Colombo, Sri Lanka

Sri Lanka’s crisis and lessons for Bhutan and the South Asian region

Sri Lanka was hit by a major economic crisis when it failed to meet its debt obligations and saw shortages of fuel and essentials, massive inflation, drop in reserves and a steep drop in its currency value in 2022.

Its GDP shrank by 8% and poverty almost doubled from 13% to around 25%. Around half the country’s population is now vulnerable when it comes to multi-dimensional poverty.

On the drive from the Colombo airport to the hotel the driver told this paper there were cases where entire families committed suicide.

He said that many of the poor cannot even afford to eat three meals a day and make do with less meals and less food.

The island nation of 22 mn did not reach here overnight, but this was a development that went back decades.

Governance crisis

Speaking at the Editor’s Forum Meeting in Colombo, Sri Lanka (organized by the World Bank) the former Sri Lankan Foreign Secretary, Prasad Kariyawasam, said a recent IMF report showed that corruption was the main cause.

“The was lack of transparency and accountability in governance, debts and expenditure. There was government overreach since 1978 which means executive overreach with no checks and balances.”

He said a weak Parliament meant it did not have oversight capacity and no teeth as it did not use its legislative and constitutional powers over fiscal policy to check the executive.

The former secretary said that Parliament was more like a talk shop and a structural construct.

Giving an example of this overreach he pointed to the disastrous decision of the former President to make Sri Lanka go organic which impacted food production. He said in a mature democracy like USA the check and balances would have ensured such an idea got stuck.

Prasad responding to a question also said that competitive political populism has also played its part as the legislature is then unable to check the executive. He said what is needed is statesmanship to do what is good and the media must be objective here and mobilize public opinion. 

He pointed out that there is a lack of trust in the government and all political leaders in Sri Lanka and political leaders need trust to bring changes.

He said that reform must be bottom up and not just top down.

Economic issues

On the economic front, he said Sri Lanka lacked competitiveness when it came to labour, land, capital and entrepreneurship.

He said 82% of the land is owned by the state and in the populated western provinces 95% of the land is occupied leaving no room for investment.

He said the issues are structural and if Sri Lanka does not reform but just manages to get there then there will be no change.

The former Secretary said that Sri Lanka has also been hit with a major Brain Drain as it loses its professionals to other countries and this is a dangerous trend.

He said that while other import restrictions have been lifted the import of vehicles is still not allowed.

Regional Cooperation

Reflecting on the role of regional cooperation the former secretary said that a Sri Lankan King Devanampiya Tissa adopted Buddhism during the time of Asoka as a regional tactical move as the King believed in the need for having regional cooperation.

Prasad said that at the height of the crisis India stepped in with USD 3.9 bn of assistance through fuel, USD currency, medical supplies, essentials etc. and even Tamil Nadu helped.

Bangladesh also stepped in with a USD 200 mn currency swap.

He said there is now goodwill for India and Bangladesh.

He said such goodwill is also important for the mobilization of public opinion for regional cooperation.

The former secretary said that South Asia lags behind compared to the level of cooperation in other blocs like EU, ASEAN, Nordic Countries etc. as the public does not know that the neighbors’ success or problems affect us. He said there is instead a sense of unnecessary competition which does not make sense as nobody can compete with India.

He said the future for Sri Lanka is not only liberalizing trade and investments but also labour to meet the skilled labour deficit as the current labour market (aimed at giving Sri Lankans priority) is not competitive.

He said Sri Lanka’s labour system currently requires visas to protect local jobs, but this needs to be converted into work permits and it is better to give a job to a more capable foreigner as one needs to be competitive and have efficiency.

He said there needs to be commercial dispute resolution and red tape needs to be reduced.

Prasad said the planned Colombo Port City was supposed to have a separate jurisdiction with separate laws.

He said in terms of regional cooperation power can be sold to Sri Lanka via cross border trade, there could be a regional body for pandemic preparedness, more e-governance, redoubling of efforts to fight corruption, south Asian payment portal and regional centers of excellence like a port for Sri Lanka.

He said for the region to thrive India must take the lead.

A laggard

In another session, a Sri Lankan finance expert pointed out that Sri Lanka’s trade to GDP ratio declined over the years and there was an overreliance on infrastructure and debt driven public infrastructure for growth.

The export to GDP ratio also declined and the expert pointed out that Sri Lanka’s basket of exports saw very little changes for many years with apparel, clothes, rubies products, spices etc. dominating and with very little higher end or electronic exports.

On the other hand, the picture of the exports basket was vastly different for Vietnam between 1995 and 2021 with higher end products dominating later exports.

He said Sri Lanka is a laggard in annual FDI and has a protectionist trade policy. He said the government instead of improving efficiency in the tax system is over reliant on collecting numerous and heavy import taxes at the border and Sri Lanka suffered when imports went down.

The expert said that Sri Lanka missed the bus as there was no consensus on the growth model and there was confusion and an oscillation between the role of the state and the private sector. He said Sri Lanka was not pragmatic.

This is while the Asian Tigers adopted an outward growth model.

A business woman said the civil war in Sri Lanka and the loss of lives also impacted the vision of the government and it could not look outwards when it was tearing itself up inside.

She said that a looming existential threat was always present and a large portion of the public budget was spent on the military.

This also meant that the focus went off the economy and anti-corruption measures.

In terms of the ongoing exodus from Sri Lanka which also includes a lot of health professionals, experts said people do not feel they can make a life in Sri Lanka and so leave and here the solution is to invest in skill development, retain not all people but the main talents, and reform the labour market to allow people to come in from abroad.

The experts said that Sri Lanka should look at providing IT services, use its location to provide logistics services like becoming an e-commerce gateway with cargo storage, be part of the supply change disruption post COVID, remove FDI barriers and make use of regional exports markets like India treating each Indian state differently.

The Bhutan Angle

While Sri Lanka is a comparatively bigger country with a bigger population it is still a small South Asian country with certain similarities to Bhutan.

Bhutan, like Sri Lanka, has dwindling reserves, has a weak private sector, has growth driven by public spending and debt fueled projects.

Tourism plays a large role in its economy which got hit with the pandemic but is now helping in its recovery by earning foreign currency.

It is a largely Buddhist country but has religious minorities and there are also ethnic minorities. The relations between these groups were not managed well and so there were several decades of civil conflict.

Sri Lanka, like Bhutan, was happy not to make any major changes to its economic and governance structure and make itself more competitive and efficient.

Political parties competed with each other to be more populist and that led to more unproductive debt and a strong man type of politics in Sri Lanka led to poor decision making like giving major tax concessions that people did not even ask for to win elections leading to huge decreases in revenue.

As the young and professionals lost faith in the country with the economic stagnancy and lack of future there they left in huge numbers abroad and continue to do so.

When this reporter was there the number of Sri Lankans leaving at the airport far exceeded those coming in.

If Bhutan does not heed the many Sri Lanka lessons then we could be next.

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