From misfortune to bankruptcy
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Troops rehearsing for the February 4 celebrations. Pic by M.A. Pushpa Kumara
Tanzania was due to celebrate its 61st Independence Day on 9 December 2022 at a cost of US$445,000. A few days prior to that, the President of Tanzania, Samia Suluhu Hassan cancelled the celebrations and directed the funds to build dormitories for children with special needs.
This is not the first time that Tanzania cancelled the Independence Day celebrations, due to some other prioritised urgent needs. It did the same in 2020 and diverted funds to buy medical supplies, and in 2015 to build a road in the country’s commercial capital, Dar es Salaam. Tanzania is not a crisis-ridden country either. It has been a high-performing economy in Africa with annual rate of real GDP growth continuing to remain around 6 – 7 per cent for most of the years after 2001.
Tanzania is also not the only country in Africa that has decided to cancel the Independence Day celebrations. Rwanda continued to ignore its Independence Day celebrations for the sake of its ethnic harmony and peace. The country’s historical ethnic conflict between Tutsi and Hutu, which also led to a bitter ethnic genocide in 1994 against Tutsi, is related to the ethnic division at Independence.
Currently, Rwanda has left its ethnic conflict behind and worked to be a fast-growing economy in Africa. The country has been growing on average at around 7 – 8 per cent annually during the past two decades.
At the 50th
Independence Day
It was yesterday that Sri Lanka celebrated its 75th Independence Day as a “bankrupt” country in Asia. It was in conjunction with our 50th Independence Day celebrations in 1998 that I published a book in the Sinhala language, giving a retrospective view over a post-Independent development story of Sri Lanka. The literal meaning of the book title reads as “The Sri Lankan Economy: 50 Years of Misfortune”.
The book showed a list of initial conditions that depicted Sri Lanka as a unique “prosperous democracy” among developing countries in Asia. The favourable initial conditions together with a substantial trade surplus would have enabled the country soon to be a “first world developed economy” in Asia after Japan. It was all based on the colonial heritage of the country at the time of Independence. The first Finance Minister of the national government, J.R. Jayewardene once said that unlike other countries in Asia, we don’t have a foreign exchange shortage to start off our development, which never happened after all.
Alas! Instead, we wasted all what we had competing for offering “irreversible handouts from non-available resources” but ignoring the fact that it all requires resource flows to be generated. When we realised that we need growth in order to generate wealth, which was in 1977, it was too late.
Weapons in hand
By 1977, the young generations from Tamils in the North as well as Sinhalese in the South already had weapons in their hands. It’s true that they were brought up in a welfare democracy, which didn’t provide them opportunities and resources thereafter. Whatever the little that was available too was snatched away from them. The resentment of both Tamil and Sinhala youth was already and almost simultaneously manifested since the early 1970s.
I remember that some were offended by the book which was called “50 years of misfortune”. They argued that in spite of slower growth, Sri Lanka has achieved so much in terms of its welfare standards – health, education, consumption and human development standards. It was exactly the question: How did we achieve our health, education, consumption and human development standards, without creating adequate wealth?
As we celebrated the 50th Independence Anniversary, many East and Southeast Asian countries that were behind Sri Lanka, appeared to have surpassed us. While creating wealth, they had also improved their health, education, consumption and human development standards eroding Sri Lanka’s initial advantage position in all these areas.
25 years later
Since then, another 25 years passed by and Sri Lanka celebrated yesterday the country’s 75th Independence Anniversary. Now it is a bankrupt nation. The country has fallen to an unprecedented economic crisis. It’s a “man-made crisis” for which we have worked for in the past 25 years in order to bring the country to bankruptcy. The following points highlights how we did make our contributions to this bankrupt state:
While the LTTE war from the North and the JVP insurgency in the South played their part in sabotaging the potential economic progress, the government played its role by abandoning the policy reform agenda. Sri Lanka had, only two rounds of policy reforms, the first in 1977 and the second in 1989. Since then the country had no policy reforms, but ad-hoc and piecemeal type changes, without a clear policy direction.
During 1995-2005, nothing significant happened other than privatisation. From 2005 onwards, economic policies took a major turn in promoting non-exportable growth. This non-exportable growth was seen in domestic agriculture, construction, transport and domestic trade, finance and real estate, and public sector expansion. And the government played a major role in investing in non-exportable sectors and initiating a massive job expansion, all with borrowed money.
The outcome was the aggravating policy and political bias against export growth, the so-called “anti-export bias” along with “unsustainable growth spurt” from non-exportable sectors. Given the unfavourable investment climate created by policy and regulatory barriers as well as by increased nepotism and corruption, private investment did not pick up.
Accordingly, there was no export growth to generate foreign exchange to pay off for imports and maturing foreign debt. While the growing budget deficit was financed by domestic borrowings and money printing, the foreign exchange shortage was cushioned by remittances, tourist earnings, further borrowings and foreign reserves of the Central Bank.
The great fall
Over the past 25 years, an economic crisis led by a growing foreign exchange shortage and increasing government borrowings, built up slowly; the slowdown got accelerated over the past five years and, then the economy collapsed, on the eve of the 75th Independence Anniversary.
In fact, the Sri Lankan economy would have collapsed much earlier, at several occasions. But fortunately, or rather “unfortunately”, it didn’t happen on any of those occasions because random events from somewhere prevented it. The economy would have collapsed even in 2009 and in 2016, but the IMF rescue missions prevented it on both occasions. These IMF rescue missions improved the country’s ability to borrow from international sources so that on both occasions, we increased foreign borrowings, but postponed the inevitable collapse.
During the period after 2019, there were a series of policy errors and shocks to the economy. And the collapse was inevitable, as the economy had no resilience to bear up the consequences of policy errors and to stand against global shocks, including the COVID-19 pandemic that swept across the world.
On the 100th
Independence Day
We are now back to square one as a nation, or perhaps, faced with an unprecedented crisis, even below the square one. Right at this juncture, it is necessary to assure three most important things regarding the journey towards the 100th Independence Day in 2048:
n We need to make sure that we have enough foreign exchange to live today and tomorrow at least maintaining our “hand-to-mouth” status quo without falling into a deeper crisis. We are not yet out of the danger, although there is just a “temporary ease” in some of the difficulties.
n We need to make sure that on a medium-term basis we are on a recovery path to get out of the crisis. There have been many discussions and preparations, but the large part of the implementation drive is yet to begin.
n We need to make sure that we are progressing “beyond the recovery” phase along a long-term growth path with investment promotion and export expansion. This requires reviving the halted reform process with policy and regulatory reforms.
A satisfactory performance in all three areas above, is necessary to ensure Sri Lanka’s journey towards a “high-income” economy by 2048.
By the way, the IMF rescue mission together with a debt restructuring effort, which is in progress now, will improve Sri Lanka’s credit worthiness again. I hope we would not end up with further borrowings and asking for the IMF assistance again.
(The writer is a Professor of Economics at the University of Colombo and can be reached at sirimal@econ.cmb.ac.lk and follow on Twitter @SirimalAshoka).
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