Maldives and Sri Lanka – through the looking glass
With the economic fortunes of the two nations tied to the nations' election cycles, politics as usual may catastrophically derail both economies.
The Lotus Tower
There are times when the simplest phrase, when given proper context, could inspire drastic change or motivation. One is reminded of a quote by Eleanor Roosevelt; “Learn from the mistakes of others. You can't live long enough to make them all yourself.”
The world has been, for the better part of the past decade or so, growing and increasing in connectivity at an exponential rate, creating macro-economies that are so interconnected that a slip in one industry ripples across the board. This applies for national economies as well, where a hit or boom in one country may have an effect on multiple nations across the map, borders notwithstanding. Some of the negative effects come directly from global disasters, like the COVID-19 pandemic, while others can be sourced back to unintelligent fiscal decisions at key points in history.
Our neighbouring country of Sri Lanka has been facing difficulties for a few years already. The pandemic hit the 10 percent GDP dependency on tourism horribly, drying up the foreign reserves of the country from USD7.5 billion in 2019 to around USD2.8 billion in July this year. This had rung alarm bells and forced the government to redouble their efforts to meet even the basic food requirements, as most of the staple food is noted, similar to the Maldives, to be imported as well.
Now, within the last few weeks, the government has also announced an economic emergency due to food shortages. As a nation of over 21 million people faces a humanitarian crisis, one that could turn horrific if a solution can’t be found, Sri Lanka could end up with uncontrollable poverty levels. The Great Depression may repeat itself in Sri Lanka dismantling her fiscal systems, and an economy on its last legs. This dire situation, however, had humble, and quite well-meaning origins.
Speculators largely trace the issue back to the ban on chemical fertilisers by the Rajapkse Administration upon their ascent to power in 2019. This caused a huge decrease in the agricultural output of the country, leading to an increased dependance on imported food. Further imports, coupled with the lack of incoming foreign cash in the shape of a halted tourism industry, aggravated the drop in forex reserves.
Furthermore, the nation had been in debt even before the incumbent government came into power, yet changes to the fiscal policy seems to have made matters worse. According to the Asia & the Pacific Policy Society website, “Sri Lanka has been facing a borrowing crisis. By 25 July, Sri Lanka had managed to repay a billion dollar bond in foreign currency debt, but two more payments – two bonds of USD1.5 billion and USD1.25 billion – of debt are due in 2022 and 2023.
The first payment was financed through foreign exchange reserves, and as such the government has introduced capital controls, limiting outgoing of foreign currency. This has prompted calls for International Monetary Fund’s (IMF) assistance to solve the economic crisis. The proposal was denied by Sri Lanka, as it has been pursuing its own solution – securing financial assistance via foreign exchange swaps with China, South Korea, Bangladesh, and India to bolster its reserves and finance imports.
The forex reserve’s depletion rippled across the entire economy, and to curb the outflow the government imposed import restrictions; on motor vehicles, agricultural products, and consumer durables. Furthermore, the central bank financed 38.7 percent of the deficit in the first four months of of 2021, printing the money to meet repayments. In addition to the high debt burden, financing civil servants have been high, even with the lockdowns and reduced productivity.
Inflation was the inevitable fiscal marker, hiking up food prices and weakening the Sri Lankan rupee against the dollar by 20 percent since 2019. Both these points further weakened the ability of repaying debt, aggravated by global increases in food prices, the year-on-year inflation increased to six percent in August of this year combined with a fuel price hike in June, and then even an increase in cooking gas prices. The credit rating was, of course, downgraded to CCC by Fitch, a fate narrowly avoided by the Maldives, cementing the bleakness of the future for the Sri Lankan economy.
Sri Lanka is choosing to secure finances through neighbouring countries as well as China with the government primarily relying on China for additional support, as an integral part of the ambitious Belt and Road Initiative. For now, China seems willing to lend, but in the longer term, things are less clear. Since India seems unwilling to do the same, the strategic incentive for China to lend to Sri Lanka may dwindle as time goes on. In the Maldives, the situation is the polar opposite; with India stepping up to lend millions while China is ostensibly sidelined and further demotivated by the Solih Administration in playing a part in Maldivian infrastructure financing.
While the World Bank shows pathways of promising results and a general hope for the economy to bounce back, it all boils down to whether the Rajapakse Administration chooses caution over ambitious attempts. The Asia & the Pacific Policy Society does list out in their article key suggestions that are worth mentioning, in addition to following those by the World Bank:
- Sri Lanka can take include removing bans on fertilisers, as the country isn’t fit for organic-based agricultural production. This could help ease the soaring inflation and reduce food prices.
- The government should turn to the IMF to uphold its foreign exchange reserves, while also collaborating with international economic experts to make a blueprint to tackle the economic crisis amidst the pandemic – similar to the neighbouring Indian state of Tamil Nadu.
- A point that is vital in mentioning is the haphazard response to the pandemic by the government. Vaccine rollouts are slow and lockdowns are long, leaving the people at an increased danger of suffering more from the viral pandemic while daily earners are left destitute, forcing them to stockpile and inadvertently affecting the economy, both in the short and long run.
Back to the crux of the matter; a lot of what the Sri Lankan government has been doing, with the exception of the changes to agricultural policy, can be found reflected in how the Maldivian government has been planning their fiscal decisions during this particular tenure. Trying to repay debt by accumulating even more debt, printing notes backed by weak promises to invigorate the economy, and the distinct lack of cutting expenditure, shows a pathway that is troubling experts.
With a modicum of arrogance, the Solih Administration depends heavily on the resurge of the tourism industry, which, while understandable, puts ‘all eggs in one basket’, so to speak. The tourism industry is one of the most volatile sources of income, and the pandemic has shown exactly how the world come to a standstill at a moment’s notice.
The lack of attention to investing in green energy, of sustainable micro-economies, cutting exorbitant expenditure wasted on political appeasement as well as ‘quick-fixes’, and then resolving this with further stresses on the pockets and wallets of the citizenry is the undercurrent of the current government’s attitude. The exceedingly, embarrassingly heavy dependence on just one country to provide the bulk of infrastructure development finance further nails the coffin of economic crash, and disaster, waiting to happen.
One can only hope that whoever takes the helm next, or stays at it, can see the signs and listen to the harbingers. The utter ruthlessness in making risky financial decisions that would have repercussions five, or even fifty, years down the line only goes to show how the fragile, imperfect politics of the Maldives is based on the five years cycle of power, rather than the visionary leadership that a every democratic nation deserves.
