From Sri Lanka, with caution
Sri Lanka is facing one of the worst economic crises in its history. Large foreign debt, low foreign exchange reserves, high inflation, shortage of food, fuel, medicine, and other essential items, and long hours of load shedding have made citizens' lives miserable. The country has been struggling to repay the maturing debts and finance the current account deficit that is growing rapidly. Due to a lack of foreign currency, the country has struggled to import and pay for essential commodities. The government even had to postpone school examinations due to a shortage of paper. Hospitals are also running out of medicines. The Sri Lankan people are becoming increasingly frustrated and have now taken to the streets, which has eroded social order and created major economic and political crises.
What led Sri Lanka to this devastating crisis? What went wrong? Sri Lanka was one of the fastest-growing economies in South Asia and was ahead of many regional countries as per multiple social indicators. So, to understand how Sri Lanka reached such a devastating situation, we need to look at the economic policies taken by the present and past governments of the country.
The ongoing crisis is the result of policies made by past governments, especially of the Mahinda Rajapaksa regime between 2005 and 2015 and, since 2019 onwards, the reign of another Rajapaksa family member, Gotabaya Rajapaksa. During the period of Mahinda Rajapaksa, the government took on a couple of ambitious projects, such as Mattala Rajapaksa International Airport, Hambantota Port, and the Colombo Port City Development project, depending on foreign loans. However, most of these projects failed to attract adequate private investment or generate business interest, and thus incurred losses. Mattala Rajapaksa International Airport is mostly empty, not even utilising five percent of its capacity. Because of low returns, the government's capacity to repay the loan has gone down and it was compelled to obtain more loans to cover the losses, increasing the debt burden further. At present, Sri Lanka's debt burden has reached to about 75 percent of its GDP. Eventually, the government leased out the Hambantota Port to a Chinese company for 99 years, so as to generate adequate return for the repayment of debts.
President Gotabaya Rajapaksa came to power in 2019, promising rapid economic growth and changes to the structure of the economy. Immediately after his assumption of power, the Covid pandemic started. Covid affected Sri Lanka's tourism sector badly, which is an important foreign exchange earning sector of the country. The tourism revenue fell sharply from USD 7.5 billion in 2019 to USD 2.8 billion in 2020. With the pandemic and subsequent lockdowns, working people, particularly people working in informal and service sectors, suffered a lot. While many workers from tourism and other informal sectors lost their jobs and moved to agriculture for subsistence, the Sri Lankan government declared to become 100 percent organic and imposed a complete ban on the import of inorganic fertilisers. The ban on inorganic fertilisers and synthetic pesticides, without providing alternative sources of organic fertilisers and pesticides, hit Sri Lankan agriculture very badly. The production of rice (which is a staple food in Sri Lanka), tea (which is an important foreign exchange earner) and of other agricultural products were affected very badly. The increasing food insecurity further worsened the already dwindling economy. It is reported in some studies that production of some crops shrunk by as much as 30 percent. Being frustrated with the situation, people left the lands uncultivated. As much as one third of the agricultural land is reported to have remained uncultivated.
All this put poor farmers at severe risk of food insecurity and put returnee migrants' employment in a desperate situation. Due to shortage of food production, Sri Lanka has to import food from Myanmar, India and China. Although the intention of the fertiliser and pesticides ban was to reduce the import cost, it eventually created further pressure on foreign exchange reserves as food import increased and tea export reduced considerably.
Many experts had warned the government that such a move could lead to adverse impact on food security. But ignoring the experts' advice, the government moved towards its "100 percent organic" goal. Despite the pandemic and immense suffering of urban informal workers, the government implemented this manifesto. In 2019, the government took another popular move, cutting down income and value-added tax across the board. Although the intention was to stimulate the economy, tax cuts during a pandemic, when public spending for social welfare increased considerably, had an adverse impact on government revenue and further increased fiscal deficits, undermining debt management further.
There was little substantive debate and discussion on these public policies in the public sphere. Instead of debate and consultation, Gotabaya, following his brother Mahinda Rajapaksa, has been trying to consolidate power and increase the family's influence in the government. Immediately after becoming president, he made the 20th amendment in the Constitution to increase power and authority of the president. Besides increasing his own authority, Gotabaya Rajapaksa made an attempt to bring more members from the Rajapaksa family to the cabinet and in important positions in the government. Five members of the Rajapaksa family are serving in Gotabaya's cabinet, including the president and the prime minister. There is little room for disagreement as family decisions frequently become government decisions.
A multiparty democratic system is critically important as a country's policy decisions should be based on its political system. In an authoritarian state, for example, decisions will be made at the top. But in a democratic political system, power is allocated at various levels and decisions are made in a participatory manner, involving all important stakeholders, and weighing all possible options and implications.
The Sri Lankan economic crisis offers some important lessons for Bangladesh and other developing countries. First, economics and politics are interrelated and influence each other. As suggested by Nobel Laureate and economist Milton Friedman, political freedom is fundamental for economic freedom and in choosing economic policies. Concentration of power in a single family is risky for a country. Decision-making power should be distributed at different levels and the process should be made transparent and democratic to ensure all perspectives are considered.
Second, resources are scarce and have alternative uses. Scarce resources should be invested in such a way that maximum benefits are generated for the society in both the short- and long-term. Making investments that are not economically viable can weaken the economy and increase the risk of eroding social and political stability, as has happened in Sri Lanka. Moreover, overdependence on foreign loans can make a country vulnerable.
Third, public policy decisions and choices should be made based on thorough analysis involving all stakeholders, taking into account expert opinions and by examining scientific merits and demerits. No country can go for 100 percent organic in one year, as it is a lengthy process that needs a long-term plan in preparing farmers and consumers and in making alternative arrangements for organic fertilisers and pesticides.
Golam Rasul is a professor at the Department of Economics, International University of Business Agriculture and Technology (IUBAT).