The Sri Lankan political mismanagement

While the world observes the political strife between the people and the government of Sri Lanka, it is important to take a look at the avoidable decisions that led to this catastrophe.

Source - Dinuka Liyanawatte via Reuters

Source - Dinuka Liyanawatte via Reuters

Behind every country’s downfall, is usually one of two things; foreign aggression by other countries seeking to undermine and then control a nation and its people, or blatant mismanagement, corruption, and overall failure of a nation’s leadership. In the case of Sri Lanka, reports going back ten years detail the latter form of downfall, and MFR recounts what added up to create the current situation, from the side of politicians.

To put a fine point on the topic, it has been the result of years of policy mismanagement, starting from the end of 2010. This includes the government taking in multiple foreign loans for infrastructure development with little to no consideration of consequences. In simpler terms, it's the long term ratio of greater imports than exports, ergo greater expenses than earnings, and a trade and budget deficit. Recipes for disaster, as can be seen by the current debt of a whopping 110% more than the country’s GDP.

Nearly all bad policy decisions tie in with campaign promises made in a ditch effort to win. Gotabaya Rajapaksa rode on the promise of deep tax cuts, a very attractive manifesto pledge for the people, yet the execution of this cut had little to no consideration of how it would be done, or how the government would circumvent the losses incurred by the cut. As a result, many investors pulled out, creating a volatile environment for investment, and making it all the more difficult for the government to reach other foreign markets.

Another move that could be lauded as revolutionary in the short run, was his banning of chemical fertilisers in the name of good health. While chemical fertilisers are a blanket term for synthesised fertilisers and other growth enhancements for crops, their detrimental effect on health is not exactly shared equally across the board, which means some such fertilisers do not cause the harms and dangers as being touted by the unaware. This move plummeted crop production, by 50% in white rice for one, a very surprising turn of events for a nation known for its vast and expansive fields. This forced Sri Lankans to begin importing white rice just to make up for the drop.

Of course, it was not only rice but other crops were affected too, and the agricultural output that made up 8% of the country’s GDP until then, dropped steeply.

Guided by the welfare-development approach of the Sinhalese Buddhist community that backed the Rajapaksa government, the government ditched the pro-market approach and banned the import of luxury goods. This was a source of income from foreign entrepreneurs who were investing in these products, and this had also generated income from the tourism sector as well, both income streams were then quickly dried up. By prioritising infrastructural growth in a dangerously tunnel-vision way, the damage was done to the market before people even had time to react.

The next move, one that prompts a déjà vu in Maldivians, is the government’s insistence on diverting all political discourse toward India over China. This was something that has been a common occurrence with Rajapaksa governments, and, like the Maldives, the approach was very militaristic as well.

Using bilateral debts to fund infrastructure and the military was the road they took. And, as has been the case with other nations around the world who had made such decisions, the debt owed to China was being largely ignored, slipping the country deeper and deeper into the self-imposed debt trap with China. While China has openly clarified they do not intend to take over their funded infrastructure, other reasons forced this downfall into debt as well, in mid-2019.

With the tourism sector making up 13% of the national GDP, the fallout of the Easter bombings was incredulous. Even before the nation could recover from these horrific attacks, the Covid-19 pandemic stampeded across the world as well. Closing the borders was the only option, halting the income from tourism entirely, which was their major source of foreign currency. It was so bad that in 2020, Sri Lanka managed to take in only 173,000 tourists, an almost colossal cut from the 2.3 million count of 2018-2019. A revenue of USD7.5 billion dried up within months. 

Furthermore, the pandemic made it unaffordable for Sri Lankans living abroad as well, further demoralising the people. Additionally, just to reiterate, all of this took place since the deep tax cut in 2019, a series of unfortunate events as consequences of decisions that begs reconsideration.

The Maldives is a prime example of how a nation could react in these situations to make the best of whatever options are available. Sri Lanka, however, reacted in a slightly similar way yet the results vary. The government reached out to neighbouring countries for financial aid, where Bangladesh lent USD200 million in June 2021 for essentials. In February 2022, India lent USD500 million to pay for oil. Yet, with both essentials, food, oil, and anything else that Sri Lanka depended on being in short supply for so long, the damage was already done and the people were restless.

In March 2022 President Gotabaya devalued the Sri Lanka currency in hopes of encouraging remittance. While the intended goal was not achieved, the 32% drop in value brought about an inflation rate of 30.2% as production rates decreased and people were forced to hoard whatever essential goods they could afford. What followed, is what has been happening in Sri Lanka for the past three months, and, as they say, the rest is history.

To summarise, soaring inflation, huge piles of unpaid debt, bleeding and drying up foreign reserves, and tanking of the currency, all led the nation and its people to this point, the worst economic crisis of the nation from the time of their independence. With a debt of USD8.2 billion already due in 2022, Colombo has already announced its intention to default. The government has finally reached out for IMF assistance, which, of course, will ultimately come at a price as well.

The options they have before them to manage this debt include debt restructuring, taking smaller loans with a lower interest rate to pay off the bigger debts, and reversing the policies that had hamstrung the people and the economy. Of course, with the national unrest, the people have shown they would not be happy as long as power rests upon the laps of the Rajapaksa family, so this might be an obvious starting point for recovery as well. 

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