Sri Lanka’s nosedive into economic chaos holds global lessons

For years Sri Lanka was held as the model South Asian country with robust rates of economic growth despite a brutal civil war and scored consistently over India on many global indices.

The Human Development Index, a much-touted worldwide benchmark, that looks at things like education and nutrition, placed the island nation at 73rd rank while India was at a very poor 130th. It turns out this completely random number crunching did not take into account basic economics like the factor cost of borrowed money.

When the music stopped, the humans of Sri Lanka were left holding the parcel. That box today brings misery. It contains, for example, Samba rice, the staple of Sri Lanka, at Rs 250 a kilo in Indian rupees; Badya, a staple fish, is a staggering Rs 700 a kilo; both have jumped 40 per cent in two months and climbing. The country has $750 million in foreign reserve, with $6 billion due over the next two quarters alone.

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The problem is not just the prices of goods. Some vital things like diesel and speciality medicines along with animal feed have been simply run out of stock. While spiraling petrol prices, currently at Rs 65 in Indian rupees a litre and inching up every day, have made it difficult to provide electricity. Fourteen-hour power cuts as tropical summer sets in are the norm. Shortages of paper have postponed national exams, while the lack of medicines has stopped surgeries. Make no mistake, this nation is in a death spiral.

The ingredients of this cocktail of doom have familiar flavours. National security and Islamic terror, a threat India too lives with, triggered the collapse. A planned suicide bombing by nine Sri Lankan Muslim men on Easter Sunday in April 2019 killed 260 people in the heart of the capital Colombo. Beyond the heart wrenching human loss, it hits at the very center of Sri Lanka’s service economy – it brought tourism to a standstill. For the economy, the attacks acted like a neutron bomb. From an all-time record of half a billion dollars in tourism revenue in 2018, it fell to a record low of half a million dollars in December of 2020. The result was millions of low paying jobs going away.

In the same year, Sri Lanka did a populist measure that would make the OECD proud. It abruptly cut the goods and services tax from 15 per cent to 8 per cent. Classical economic theory says when you cut taxes, revenues for the government increase – what they don’t say is that economic growth has to keep pace. A nation that subsidized fuel prices, schools, diesel for its fishing fleets and the cost of hospitals suddenly found itself broke. Thanks to its relatively stable international ratings, it borrowed in dollars to meet the shortfall. The revenues never rose as the third part of this morbid play played out – the virus that originated in Wuhan.

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Covid shut Sri Lanka out like many others in the world, leaving it adrift. Remittances, the lifeblood of foreign earnings, fell from $7.1 billion in 2020 to $5.4 billion in 2021.

But President Gotabaya was not done yet. He liked the cocktail party idea of ​​organic farming and forced Sri Lanka to go completely organic. Now organic farming is an excellent thing for a lawn in Lutyens’ Delhi, but for Sri Lanka, a proud self-sufficient rice cultivator, it was a catastrophe. The banning of pesticides and non-organic fertilisers made the agricultural yield, like the country now, complete bottom. Again they had to borrow money to import half a billion dollars of rice, and the price of the product doubled twice in two years.

To sum up, Sri Lanka has three major lessons for the world. Firstly, you cannot borrow and live happily ever after (another dubious but much-celebrated global index on happiness ranked Sri Lanka far above India). Domestic consumption without too much borrowing matters. Today the story of this hapless island nation is stark, with $45 billion outstanding, of which $8 billion is to China and $12 billion is a sovereign debt due soon. The borrowers are knocking at the doors of those fabulous villas in Galle. When you can’t print the dollar as the US can, you descend en mass into poverty. Fashionable liberal ideas like organic farming and pandering to Islamic terrorism doomed the country.

The only two options are an IMF bailout or more commercial borrowing; both will squeeze Sri Lank into penury. China may want to convert its $8 billion debt into geopolitical equity, but even that will be tough. China’s ‘one belt and road’ has lost another multi-billion dollar here. For India, alas, throwing more than $1billion of good money after bad isn’t an option. Get ready for a meltdown.

(Ninad D Sheth is a journalist)

Disclaimer: The views expressed above are the author’s own. They do not necessarily reflect the views of DH.

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