Island of Despair

MANY SRI LANKAN families fleeing hunger and extreme economic distress have landed on the southern Indian coast of Tamil Nadu following perilous and illegal boat journeys. Elsewhere in the world, this is typically a last-ditch effort by people escaping military invasions or civil unrest, the way we have seen Syrian refugees cling on to overcrowded dhows and small vessels to reach parts of Europe in what is often seen as a suicidal trip. In Lanka, there is no war at the moment, but there is a war-like situation with angry crowds hitting the road protesting gross shortage of everything from food items, essential provisions and fuel, with Covid upsetting its economy and tourism dollars drying up during the lockdown. Internal violence and perceptions about religious fissures also accentuated the crisis.

Writer Ajay Kamalakaran was in Jaffna, in north-eastern Sri Lanka, recently for a wedding. As a regular visitor to the island nation where he has close buddies and family friends with whom his family celebrates New Year, he was shocked to see armed soldiers at fuel stations this time around. “This economic crisis has affected people from every walk of society. You see fancy sedans and SUVs in queues for petrol and diesel, while middle class people wait in serpentine lines for cooking gas, and the poor, with large cans in hand, patiently bear the heat with the hope of getting some kerosene. Factory owners are frustrated with the daily-changing power-cut schedule as they often face a situation where workers sit idle,” Kamalakaran talks of his recent visit to the country where people are battling an abject poverty-like situation.

Of course, this isn’t the first time the people of India’s southern neighbour have been down on their luck and struggling to get back on their feet. The decades-long civil war starting from 1983 that ended with the decimation of the Tamil Tiger forces (LTTE) in 2009 amidst charges of war crimes and unprecedented horror is proof of the trauma that the nation had gone through.

Long-time President Mahinda Rajapaksa, who is now prime minister, had earned the credit for battering the Tamil Tigers, a feat that also made him a hero among the Sinhalese majority in the country. He also won applause worldwide for crushing a dreaded extremist organisation that was thought to be invincible. In the aftermath, Rajapaksa acquired a halo as a triumphant Sinhalese nationalist and went about what many analysts call vanity projects to turn his country into an economic powerhouse by borrowing heavily from China. Voices against him and his excesses during that period and before, including those from the media, were extinguished with extreme bias. The killing of journalist Lasantha Wickrematunge in January 2009 was seen as a warning to anyone who dared take on the new rulers of Sri Lanka who steered the nation during and after the war. The current president and younger brother of Mahinda Rajapaksa, Gotabaya Rajapaksa, who was the defence secretary, came under attack for trying to brush war crimes of their dispensation under the carpet.

Thirteen years later, a period that saw the Rajapaksas in power except for briefly, the country is struggling with what economists call the twin challenge of servicing massive debt as well as meeting domestic needs.

With queues for essential services getting longer, the government had to call in the army to replace the police forces at department stores and other delivery centres fearing public wrath

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Former IMF economist Sergi Lanau, who is now the deputy chief economist in the economic research department of The Institute of International Finance (IIF), a trade group for the global financial services industry, has been warning about the Sri Lankan economic crisis for a long time now. In an interview to Open on what exactly led to the unprecedented situation in Sri Lanka, he doesn’t want to speak about “vanity projects” launched by the Rajapaksas with Chinese assistance, but offers a stunning analysis. “Sri Lanka issued external bonds and borrowed from official lenders like China for years to finance current account deficits. These deficits arose from loose economic policies. While tourism revenue was high, investors thought Sri Lanka was a good credit risk. When tourism evaporated in the Covid crisis, the government ran out of financing options. At that point, the only way to avoid losing international reserves fast would have been higher interest rates and less public spending. The government decided to not tighten policies and hoped tourism would recover fast, but things didn’t go well.”

Raw data reveal the extent of the problem at hand. Sri Lanka’s public debt is estimated to have risen from 94 per cent in 2019 to 119 per cent of its GDP in 2021. The country, which relies hugely on others, imports many essential items, including petroleum, medicines, food, grains and so on. As it is plagued by inflation, the government doesn’t have the money to pay for imports, resulting in a shortage of material for domestic consumption. Scarcity of the foreign currency reflects in the rapid decline of foreign direct investment into Sri Lanka to $548 million in 2020 compared with $793 million in 2019 and $1.6 billion in 2018. In fact, the situation is so bad that the government had to cancel examinations for school students due to scarcity of printing paper, which is also imported. A Reuters report said that the government also had to suspend operations at its only fuel refinery because it ran out of crude oil stocks.

Inflation is another scourge facing the country. Food inflation has soared to 25.7 per cent with the prices of essentials, including milk, skyrocketing. With queues for essential services getting longer, the government had to call in the army to replace the police forces at department stores and other delivery centres fearing public wrath.

Kamalakaran, meanwhile, speaks about the resilience of the Sri Lankan commonfolk. “Although there is growing resentment against the government, the average Sri Lankan has shown saint-like patience in dealing with the situation.” He however warns, “But with the Tamil and Sinhalese New Year coming up in less than a month, we are likely to see things boil over unless the situation changes dramatically.”

This economic meltdown in Sri Lanka is seen as the worst since the country’s financial crisis of 1948. As regards the consequences, Lanau notes, “Sri Lanka is in a financial crisis that will likely lead to recession and sharp compression of imports and domestic demand.” He also offers some solutions, “At this point, the only viable option is negotiating a package of adjustment policies with official lenders in exchange for loans that will lessen the impact of the crisis. Without any external support, importing enough essential goods will be very hard.”

The rest of the world has a lot to learn from the Sri Lankan experience. Lanau points out that many countries have found themselves in similar situations in the past. “For example, Argentina also borrowed heavily in dollars in 2016-18 but did not reduce fiscal deficits and inflation fast enough to sustain market confidence. Turkey has faced similar problems in the last few years.”

He goes on, “The main lesson from all these cases is that trying to achieve high economic growth through heavy external borrowing is dangerous. It sometimes works very well but when it fails, the resulting crisis is deep. With a credible plan to adjust economic policies and international support, Sri Lanka will be able to restore stability and have another opportunity to grow sustainably.”

But for the time being, the island is in dire straits.

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