Navigating Stability towards Dynamic Growth

• Sustaining Reform Momentum for a Strong Recovery: Impact of Geopolitics.

By HMGS Palihakkara

(The following is the text of Mr. Palihakkara's keynote address at the CMA National Management Accounting Conference 2024, 24 July 2024—Colombo.)

We, the citizens of Sri Lanka, suffer many hardships at this juncture. Among them are three fatigues: crisis fatigue, reform fatigue, and last but not least, analysis fatigue. I hope my remarks will not add to this last one. More so because we seem to have an abundance of analyses but are confronted with a paucity of solutions, particularly those based on the imperative of agreed reforms. I emphasise the word ‘agreed’. This is simply to flag the need for a political understanding, if not a consensus, on a way forward anchored in a prudent reform regime. The stark reality is that if the crisis was painful, the reforms needed to recover can be equally or more painful. Hence my emphasis on a consensual reform regime. That was how other countries ranging from India to Italy to Greece—to name only a few—prevented such crises from happening or recovered after such crises. Unfortunately for the people of Sri Lanka, their so-called leaders on all sides have failed once again to reach a common understanding on the imperative and substance of reforms. They failed to explain that stark reality to the taxpayers who have to bear the burden of a double jeopardy, viz., an agonising crisis followed by reform pain. Instead, the quarrelling politicos on both sides have opted to expose this ‘existential requirement’ of reforms to the unforgiving blood sport called election politics in a very controversial election campaign. Consequently, we have enforced-reforms instead of consensual reforms.

This political malaise spawns several concerns:

• Firstly, it suggests a degree of uncertainty and unpredictability to the trajectory and future of reforms.
• Secondly, the external inputs needed for the recovery process are becoming more prescriptive or even punitive—the latest report by the UN High Commissioner for Human Rights to the ongoing session of HRC in Geneva already suggests this unprecedented line of action towards Sri Lanka even in the context of the reform-restructuring effort under the IMF auspices. I have not seen such an approach in regard to any other similarly affected country.
• Finally, it can once again open windows for intrusive geopolitical pressures constraining our freedom of choice in public policy making and governance as our creditors try to formulate their medium- and long-term approach to Sri Lanka’s problems consistent with their own financial and strategic interests.

The forthcoming elections have already become controversial. If and when they are held, they may change some faces but not much else. This is because it is not yet clear whether the outcome of the election will bring about a more constructive and consensual approach to reforms or whether it will aggravate the prevailing polarisation of reform hardships being used for regime change.

This then is the context in which we have to look at the impact of geopolitics on the recovery/reform effort.

Sri Lanka has now reached a semblance of stability, with some economic and financial indicators showing good work in progress. There is also a reasonable outcome in negotiations with bilateral plus multilateral creditors as well as with the all-important nonstate ISB creditors. These happened despite a volatile election season that is looming large and related uncertainties. This good work by the negotiators needs to be appreciated. However, the breathing space thus gained to recover and move on cannot and should not be misconstrued as an assured pathway to sustainable growth. It won’t happen without a political consensus committed to a consistent and continued reform effort over the long haul.

There are concerns on several fronts.

Usual election polemics about undeliverable promises are being heard again. There is unhinged trade union activism and other disruptive street manifestations driven not always by the principles of collective bargaining but by parochial interests. The State’s propensity to respond to these disruptions and distortions by using water cannons and forceful suppression as a substitute for negotiations appears worrisome—these already signal the perils of enforced reforms as against consensual reforms. Such reforms that decimate the vulnerable segments of society and multiply poverty can bring about more instability and no agreed pathways. The rising poverty statistics given by UNDP, if accurate, are alarming and depressing.

Obviously it is necessary to reaffirm the reform imperative and explore how and why it is in Sri Lanka’s national interest to do consensual reforms as opposed to enforced reforms, even from a perspective of geopolitics, and negotiate the external inputs required to advance the recovery/growth process beyond the current status quo—an inflection point at which Sri Lanka seems to be rather delicately placed.

First, what is geopolitics?

The term geopolitics is said to be a coinage by the Swedish political scientist Rudolf Kjellén about the turn of the 20th century. It sports many definitions and volumes of literature. Suffice it to say here that geopolitics is no better or no worse than local politics. Geopolitics represents doctrines, policies and practices by major powers to advance their interests by the use or threat of use of power, often at the expense of some others’. Basically, it is power-based manipulation. The power may be hard power or soft power—military, economic or cultural power. Countries that hop from crisis to crisis due to bad macroeconomic deficits and fiscal indiscipline, like Sri Lanka, are particularly vulnerable. Multilateral system entities like the IMF, WB, etc. have ancillary roles in this geopolitical framework. The Sri Lankan crisis fits in here as a telling case study. So geopolitics has been and will continue to figure as synonymous with coercive international politics.

So why bother much about geopolitics or externalities—the international system? After all, it is our economy and our work at home. If we get it right here. We can’t go wrong abroad. In an ideal world yes, but not necessarily in the real world. Although there is much talk by the major powers about the primacy of a rules-based order of the world, it is in reality more a world where the rule of force rather than the force of rule applies, as we discussed above. We cannot grow or develop ourselves in isolation. Also, the playing field is uneven, and the world is asymmetric.

The Oxford Handbook of Modern Diplomacy says: “Domestic policy objectives cannot be achieved independently of what is happening in the global economy or of the policies of other countries…. economic diplomacy is all about reconciling domestic and international policy objectives in an increasingly interdependent, if not global, economy….”

The home truth embedded in this diplomatic jargon is that the high moral ground of a ‘rules-based international order’ notwithstanding, we should be pragmatic enough to reconcile our policy objectives with those of other countries—translation: we need to reckon with geopolitical power players.

In its broadest sense, geopolitics have and will interact with both the causes of as well as recovery from Sri Lanka’s economic crisis.

The US-led West and India plus some analysts in Sri Lanka opine that a principal contributor to the crisis is the alleged debt trap diplomacy by China driven by its strategic interests—primarily its aggressive Belt and Road Initiative (BRI) designed to project its rising global footprint. Obviously, this view is connected with complex strategic calculations by the Western alliance and by India for managing and containing the phenomenal rise of China as an economic powerhouse and a major global player. The West and India want to do this without precipitating an armed conflict or an economic decoupling with China. Of course, China and Sri Lanka dispute this contention, citing much more complex considerations and structural issues as being responsible for the Sri Lankan crisis. In fact, China contends that Sri Lanka is not in a ‘China debt trap’ but in a development trap of its own making. Analysts here too feel that the crisis was of Sri Lanka’s own making due to failures in macroeconomic management, governance, public policy blunders—on the whole, a malfunctioning system, political mischief, and corruption here—and, very importantly, a long-running internationally focused accountability deficit in the country.

One can hardly blame those who surmise that the truth lies somewhere in between these two contentions, namely the preponderance of China in bilateral debt as well as clear and present failures in political leadership, governance, public policy, and endemic corruption in this country.

The complexity of these considerations relevant to the genesis of our crisis as well as to recovery therefrom is signified by various perceptions about our crisis by different geopolitical players—some perceptions complement each other while others seem to countervail.

For instance:

• Negotiating crisis recovery and reaching a sustainable growth path require not only sound economic analysis but also careful diplomacy to corral key creditors onto a common platform beneficial to Sri Lanka. But this is caught up in the triangular rivalry and competition among the US-led West/India on one side and China on the other.
• India would like to frame what it calls its ‘generous’ financial assistance to Sri Lanka during the crisis as an expression of what it sees as its legitimate sphere of influence in the region, particularly South Asia. Accordingly, Indian assistance may necessitate geopolitical quid pro quo from Sri Lanka.
• The Western/Indian creditors claim that China came on board debt restructuring ‘common ground’ for Sri Lanka owing to diplomatic pressure from their Indo-Pacific partners, who basically constitute the core of the Paris Club. US Assistant Secretary of State Donald Lu, during his last visit to Sri Lanka, said as much by making this assertion publicly. China predictably disputes this.
• This somewhat tangled web of permutations signifies a complex mix of foreign relations, geopolitics, and economic interests.

This notwithstanding, GOSL has done reasonably well so far to navigate the debt restructuring stretch of the recovery process, as indicated by the recently announced outcome of negotiations with bilateral state creditors and nonstate creditors.

This needs to be built upon a firm foundation of a consistent and continued reform drive, especially after the grace period secured by Sri Lanka, to ensure that reasonable progress so far does not morph into yet another crisis down the road but that progress will transit into a stable growth scenario.

Sri Lanka is often credited with an envious strategic location in the critical east-west supply route catering to the global market. It must therefore sense and evaluate every pulse of this strategic rivalry and competition correctly and respond to it wisely so as to reap maximum economic benefits from all sides.

Some have raised the question of whether we should enter the fray of this rivalry or stay neutral. The answer to this will determine whether Sri Lanka’s so-called strategic location value will be an economic asset or a geopolitical liability for us.

Our own past experience and the economic success of ASEAN tell us that ‘alliance neutrality’ not ‘alliance partnership’ ought to be the way forward for us. This will enable us to engage with and benefit from all without getting entrenched with any geopolitically or strategically.

The reasons are simple and obvious. We should not be accused by anyone for being on the wrong side of any strategic power rivalry, simply because we want to benefit from all sides as demanded by our national interest. Something that the economic success stories of SE Asia have done well. So whatever terminology you use—non-aligned, neutral, multi-aligned, or other nomenclature—the core element of our policy mantra should be shunning power rivalries—that is the way forward for us as we strive to recover and reach a growth trajectory. This by definition has to be based on a reform regime that enjoys general or ideally consensual support on the one hand and carefully calibrated relief for the vulnerable groups of our citizens on the other. Make no mistake—a rising poverty index and a falling human development index already signify these dangers. The ensuing instability will militate against recovery dovetailing into a pathway to growth.

Now some brief observations on geopolitical aspects of reforms and recovery.

Firstly, it is not rocket science to know that if we do not muster enlightened reforms and a political consensus thereon, and if reforms fail or reforms decimate the vulnerable, instability and crises can recur. If we do not reckon with this reality, whatever cosmetic changes the promised but yet uncertain elections may or may not bring will be of little relevance. And no major geopolitical player or a serious investor will want this strategic hub to be crisis-hopping forever, even if they do not harbour military base aspirations here. Also, as a result, more intrusive external interventions in our governance affairs can ensue.

Secondly, Sri Lanka is already under severe and continuing multilateral scrutiny and aggressive prescriptions on many of our internal affairs by the UNHRC, especially on our long-running issues with accountability, reconciliation and governance. The last UNHRC resolution added to this embarrassing list of prescriptions, the so-called ‘Economic Crimes', opening up a whole gamut of new issues going beyond civil and political rights—issues that normally fall under the domestic jurisdiction of any sovereign country. Various further resolutions by the EU and other Western legislatures also refer to these issues, adding the reference to Chana’s presence in Sri Lanka certainly bringing in new challenges of a greater geopolitical flavour for the country. What all this signifies is that if we do not get our domestic act together in governance, accountability, etc. through targeted reforms, external intrusiveness or interventions dictated by geopolitical interests can intensify harming Sri Lanka’s prospects for becoming an FDI destination.

Thirdly, India will have its own strategic interest in ensuring a stable Sri Lanka remaining within what it perceives as its ‘sphere of influence’ particularly at this juncture when India is defining a geopolitical profile for itself as a major global power. Indian Foreign Minister Dr. Jaishankar put it as India’s transition from a ‘balancing power’ to a ‘leading power’. India has a concern or even a fear about Sri Lanka. Whether this is an ill-founded or well-founded concern is, of course, a different matter and even a debatable one. But it does have a concern that an unstable and crisis-prone Sri Lanka can fall prey to a power that is inimical or a threat to India’s security, interests, and global aspirations. That is why Sri Lanka is given the dubious status of an ‘unsinkable aircraft carrier’ in the Indian strategic literature. It is in Sri Lanka’s interest to allay this fear by reasserting our self-governing credentials through consensual reforms so that the strategic autonomy of Sri Lanka, enfeebled by the crisis, is restored sooner than later, lest any external power seek to exploit that lacuna.

What is even more important is that Sri Lanka has its own intrinsic interest in strong reform-backed recovery as a prudent via media to modulate India-Sri Lanka's economic cooperation in a way that will not compromise our sovereignty for making independent decisions concerning public policy and economic development. All Sri Lankans should of course be thankful to India for its gesture of $4.5 billion in tide-over assistance and for her role in building common ground among key bilateral creditors to facilitate our debt restructuring under the EFF of the IMF. However, questions remain about what India expects in reciprocity and how Sri Lanka can do that without impairing our ability to make independent public policy choices, especially for economic development.

This will not be clear until we know the fuller details of the recent agreements and MOUs concluded during President’s visits to India in crisis time. It goes without saying that Sri Lanka should deepen and widen economic cooperation with India to exploit our comparative advantage with that country in terms of trade and investment so that we derive maximum benefits from the robustly growing Indian economy.

While cooperation is welcome, one needs to be prudently cautious about integration through random transactions devoid of an overall strategy. Does India expect exclusive rights to certain of our sovereign assets? Do they ask for exclusivity for investment in certain strategically sensitive areas of Sri Lanka, like Trincomalee? Does the last joint declaration on ‘connectivity’ coupled with the energy pipeline and land bridges represent an integration framework, not by negotiation but by momentum—an integration process in connectivity clothing? These questions can only be answered when MOUs between the two countries become public and their small print is interpreted carefully.

So a domestic consensus on an enlightened reform regime that will ensure there will be no deficits in the interrelated areas of governance, economy, accountability, human rights, and so on that will give rise to these kinds of external interventions constraining our capacity to independently decide, will be of paramount importance.

Sri Lanka is a case study of unwelcome and unwarranted experiences in this regard.

How does one prevent or at least minimise such unwelcome things and retain our strategic and sovereign autonomy in making choices while reckoning with a globalised world?

Two things stand out.

First, reform of a malfunctioning system in accordance with the rule of law, not the rule of men. Second, the right people asking the right questions at the right time, be it in public governance or corporate governance. Who are the right people? The public officials in the former and the professionals in the latter, including those leaders and professionals in the CMA domain, gathered here. If this does not happen and domestic deficits continue, whether due to corrupt politics, malfunctioning systems, or even corrupt clients, the crises will recur and deficits will continue. Again, it will create space for geopolitical interference, be it under the guise of external assistance, accountability, or human rights.

This, in essence, is the fundamental interplay between geopolitics and reforms, or the absence of it.

Let me conclude with something positive.

We are supposed to be a multi-branch democratic government system with a clear separation of powers with attendant checks and balances. With some landmark determinations in recent times, the Judicial Branch of this multi-branch system has taken the lead in asking some probing questions and taking some robust actions, brightening hope for revitalising accountability. Sri Lanka’s crisis in its broadest sense was and remains a crisis of accountability that evaded our domestic regulatory system. It is time for the executive and legislative arms in both the public and corporate sectors, therefore, to take the cue from the judiciary and follow suit. They can and should ask those probing and may be uncomfortable questions relevant to their mandates without waiting for politicos to deliver. That is because the track record of delivery by politicos has been one of miscarriages and still births, if I may put it that way.

If changes do not happen through an enlightened reform project on a system-wide basis, chasing the lenders of last resort yet again at the butt end of interference by the geopolitical forces in the neighbourhood and in far-flung places can become a strong possibility. Sri Lanka needs to avoid being branded as a country of crisis proclivity. It is doable through consensual reforms. Whatever happens or doesn’t happen prior to or at the elections, the politicos must get their act together to build that common ground. The public service and professionals like the CMA partners can and should provide the necessary institutional prodding towards it. That is the best shot the professionals can take at averting cyclical crises.

(The writer is a former foreign secretary of Sri Lanka)