our economy until the debt restructuring process is completed and an IMF programme commences.
“Sri Lanka is grateful for the support provided by India, our close friend and neighbour, which responded with generosity in our time of need. The support extended by our other neighbours and development partners, as well as regional and global institutions, is also deeply appreciated.
“Japan remains one of Sri Lanka’s key development partners, and we hope that the negotiations now underway regarding bridging funds from Japan will conclude soon, and support Sri Lanka as we try to stabilise our economy and our nation.
“I appeal to the other friends of Sri Lanka present here today, to also explore the possibility of extending support and solidarity to my country at this very difficult time.
“A positive aspect of recent events in Sri Lanka has been the increased engagement of our youth in the nation’s politics.
“We have seen similar activism in other countries too, where the loss of confidence in prevailing systems has led to strong displays of opposition against governments.
“It is important to ensure that these systems undergo the reforms that are essential to their improvement so that future generations will benefit from better opportunities in education and employment, leading to an increase in their productivity.
“The grave difficulties facing Sri Lanka are an early indication of the long tail effects of the COVID19 pandemic, made worse by the ongoing conflict in Europe that may affect other vulnerable nations too.
“Supporting such vulnerable nations through these difficulties is essential for regional as well as global stability.
“It is therefore earnestly hoped that nations able to do so, lend a helping hand to these countries as they seek to overcome the very serious threats they face. An even more widespread problem that the world will face in future concerns food security.
“The shortages of food items and sharp increases in food prices likely to occur in the months ahead will place considerable strain on many countries.
“It is therefore essential that we pay attention to this crucial problem and prioritise agricultural production locally and improve our resilience in the face of this coming issue.
“Increased cooperation amongst nations will also be necessary to ensure that we overcome this issue.
“As we look to the future, it is no secret that even more widespread challenges caused by human induced climate changes lie ahead for the Asian region as well as the world.
“The adverse impacts of such climate change, including loss of biodiversity, water scarcity and pollution, degradation of air quality and ecosystems, will all contribute to significant challenges for many nations including in food security.
“Maritime security in Asia is another thorny issue that require serious policy attention. In addition to traditional security concerns involving the projection of naval power, many non-traditional issues including piracy, human trafficking, drug-smuggling, and illegal, unreported and unregulated fishing continue to pose challenges in this region.
“Sri Lanka has a great interest in the security of the Indian Ocean region, and the protection of the sea-lanes has established a strong relationship between Sri Lanka and dominant regional players including Japan.
“Sri Lanka has responsibility over protecting sea routes, maritime resources and combating maritime crime over a significant region of the Indian Ocean, and we look forward to partnering with the Asian community as we seek to expand our capacities in these areas in future.
“Another enduring regional concern has been civil unrest, conflicts, and communal violence. Sri Lanka too has been marred by sectarian tensions throughout its history. I am of the view that policymakers must come together to devise collaborative regional mechanisms on such issues.
“Exchanging expertise and experience to build capacity in the fields of peacebuilding and reconciliation is essential. So too is the empowerment of the underprivileged, because this is one of the root causes of unrest.
“In this context, I respectfully submit to this forum that the core objectives and functioning of some existing regional bodies are presently affected by conflicts of member countries on matters relating to economic, political, or strategic interests.
“It is my hope that member countries will be able to overcome such impasses and work together in the true spirit of Asia to fulfil the region’s priorities.
“In concluding, I once again thank Nikkei for having organised this conference, and the Government of Japan for hosting this event.
As Sri Lanka overcomes its present difficulties and starts rebuilding for tomorrow, we look forward to constructively participating in future such events too, for the betterment of Asia.”
BASL, Opposition reject 21-A draft
The Bar Association has rejected the 21st Amendment to the Constitution that has been presented by Justice Minister Dr. Wijeyadasa Rajapakse, PC, to the Cabinet recently.
The main Opposition Samagi Jana Balavegaya (SJB), too, has rejected the 21 A in its present form.
Addressing the media at the Opposition Leader’s Office in Colombo, SJB spokesperson Eran Wickremaratne explained why the SJB wouldn’t support the proposed law as it would further enhance the executive.
A spokesperson for the BASL told The Island that they pointed out serious shortcomings in the draft and the need to rectify them. According to him, the BASL, in letters dated May 23 explained their position to President Gotabaya Rajapaksa, Prime Minister Ranil Wickemesinghe and Justice Minister Dr. Rajapakse.
The JVP and TNA too have rejected the 21 Amendment in its present form.
The following is the text of the BASL letter addressed to the President, PM and the Justice Minister: “On the 23rd of April 2022, the Bar Council approved the “PROPOSALS OF THE BAR ASSOCIATION OF SRI LANKA (BASL) TO RESTORE POLITICAL AND ECONOMIC STABLITY IN THE COUNTRY”. In the 13-point proposal the BASL proposed the introduction of the 21st Amendment to the Constitution by repealing the provisions of the 20th Amendment and restoring the 19th Amendment, and the re-establishment of the Constitutional Council and the Independent Commissions which existed under the 19th Amendment whilst enhancing their financial independence, transparency, and accountability.
The BASL is concerned that whilst the 21st Amendment will restore the provisions of the previous 19th Amendment to the Constitution as regards the Constitutional Council and the Independent Commissions, there are several vital provisions which were found in the 19th Amendment which are not incorporated into the draft 21st Amendment.
The provisions of the 19th Amendment precluded the President from assigning to himself any subjects or functions. However, the 21st Amendment does not incorporate such a provision and as such the President will be able to continue to retain Ministries and assign to himself any subjects and functions and take over subjects and functions of any Minister. The BASL is of the view that the 21st Amendment must include a provision amending Article 44(2) of the Constitution removing the power of the President to retain Ministries and assigning to himself any subjects or functions. Such provision must be made operative as soon as the 21st Amendment is passed.
In addition, the BASL observes that the President’s powers to prorogue and dissolve Parliament are left intact, in contrast to the 19th Amendment to the Constitution where the President could dissolve Parliament only after four and a half years following a Parliamentary election. The BASL is of the view that the provisions in the 19th Amendment relating to dissolution of Parliament should be restored. In addition, the BASL recommends that the following matters which were contained in the BASL proposals be included in the 21st Amendment:
1. A provision for the members of the Monetary Board to be appointed with the approval of the Constitutional Council (in addition to the Governor of the Central Bank);
2. A provision for the appointments of the Secretaries to the Ministries, Governors of the Provinces, Ambassadors and Heads of Missions be done on the advice of the Prime Minister in consultation with the Cabinet of Ministers;
3. A provision to require Presidential Pardons to be done according to the recommendation by a body established by law, appointed by the President on the recommendation of the Constitutional Council;
4. A provision to enhance the financial independence, transparency, and accountability of the Independent Commissions.
The BASL further recommends that the number of members of the Constitutional Council who are not Members of Parliament be increased from 3 to 5 and conversely the number of Members of Parliament on the Constitutional Council be reduced from 7 to 5 as was found in the 17th Amendment to the Constitution. This is consistent with the position taken by the BASL in 2015 when the 19th Amendment was enacted.
The BASL calls on the Government to ensure the early enactment of the 21st Amendment to the Constitution, as it is a necessary step towards achieving stability in Sri Lanka.”
Plea for debt moratorium to rescue drowning SMEs and saving millions of jobs
Around 4.5 million Sri Lankans employed in the small and medium enterprises (SMEs) might lose their jobs in the coming months unless the government stepped in and assisted businesses, Chairman of Sri Lanka United National Businesses Alliance (SLUNBA), Tania Abeysundara told the media in Colombo on Wednesday.
She warned that a lot of SMEs might collapse in the next month unless the government arranged a debt moratorium.
“4.5 million people work in SMEs. When we asked the Central Bank Governor, he said that he can’t assure a debt moratorium. He was worried about the banking sector. I would like to ask the governor, wouldn’t the banking sector collapse if the SME’s can’t pay their loans,” Abeysundara said.
She said that Prime Minister Ranil Wickremesinghe had approved money printing to pay the salaries of government employees.
“When the government has no money to pay their employees, they can always print the money. What about us? Are we also to print money? Unless we receive a debt moratorium we will have to close our businesses,” she said.
Meanwhile, Treasurer of the SLUNBA, Lakmal Perera said that “once people lose their jobs, it is likely that they would come on to the roads and that will lead to a chaotic situation.
“We asked the government about this and they have no answer. There is no way that we can pay our loans with this contraction of the economy. We need an answer soon, when these people are on the roads the 225 MPs won’t be able to stop them,” he warned.
Vice chairman of the Association and President of the Vehicle Importers Association, Indika Sampath Merenchige also insisted that the government should talk to the business owners and give them a moratorium. If that did not happen, SMEs would be compelled to stop repaying loans.
“We give the government two weeks. We have employees that have been working with us for 10-15 years. They are a big part of how we have succeeded and survived. So, we can’t send them home. We have to somehow pay them. So, we have to stop paying loans,” Merenchige said.
Deputy Chairman of the SLUNBA, Susantha Liyanarachchi, who is also the Chairman of the National Construction Association of Sri Lanka (NCASL) said that there was a danger of a large number of garment factories leaving the country and as they couldn’t expect the cabinet that had been appointed to navigate the country out of the economic crisis.
“If garment factories leave, what will happen to foreign currency earnings?” he asked.
Governor of the Central Bank, Dr. Nandalal Weerasinghe said that the minimum economic activity would be experienced in the country in the next six to eight months.
“That means the economy will contract. We estimate that the economic contraction this year will be greater than any other time in post-independence Sri Lankan history. No one can bring down inflation below 30-40 percent in the next six months. People who are poor and vulnerable will be severely affected. Unless the government provides some support, the poor will find it hard to live,” he said.
Dr. Weerasinghe said that poverty levels would increase and when an economy contracted there would be a lot of unemployment, especially in the SME sector. (RK)
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