Stability and consistency among hard lessons for Sri Lanka

Sri Lankan student Buddhist monks shout slogans as they march demanding President Gotabaya Rajapaksa resign over the economic crisis in Colombo, Sri Lanka, June 20, 2022. (ERANGA JAYAWARDENA / AP)

HONG KONG – The combination of factors that led to Sri Lanka’s most serious economic crisis in more than 70 years, with food and fuel shortage, offers some hard lessons, analysts say. Chief among those lessons is the importance of political stability, policy consistency, and strong and sound leadership in government. 

“I think (this is) definitely one of the worst economic crises since the founding” of modern-day Sri Lanka, said Professor Lawrence Loh, director of the Centre for Governance and Sustainability at the National University of Singapore Business School. And “there are a lot of domestic and external reasons” for it, he said. 

According to Loh, the government made “certain key mistakes” in economic policy. “The first one, of course, is regarding fiscal finance; they reduced the tax and then the government is running a very severe deficit that can make the country go bankrupt,” Loh said.  

READ MORE: Economic crisis pushes Sri Lankans to seek overseas passports

“Then they tried to bring in more money supply, so it creates the inflation that devalues its currency. And the third problem is … too much borrowing from international bodies and countries.” 

What happened recently is the Sri Lankan government has run out of foreign currency reserve to pay for foreign debts as well as imports of food and energy.

Li Wei, Lecturer, University of Sydney Business School 

The Russia-Ukraine conflict has added fuel to the crisis, as both of those countries were big exporters to Sri Lanka. Russia was a great source of tourists to the island country, and the rise in commodity prices due to the conflict has also increased the burden on Sri Lanka, Loh noted. 

In addition, Sri Lanka’s major foreign currency earners including tourism have been severely battered by the COVID-19 pandemic since 2020, said Sirimal Abeyratne, an economics professor at the University of Colombo. 

The South Asian nation is grappling with an impending food shortage. According to the United Nations World Food Programme, 5 million of Sri Lanka’s population, or over 20 percent of the total, need food assistance. Local experts have warned of a possible shortage of rice and other essential food items from September this year due to lower production.  

Sri Lanka decided to ban the use of chemical fertilizer in April 2021, and agricultural output has declined sharply as a result. “They want to do organic farming and be sustainable, but this backfires,” said Loh, citing increased costs and falling production. 

To increase production in the country, Sri Lanka’s ministerial cabinet approved a proposal to declare Fridays a holiday for government employees, to encourage them to carry out agricultural work, local media reported last week. 

“With three non-working days, public sector employees will be encouraged to carry out agricultural work to increase production in the country,” a cabinet paper said. 

ALSO READ: Sri Lanka gives public workers extra day off to grow food

Besides food, Sri Lanka has also suffered crippling fuel shortages since February as a foreign exchange crisis worsened in the island country.  

Taking into consideration the impact of the fuel shortage on public and private transport, the Sri Lankan government on June 17 decided that public sector employees would work from home for two weeks starting from June 20. However, employees of essential services must report for duty as usual. 

People place their canisters in line as they wait to buy kerosene oil outside a fuel station in Colombo, Sri Lanka, June 11, 2022. (ERANGA JAYAWARDENA / AP)

The Sri Lankan government announced that only 100 gas stations were provided with fuel on June 17. The situation led to the longest ever fuel queues in the country. About 85 percent of private buses were not operational due to the diesel shortage. 

Sri Lanka’s Minister of Power and Energy Kanchana Wijesekera told reporters on June 19 that the government has reached out to several Russian crude oil suppliers for an energy solution for the country, according to the Russian embassy in Colombo. 

Wijesekera said Sri Lanka is trying to obtain Russian crude oil on credit to keep the country’s only oil refinery running. 

The minister said Sri Lanka’s oil bill, as of June, has risen to $550 million a month. He added that Sri Lanka now owes oil firms $730 million for oil imported on credit, and these companies will now only supply fuel after upfront payments or deposits. 

Due to the fuel shortage, Sri Lanka has been experiencing daily scheduled power cuts since February. However, state-owned electricity producer Ceylon Electricity Board Engineers’ Union warned last week that Sri Lanka could experience power cuts for at least three more years. 

A team from International Monetary Fund on Monday arrived in Colombo, the capital of the island nation to discuss an economic package and will stay through to June 30. The package might be backed up by a loan. 

Abeyratne said while some recommendations from the IMF are helpful in solving the difficulties, “however in the case of Sri Lanka, we should not take the IMF approach as the absolute truth that we need”. 

And even without IMF, the recommendations about fiscal consolidations to improve revenues are needed at this moment for Sri Lanka to improve its macro economy, he noted. 

READ MORE: Sri Lanka hit by power cuts after key union goes on strike

Loh, the economic expert, however noted that Sri Lanka have to be quite careful as how to interact with IMF, because usually nothing is for free, and monetary agencies including IMF and World Bank are led by western powers including the European and American. 

“From my previous experiences in Southeast Asia including Thailand, usually with the IMF assistance, many conditions were imposed, for example, they (the IMF) want to have fiscal policies that cut government expenditure or devalue the local currency,” he said, “For many countries that receive IMF program they usually fall into some kind of hardship.” 

Li Wei, a lecturer at the University of Sydney Business School, said, “What happened recently is the Sri Lankan government has run out of foreign currency reserve to pay for foreign debts as well as imports of food and energy.” 

According to Li, since the 2010s, the Sri Lankan government has shifted to an economic policy that prioritizes the domestic market over exports to international markets. “The country’s economy increasingly relies more on imports than exports every year,” she noted, adding that back in 2017, Sri Lanka’s import volume was already double the size of its export volume. 

To revive the industry, the Sri Lanka Tourism Development Authority has said the country expects to attract around 800,000 tourists in the coming months, with revenue of $800 million anticipated. 

Local media reported on June 17 that Sri Lanka’s Prime Minister Ranil Wickremesinghe is to present a roadmap soon to Parliament on overcoming the current economic crisis. 

*Xinhua contributed to the story

Contact the writer at vivienxu@chinadailyapac.com