Sri Lanka is facing one of the worst economic crises in its history. Large foreign debt, low foreign exchange reserve, high inflation, shortage of food, fuel, medicine, and other essential items and long hours of load shedding made citizens' life 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. Government even has to postpone school examination due to shortage of paper. Hospitals are also running out of medicines. Extreme hardship and misery affected people very badly. Sri Lankan people 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 in this devastating crisis, what went wrong? Sri Lanka was the fast-growing economy in South Asia and ahead of many South Asian countries in many social indicators. To understand how Sri Lanka reached to 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 consecutive governments, especially of the Mahinda Rajapaksa regime between 2005 and 2015 and since 2019 onwards when another Rajapaksa family member Gotabaya Rajapaksa came into power. During the period of Mahinda Rajapaksa, the government took a couple of ambitious projects with foreign loan, 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 used 5% of its capacity. It has been a white elephant. Because of low return, the government's capacity to repay the loan has gone down and it is compelled to obtain more loans to cover the losses that has increased the debt burden further. At present, Sri Lankan debt burden reached over 100% of GDP. Eventually, the government leased out the Hambantota Port to a Chinese Company for 99 years so as to generate adequate return for repayment of debt.
President Gotabaya Rajapaksa came to power in 2019 promising rapid economic growth and to change the structure of the economy. Immediately after his assumption of the power, COVID-19 pandemic started. COVID-19 affected Sri Lanka's tourism sector badly, like in many other countries, which 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 sector lost their job and was moving to agriculture for subsistence and managing the crisis, the Sri Lankan government declared to become 100% organic and imposed a complete ban on the import of inorganic fertilizers. The ban on inorganic fertilizer and synthetic pesticides, without providing alternatives sources of organic fertilizers and pesticides hit the Sri Lankan agriculture very badly. The production of rice, which is staple food in Sri Lanka and tea, which is an important foreign exchange earner affected very badly along with other agricultural products, and food security that further deepened the already dwindling economy. It is reported in some studies that production of some crops shrunk by as much as 30%. Being frustrated with the situation, people left the land uncultivated. It is reported that as much as one third of the agricultural land remained uncultivated. All these 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 fertilizer and pesticides ban was to reduce the import cost, but eventually it created further pressure on foreign exchange reserve as food import has increased and tea export reduced considerably due to reduction in production.
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 to 100% organic. During his 2019 election campaign, the Sri Lankan President Gotabaya Rajapaksa had vowed to transform the country's agriculture sector into 100% organic. Despite 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 tax across the board. Although, intention was to stimulate economy, tax cut in a time of pandemic, when public spending for social welfare increased considerably, has 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 in the government. Immediately after becoming President, he made 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 in the Cabinet and in important positions in the government. Five members of the Rajapaksa's family is serving in the Gotabaya's cabinet including the President and the Prime Minister. There is little room for disagreement in such a setting that the family decisions frequently become the government decisions. A multiparty democratic system is critically important for as a country's policy decisions are based on its political system. In an authoritarian country, for example, decisions will be 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.
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 the Nobel Laureate 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 they have alternative uses. Scarce resources should be invested in such a way that generates maximum benefits to the society both 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 that happened in Sri Lanka right now. Moreover, overdependence on foreign loan can make the 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% 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 fertilizers and pesticides. Because of 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).
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