How Sri Lankan economy got into its biggest mess - The Times of India

Sri Lanka is today facing dire economic circumstances. Ranga Jayasuriya, researcher and former senior fellow at Institute of National Security Studies, Sri Lanka, spoke with TOI about what led to the mess: How have things come to this pass for Sri Lanka? Actually the origin of today’s crisis dates back to the 2000s when Sri Lanka first started issuing sovereign bonds. Since then we have accumulated so much debt that it is no longer sustainable. On top of that we have a large chunk of Chinese loans that we have to service. In fact, this year alone we have foreign debt of $6.8 billion out of which $1.5 billion is sovereign debt. The rest is between governments and multilateral institutions. The government never had a concrete strategy to solve the problem. It adopted a piecemeal approach of paying back the loans by banking on foreign remittances and tourism revenue. medium89754742 But Covid-19 dealt a massive blow to tourism, while the Sri Lankan central bank’s decision last year to prohibit exchanging more than 200 Sri Lankan rupees for a dollar backfired. With the black market rate around 250 Sri Lankan rupees to a dollar, Lankan citizens working abroad started using unofficial channels to send back money. To make matters worse, the people in government have their own political calculations that prevent them from taking the necessary actions to get out of this mess. On the contrary, they have compounded the problem by implementing extensive tax concessions amounting to around 1.5% of the GDP. Then to manage the situation, government started printing money and 1.2 trillion Sri Lankan rupees were printed in the last two months alone, leading to inflation spiralling to 16% in January. So we are stuck in a vicious cycle. How much of this economic crisis is due to Chinese debts? If you look at the foreign debt composition of Sri Lanka, Chinese loans are not more than 10% of the total, which is around the same level as that of our loans from Japan. In fact, Chinese loans are not much different from commercial borrowings, but they come with less strings attached. But the real problem is still the sovereign bonds which amount to around $17 billion or about 47% of Sri Lanka’s foreign debt. These are the loans that the government is struggling to pay.Untitled Carousel 86035789 So, are populist policies also to blame? We are in a situation where the government cannot afford the subsidy on fertilisers which is around $400 million annually. President Gotabaya Rajapaksa said he will make Sri Lankan agriculture 100% organic as part of his election promise. But we know this has nothing to do with poll promises and the simple fact is the government has no money for fertiliser subsidy. The result of the organic switch is that overall agriculture output has come down by 40%. Sri Lankan paddy farmers are in a dire situation – not only are they unable to pay off their loans but they also don’t have enough to feed their families. Then look at our regressive fuel subsidy. Only about 30% of the population actually benefited from this subsidy, mostly those with high-consumption levels to begin with. It has had disastrous consequences. The previous government had an electricity pricing formula. But the current government ridiculed it and scrapped it saying why do you need a government if the prices are going to be decided by the market? Today we are in a situation where we can’t import oil for our power plants. Then we are getting confusing signals from the government. Finance minister Basil Rajapaksa said he is willing to renegotiate with the sovereign bond holders. But at the same time the central bank governor says we are in a position to pay off the debt. So there is no sense of clear authority and direction from this government. What is the way out for Sri Lanka? We need something drastic like IMF-mediated debt restructuring. But this government considers that as losing face. The government should be ready to swallow some hard pills. But they are looking at the forthcoming local elections which will require them to grease the wheels of the patronage system and they are giving away 100 billion Sri Lankan rupees to the local governments. So they will rely on small change from countries like Pakistan or Bangladesh, but knowing that is not enough, they are now trying to get something from India and all eyes are on the Indian forex package. But this is not a solution and only delays the inevitable. We are looking at an uncertain future.