The Sri Lankan Economic Crisis: Options before the Rajapaksa government

Venkat Shanmugam is an ethnic Tamil who stays with his family in a suburb of Colombo. He is working in a government department as a junior division clerk. His family is surviving on basic food like Rice, some curry & tea without milk or sugar. The majority of food items have disappeared from the market and they are not available even after payment of huge sums. Banks are closed & people are unable to withdraw their own money. Fuel is in scarcity and even senior government officials are not getting it easily. All the fuel stations have Armed forces deployed to control any untoward situation. Shanmugam has no answer as to how can he and his family survive further. He is thinking of migrating to India where his relatives stay so that they can get proper meals.  

The situation in other parts of Sri Lanka is not different. Tier 2 cities are witnessing the worst with extremely high levels of uncertainty. Moreover, there is no ray of light in the future and Sri Lanka is inching toward solvency now. Being in the proximity of India and being its closest neighbour, it becomes extremely important for us to not only watch all the developments but also help Sri Lanka recover from this crisis. Interestingly, this country has a surplus economy till 2017-18 and as we see that the entire financial system has collapsed in just four years. Few experts have blamed the 2019 Easter Bombings, COVID outbreak or ban on chemical fertilisers as the reasons but going into deep, we have reasons to say that family-run governance where three brothers are running the country as President, Prime Minister and Finance Minister was a major contributor to policy failure which led to this crisis.  

Since the island country is moving towards solvency, we must understand what the options before President Gotabaya Rajapaksa are to counter this crisis & sail his country to the path of success. 

Here are 10 of them: 

The strict control of imports 

The Sri Lankan government must make adequate policies to curb imports. It may be a temporary arrangement till the economy bounces back to its previous state but is extremely essential to save precious foreign reserves. Although as per the official statement, its foreign reserves are close to 2 billion USD the availability of the same for repayment of loans and sovereign bonds is less than a billion which is a matter of concern. Due to the gradual reduction in COVID related curbs worldwide, remittances are going to increase and Sri Lanka must be prepared for this.  

Restructuring of government

As we learned that the primary reason of this failure was policy paralysis where a family-run government ignored the signs leading to the collapse of its financial set-up. Hence adequate restructuring in the government is required where others including opposition leaders also to be made part of the decision-making process. It is a national crisis and to be dealt with in a cohesive manner rather than declaring a nationwide emergency and arresting people opposing the government.  Failing to do so will not only intensify anti-government protests but may also contribute to the rise of rebel groups once again.  

Rollback of Policies and orders 

One of the major reasons which reduced the agricultural output of the country by half was the chemical fertilizer ban. Such decisions are to be planned over the long term and in a phased manner. There were other policies too that contributed significantly to the financial breakdown. These policies and orders need to be revoked so that the country has a chance of bouncing back.  

Austerity Measures

The government in Colombo need to impose strong economic policies where the emphasis should be on more income generation while expenditures to be curtailed. One of the major sources of expenditure is Sri Lankan Military which still has over 4.5 Lakhs personnel. It may have been relevant earlier but after the Sri Lankan Civil war, their numbers should have been curtailed as being an island country, Sri Lanka has fewer external threats but that did not happen.  Since the current President has been an ex-Military officer, no step was taken to reduce their expenditure.  

Bailout package from IMF

As Sri Lanka is moving to be solvent, it must go to IMF asking for a bailout package and rollover of its loans. It may be tough for the government to implement policies and instructions of the International Monetary Fund (IMF) but it will save the country from a major disaster. Rollover of loans will also provide a new lease of life to its economy.  Another neighbour Pakistan did it in the recent past and Greece took multiple bailout packages over the last 12 years.  

Aid from other countries 

China has already accorded a 2.5 Bn USD package while India extended a similar amount of credit line to buy essential commodities. Sri Lanka can ask other countries also to help the nation in these times of crisis. At present, coming out of the dark times is of utmost importance. It can also ask for humanitarian aid from other countries apart from financial ones and we can be sanguine that the world will help.  

Countering tax evasion & corruption 

One of the main reasons for the revenue drop for the government was increasing corruption and tax evasion. Like our western neighbour Pakistan, retired Generals have made their deep inroads into the Sri Lankan Economy too and are sitting at positions in the government and the industry. Politicians too have formed a significant part of the industrial setup of Sri Lanka. These factors have contributed to a major rise in corruption and tax evasion in Sri Lanka over the last few years. Strict measures are required to be implemented by the Rajapaksa government to curb these practices.  

Negotiating with the Financial institutions

Another immediate relief can be brought if the governments talk to various financial institutions about its debt servicing. It can ask them for a haircut, a rollover, or relaxing the payment terms, or reduce the interest rates. All of these will depend upon how the government handles this issue. Their negotiation skills will decide the future of the country.  

More Revenue Generation - Exports and Trade

To bring in precious foreign reserves, the Sri Lankan government has to put more emphasis on its exports and trade. Sri Lanka is one of the major shipping hubs of the world and counted among the top 25 Trans-shipment hubs. Its strategic location gives it an advantage in maritime trade which can be a good source of revenue. Further, it can also remove trade barriers towards its export and impose more barriers on imports so that its trade balance can be improved. There are certain commodities like tea & spices which can play a vital role in getting forex in Sri Lanka.  

Tourism

Historically tourism has been a major source of revenue for Sri Lanka and contributed to its GDP significantly. COVID related curbs are getting over and it is the right time for the Sri Lankan government to sell its tourism potential to the world. It has to develop some of the areas as major tourism hubs and create different tourism circuits for Religious, Leisure, Adventure and sports-related tourism. This will help its economy well.  

Factors indicate that this crisis was not a sudden one but erupted over last 3-4 years slowly. The government of Sri Lanka ignored the warning signs and continue to enjoy till the situation became critical. Mr Gotabaya Rajapaksa needs to take tough calls now so that the country can bounce back to its original shape and for that, he needs to work a lot. What I have mentioned here is indicative but relevant. These will decide the future of Sri Lanka.