Lankan crisis: lessons for Bangladesh, other developing countries

Island nation Sri Lanka is sinking in the worst economic crisis in its history. Ballooning foreign debt, low foreign-exchange reserves, high inflation, shortage of food, fuel, medicine, and other essential items and long hours of loadshedding made citizens' life a misery, without a ray of hope for a bailout thus far.

The country has been struggling to repay the maturing debts and finance the current-account deficit that is getting bloated rapidly. For lack of foreign currency, Lanka struggles to import and pay for essential commodities. The government even has to postpone school examinations due to shortage of paper. Hospitals are running out of medicines.

Extreme hardship and misery affected people very badly. The Lankans are becoming increasingly frustrated, and they are now on the street, which has eroded social order and created huge economic and political crisis.

Question arises as to what led Sri Lanka into this devastating crisis, what really went wrong. Sri Lanka was a fast-growing economy in South Asia,  ahead of many South Asian countries in many social indicators. To understand how Sri Lanka reached such a devastating situation we need to look at the country's economic policies taken by the present and past governments. The ongoing crisis is the result of the policies made by the past governments, especially by the Mahinda Rajapaksa regime between 2005 and 2015 and since 2019 onwards when another Rajapaksa family member, Gotabaya Rajapaksa, came to power. During the period of Mahinda  Rajapaksa, the government took a number of ambitious projects with foreign loans, such as Mattala Rajapaksa International Airport, Hambantota Port, and the Colombo Port City Development project.

However, most of these projects failed to attract adequate private investment, generate business interest, and incurred losses. Mattala Rajapaksa International Airport is mostly empty, not even 5 per cent of its capacity is used. It has veritably become a white elephant. Because of low returns, the government's capacity to repay the loan has gone down and it is compelled to obtain more loans to cover the losses, which has increased the debt burden further.

At present, Sri Lankan debt burden reached over 100 per cent of gross domestic product (GDP). Eventually, the government leased out the Hambantota Port to a Chinese company for 99 years so as to generate adequate returns for repayment of debts.

President Gotabaya Rajapaksa came to power in 2019 promising rapid economic growth and to change the structure of the economy. But his lucky stars didn't' smile on him. Immediately after his assumption of power, the Covid-19 pandemic started. The Covid-19 affected Sri Lanka's tourism sector badly, like in many other countries. Tourism is an important foreign-exchange earning sector of the country. The tourism revenues fell sharply from $7.5 billion in 2019 to $2.8 billion in 2020. With the pandemic and the 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 were moving to agriculture for subsistence, the Sri Lankan government declared a plan to become cent-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  agriculture badly.  The production of rice, which is the staple food in Sri Lanka, and tea, which is an important foreign exchange earner, were affected very badly along with other agricultural products, and food security that further deepened the already squeezing economy.

It is reported in some studies that production of some crops shrank by as much as 30 per cent. Getting frustrated over the penury, people left the land uncultivated. It is reported that as much as a third of the agricultural land remained uncultivated.   All this put poor farmers at severe risk of food insecurity and returnee migrants' work 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 fertiliser and pesticides ban was to reduce the import cost, but eventually it backfired, creating further pressure on foreign exchange reserves as food import has increased and tea export decreased considerably due to reduction in production.

Many experts had warned the government that such a move could cast adverse impact on food security. But ignoring the experts' advice, the government moved to be 100 per cent organic. During his 2019 election campaign, the Sri Lankan President Gotabaya Rajapaksa had vowed to transform the country's agriculture sector into 100 per cent organic. Despite the invasion by the Covid-19 pandemic and huge suffering of the urban informal workers, the government implemented the election manifesto.

In 2019, the government took another popular move: cutting income-and value-added taxes across the board. Although the intention was to stimulate the economy, tax cut at a time of pandemic, when public spending for social welfare increased considerably, had a huge adverse impact on government revenue and increased fiscal deficit further that undermined the debt management further.

There was little substantive debate and discussion on these public policies in public sphere. Instead of debate and consultation, the Gotabaya government, following his brother Mahinda Rajapaksa, has been trying to consolidate the power and increase the family influence on government. Immediately after becoming President, he made 20th amendment to 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 in the Cabinet and in important positions in the government. Five members of Rajapaksa's family are serving in the Gotabaya Cabinet, including the President and the Prime Minister.

There is little room for disagreement in such a setting that the family decisions frequently become  government decisions. A multiparty democratic system is critically important as a  country's policy decisions are based on its political system. In an authoritarian country, for example, decisions are made from the top. In a democratic political system, on the other hand, 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 woes offer some important lessons for Bangladesh and other developing countries. First, economics and politics are interrelated and influence each other. As suggested by Nobel-laureate economist Milton Friedman, political freedom is fundamental for economic freedom and in choosing economic policies. Concentration of power into 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 that all perspectives are considered.

 Second, resources are scarce, and they have alternative uses. Scarce resources should be invested in such a way that generates maximum benefits to  society, both short- and long-term ones. Making investments that are not economically viable can weaken the economy and increase the risk of eroding social and political stability as happened in Sri Lanka right now. 

Moreover, overdependence on foreign loan can make a country vulnerable.

Third, public policy decisions and choices should be made based on thorough analysis involving all stakeholders, taking into account the expert opinion, and examining scientific merits and demerits. No country can go for 100 per cent organic in a year, as it is a long process that needs a long-term plan in preparing farmers and consumers and in making alternative arrangements for organic fertilisers and pesticides. Proper analysis and care should be taken when selecting public sector projects and making investment decisions.

Dr. Golam Rasul is a professor, Department of Economics, at the International University of Business Agriculture and Technology (IUBAT) and former Chief Economist at the International Centre for Integrated Mountain Development (ICIMOD).
[email protected]