Sri Lankan Economy Heading Towards A Dangerous Phase

By Ameer Ali –

Sri Lanka is moving into an uncharted territory and a dangerous one with negative economic growth and critical shortages in consumer essentials. Economic crisis has now turned into humanitarian crisis and unless supply shortages are eased and consumer queues are shortened the situation may soon develop into a law-and-order crisis. The nation is confronting the effects of a double whammy. A self-inflicted catastrophe at home is coinciding with adverse market reaction arising from anti-inflationary measures adopted by industrial economies. It is going to be a nightmare to say the least for a reshuffled team of managers headed by a stopgap Prime Minister, who has to work with an unpopular but autocratic president Gotabaya Rajapaksa whose erratic policies brought catastrophe in the first place. Working relations between the two leaders are reported to have soured as the tussle over the tenure of CGSL’s Governor demonstrates.

Supply disruptions and slowdown in economic activities caused by the war in Ukraine and Covid pandemic respectively had allowed the evil of inflation to raise its ugly head in the industrialized world and the fight against inflation has taken the usual route of raising interest rates. US raised it by 0.75% for the first time since 1994, Australia did the same, UK raised it by 1.75% and EU is contemplating on a rise of 50 basis points in days to come. These increases will have a flow on effect on commodity prices, and for an import dependent economy like Sri Lanka it would mean increase in import prices and further depreciation of the rupee culminating in steeper increase in cost of living. That would make life excruciatingly painful to a population that is already struggling to survive with shortages in food, fuel, medicine and other necessities. RW’s warning of things to get worse before getting better is going to be realized with unparallel severity.

The eagerly expected IMF stabilization package with debt restructuring, the details of which are yet to be drawn out, would take at least months if not a year to come into effect. Even then, unless that package comes with generous provisions for immediate relief to low-income earners, the poor and needy, life is not going to be comfortable to the majority of people. IMF’s remedy works at best in the long run and is not helpful to solve the immediate problems facing the people. Bridging funds from the World Bank and the Asian Development Bank must be expedited before IMF reforms come into operation.

Ranil Wickremesinge and the CBSL chief have already introduced certain fiscal and monetary measures along the lines acceptable to IMF advisors. These measures, although are necessary to achieve macroeconomic stability, themselves would add to the economic pain of consumers considerably. These reforms are not going to reduce supply shortages that are crippling households at the moment. Therefore, over the next twelve months at least, the country desperately needs direct humanitarian assistance by way of food, fuel, medicine and other essentials from anywhere in the world. Time has come to think outside the box.

Without such assistance, according to Jens Laerke, a spokesperson for UN office for Coordination of Humanitarian Affairs (OCHA), Sri Lanka would be in “a full-blown humanitarian emergency”. What a turn of fortunes or misfortunes to an island that never faced such dire situation in its recorded history. The irony is that the economic managers who were immediately responsible for this calamity are still in power and calling the shots.

So far only India and to a lesser extent China have come forward to lend a hand. The reason for their readiness to help is more than altruism and falls into the realm of geopolitics. Japan too has promised to aid and Australia has decided to advance $50 million to emergency food program. However, apart from a few, assistance is not forthcoming that readily and generously from others, which makes one to think whether Sri Lanka’s foreign policy is set on the right track. With the fuel crisis disrupting the normal functioning of virtually every sector of the economy, one is driven to wonder what would have been the situation had Sri Lanka maintained its extremely friendly relations with the OAPEC (Organization of Arab Petroleum Exporting Countries) nations? Sometime back, when there was a similar crisis during JR’s presidency, he at once dispatched his Foreign Minister Hameed to Libya, and Gadhafi did not send his visitor back empty handed. Before JR, when there was a foreign exchange crisis during Sirimavo’s Leftist Coalition Government, it was her Minister of Education Mahmud who was sent to the Arab Middle East to seek assistance, which helped to ease that crisis temporarily. Even today, it is the Arab Middle East that is providing employment to Sri Lanka’s surplus labour and it is the hard-earned dollars from that labour that replenish the treasury’s coffer, at least to a limited extent. Why then the new economic managers are not thinking of a Muslim delegation to the Middle East at this time of fuel shortage? To be honest, the current Minister of Foreign Affairs is not the right person to be sent to that part of the world, not because that he is not a Muslim but because that his lack of sensitivity and compliance with injustices done to the local Muslim community under GR’s presidency didn’t go well with the Muslim world. At least OIC’s resolution against Sri Lanka on the eve of UNHRC’s meeting in Geneva in 2020 should have alerted the government that fences have to be mended with the Arab world. This is not to rekindle the past in the parochial interest of Muslims or Islam, but to draw attention during a time of emergency to the cultural nuances of that region, which, if understood rightly and handled wisely, could bring in immense benefits to the country. The fuel crisis provides a good opportunity to rethink about Sri Lanka’s relations with Arab Middle East. There is an old Tamil lyric: aadukira maattai aadi karakkanum, paadukira maattai paadi karakkanum (one should milk the dancing g cow with dance and singing cow with song).

Rajapaksa regime’s distancing from the Non-Aligned Movement and leaning more towards China at the expense of India, the West and others is proving to be costly at present. India is no doubt getting closer, because it has ulterior motives. China also will continue to help to outbid India. Yet, Sri Lanka’s foreign policy regime needs a new setting. During the last three years in particular, considerable damage had been done to Arab-Lanka relations. It needs serious reparation. That requires a team of highly qualified and professional diplomats, possibly with fluency in the language of the area to which they are posted to. How many foreign language speaking diplomats, apart from English, does the country have at present? The entire foreign policy department needs an overhaul.

This is not the time to mix politics or ideology with economics. More immediately, peoples’ and particularly children’s lives are in jeopardy. According to a UNICEF spokesperson, Sri Lanka is second highest in child malnutrition in South Asia. These children are the country’s future asset. If the new managers fail to generate enough humanitarian aid and ease the shortages, the country is destined to become chaotic and anarchical. There is a limit to peoples’ endurance. Already one hears of the army shooting in the air in Mullaitivu to disburse a Tamil crowd waiting to get some fuel? Why the army in the north while the police take charge in the south? Why is this discrimination? Is there something sinister and diabolical brewing behind the scene to misrepresent the crisis and turn it into a communal problem?

Sometime back GR promised UN Secretary General in New York that he would meet members of Tamil diaspora to discuss about Tamil issues. That never happened. Recently, a TNA parliamentarian has expressed his disappointment from Switzerland that Sri Lankan government is not willing to seek economic or financial assistance from Tamil diaspora at a time when the country needs assistance from any benefactor without strings attached. Why is this parochialism on the part of rulers?

The 14th Governor of CBSL, Dr. Indrajit Coomaraswamy, in a recent panel discussion organized by the bank had summarized the origins of the current catastrophe and expressed confidence in the success of IMF’s structural reforms. He had pinpointed a bitter truth that excess demand created by governments had cause a drain on treasury’s coffer. That demand was generated by plans to build and maintain white elephants in the name of economic development – a fact the Governor diplomatically avoided mentioning. Rajapaksa regime had been notorious for this wastage. Even now what on earth is the use of maintaining an army of 300,000 that consumes nearly 50 percent of budget expenditure salaries? People are paying the price for this unwanted profligacy by foregoing their minimum comfort. IMF structural reforms would take time to steady the sinking ship. The immediate worry is to bring relief to the daily suffering of households. This why we need to think outside the box.

*Dr. Ameer Ali, Murdoch Business School, Murdoch University, Western Australia

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