Sri Lanka is experiencing an economic, political and strategic crisis it has never had before. While major investor China has refused to consider loan moratoriums on its large projects in Sri Lanka, the international financial institutions like the IMF and neighbour India, have stepped in to help. The situation is fragile – but a creative solution and determined national interest can put the island nation on the right path.
Rajiv Bhatia, Gateway House’s Distinguished Fellow for Foreign Policy Studies, has a conversation with economist Ganeshan Wignaraja, Senior Fellow, Institute of South Asian Studies, National University of Singapore, on how Sri Lanka came to the current condition, and what needs to be done to return it to stability and growth. This Q & A is an excerpt from the webinar From crisis towards recovery : Takeaways from Sri-Lanka hosted by Gateway House and Geopolitical Cartographer on June 29.
Ambassador Rajiv Bhatia (RB): A fatal mix of populism, a bit of authoritarianism and also perhaps, a considerable amount of political corruption creates a fertile climate for the kinds of economic challenges Sri Lanka is facing today.
Dr. Ganeshan Wignaraja (GW): During his election campaign in 2019, Gotabya Rajapaksa talked about vistas of prosperity and splendour and enunciated repeatedly that the per capita income will rise to US $ 6,500 by 2025. However, his administration took a Sri Lankan economy that was at the cusp of upper middle-class income status (above US$ 4,000) and regressed it so that GDP growth entered negative territory and per capita incomes declined. The Sri Lankan economy is likely to contract by -4% to -6% in 2022 and per capita income in 2022 will be less than in 2019. There are also an additional 750,000 ‘new poor’ created due to the economic hit of the pandemic and economic mismanagement under the Rajapaksa administration. There is a serious risk of further backsliding, if policy reforms aren’t undertaken immediately by a new administration.
RB: What reforms would you like to see?
GW: Three. The first is concluding negotiations on a US$ 3.5 billion+ IMF programme implemented over, say, five years. The IMF programme will increase taxes and utility prices to raise much-needed government revenue and increase interest rates to control hyperinflation while preserving social welfare expenditures to protect the poor. An IMF programme will provide some new money and bring confidence in the Sri Lankan economy which is at a low point. It will also enable Sri Lanka to avail of new bilateral and multilateral assistance. It will take some time to conclude an IMF programme as Sri Lanka has to first demonstrate debt sustainability.
In the interim, Sri Lanka urgently needs bridging finance from friendly countries like India.
The second set of reforms are structural in nature. The economy needs to be more open and business-friendly. That really means getting government out of a lot of areas in Sri Lanka; there is too much bureaucratic red tape and much governmental interference, too many loss-making state-owned enterprises, (for instance, Sri Lankan Airlines, the Ceylon Petroleum Cooperation, the Bank of Ceylon, etc.) and the trade unions are very strong.
The third is to have reforms of the political system and governance. Gotabaya Rajapaksa won a two-thirds majority and used it to greatly strengthen the power of the president. Mismanagement, political interference, cronyism and corruption has become rife. There are calls for the executive presidency to be abolished and replaced with a Westminster style system of government. Anti-corruption should be strengthened with asset declarations by parliamentarians and a strong anti-corruption office assisted by the United Nations. There are also calls for looted national assets and funds obtained through rent-seeking behaviour to be recovered.
These are the issues Sri Lanka needs to tackle, if it wants to prosper as a modern democratic middle income economy in South Asia. The big question facing all Sri Lankans is this: do they want a failed state model, which is something that Pakistan or Myanmar emulates, or do they want to be a prosperous country, like Hong Kong, China, India?
RB: What is the perception in Sri Lanka, about India’s role? Has India done enough? Nearly $4 billion has been allotted in aid, with more in the pipeline.
GW: India coming in as a first responder to Sri Lanka, has been greatly appreciated by the people of Sri Lanka. India is the country that came in with food, fuel, and most importantly, cash. The cash came with the RBI swap, then there was a bilateral swap to help shore up the country’s reserves. There have also been Indian credit facilities for fuel imports and food and medicine aid.
The Chinese, well they were happy to provide commercial loans at 6% interest rates for infrastructure projects like the controversial Hambantota Port and Mattala Airport but seem less willing to provide debt moratoria or write off of debt, as expected by the Rajapaksa brothers particularly Mahinda Rajapaksa who had a pro-China stance.
There is growing interest in what kind of monitoring and evaluation methods India is putting in place for how that aid is being distributed in Sri Lanka. One hopes that it should go to the poor and all over Sri Lanka, not just to certain parts of Sri Lanka. Similarly, it would be prudent to have appropriate controls in place to ensure that leakages and wastage do not occur.
Second, increased Indian aid will be very useful, because Sri Lanka needs about half a billion a month to stay afloat for essential inputs like food, fuel, etc, until an IMF programme can be implemented and other assistance flows in.
Third, this is a very good opportunity, to really build an India-Sri Lanka trade-investment nexus, and not an aid dependency relationship.
This can be a win-win for both India and Sri Lanka, having seen the Hong Kong-China model, having seen the South Africa model with its neighbours, having seen these larger configurations, even in Latin America, Brazil and its neighbours. Sri Lanka-India is a natural configuration because of the geography. And a trade agreement can add a rules-based working on this. People in Colombo know the example of the ambulance service India built in Sri Lanka. The public health system in Sri Lanka comprises 1,000 plus hospitals and we had a problem because we couldn’t get people to the hospitals. India came with a wonderful $20 million project for an ambulance service, with 400 plus Tata ambulances, and just changed the game. India should be proud about being first responders in Sri Lanka
RB: We made a reference to 1991, to PV Narasimha Rao and his finance minister, Dr. Manmohan Singh, who pulled India out of the gravest economic crisis back in 1991. In terms of your knowledge and understanding of history, do you feel that interim Prime Minister Ranil Wikremasinghe can be the PV Narasimha Rao of Sri Lanka today?
GW: PV Narasimha Rao and Dr. Manmohan Singh will go down in history as leaders who opened up the sluggish inward-oriented Indian economy to foreign trade and investment with impressive results. It is perhaps premature to make this comparison as Ranil Wickremasinghe – a six time PM – has only been in office for a few weeks and faces an uphill task of tackling the terrible debt and economic crises in Sri Lanka.
Some initial steps he has undertaken so far include (1) providing honest facts about the depth of the economic crisis facing Sri Lanka, (2) the appointment of an international law firm and a debt advisor and (3) an in-person visit of an IMF team to Sri Lanka for discussions on a staff level agreement. I guess significant market-oriented economic reforms to make the Sri Lankan economy more attractive to investors and competitive may be a future agenda item here.
Dr Ganeshan Wignaraja is a Senior Fellow, Institute of South Asian Studies, National University of Singapore.
Rajiv Bhatia is Distinguished Fellow, Foreign Policy Studies Programme, Gateway House, and a former Ambassador.
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