Any proposal and any action to economic crisis?
By Professor. V. Sivalogathasan
Sri Lanka is experiencing its worst economic crisis due to poor governance, corruption and economic mismanagement consequently the masses and suffering. For the first time in our life, we are seeing such an unprecedented uprising wave of spontaneous protests as the island nation of 22 million by the people across all works of life. Almost entirely peaceful. This show of people power give hope.
Ongoing economic crisis in the island nation of Sri Lanka largely attributed to the economic mismanagement and corruption of the incumbent government, leading to unprecedented levels of inflation, near-depletion foreign exchange reserves, shortages of medicinal supplies and rising prices of basic commodities. The crisis has said to be caused by multiple compounding factors such as tax cuts, money creation, a nationwide policy to shift to organic or biological farming as well as events such as the Easter bombings in 2019 and the impact of the COVID-19 pandemic. The subsequent economic hardships resulted in the public openly voicing their dissent, leading to one of the largest demonstrations in the island's history:
Sri Lanka had been earmarked for sovereign default, as the remaining foreign reserves of US$50 million as of May 2022 insufficient to even cover a week of imports, and leading to spiraling shortages of everything from diesel to some food items. the country's foreign debt obligations for 2022, with US$4 billion to be repaid. An International Sovereign Bond repayment of US$1 billion is also due to be paid by the government in July 2022. Sri Lanka has a total of US$8.6 billion in repayments due in 2022, including both local debt and foreign debt. In April 2022 Sri Lanka announced that it is defaulting making it the first sovereign default in Sri Lankan history since gaining independence in 1948.
the country was a long way into an economic crisis in 2015. The government which came into power in 2015 knew these risks and while then Prime Minister Ranil Wickremesinghe in 2015 had presented a strong economic policy to address the situation, the coalition government could not get the policy pushed through Parliament which would eventually result in further policy confusion in the coming months. The government did not adequately address the economic warnings and emerging dangers, consuming itself in other government related activities such as "constitutional reforms". Certain practices, including corruption. Election related economic decisions were pushed such as excessive distribution of freebies. Further political turmoil in 2018 worsened the economic outlook. By that time, the government had carried out several reforms under an IMF supported program towards fiscal monetary consolidation and had successfully controlled inflation. These reforms included an automatic fuel pricing formula which significantly reduced fiscal risks posed by state-owned enterprises (SOEs), raised the for Value Added Tax (VAT) rate from 11 percent to 15 percent and broadened the VAT base by removing exemptions. Many of the reforms were reversed by the new government after the 2019 elections.
The previous administration also drafted the 2019 Central Bank Bill to make the Central Bank independent from political influence by banning the Treasury Secretary and any member of the Government from becoming members of the Monetary Board. Money printing was also to be banned as the bill states. The government led by the Rajapaksas opposed an independent Central Bank and discarded the bill as soon as they came to power.
Many experts compared Lebanon's economic situation with that of Sri Lanka and had warned that Sri Lanka too was on the way to defaulting on its sovereign bonds. Both nations had similar issues, including deep economic crises occurring after their successive governments piled up unsustainable debts following the end of civil wars.
The massive loss of tax revenue resulted in rating agencies downgrading the sovereign credit rating making it harder to take more debt. In 2021 to cover government spending, the Central Bank began printing money in record amounts, ignoring advice from the International Monetary Fund (IMF) to stop printing money and instead hike interest rates and raise taxes while cutting spending. The IMF warned that continuing to print money would lead to an economic implosion. The tax cuts were also opposed by the former Finance Minister Mangala Samaraweera who noted that as the Sri Lankan government already had far less tax revenue relative to most countries which combined with its high debt load tax cuts would be dangerous. He predicted that “If these proposals are implemented like this not only will the entire country go bankrupt, but the entire country will become another Venezuela or another Greece.”
February 2022 while the government attempted to keep the currency pegged at 200 LKR to the USD unofficial market value of the LKR was exceeding 248 to the US dollar. Thus foreign workers went on remitting money through unofficial channels causing Sri Lankan banks to run out of foreign currency and foreign remittances to crash with a 61% reduction in official remittances in January. Former Deputy Governor of CBSL W.A Wijeywardana criticized the policies calling it "Cabraalnomics 2.0" noting that the dollars are disappearing from official markets while a superior dynamic black market has caused exporters and immigrants to shun the formal banking system resulting in dismantling the power of the Central Bank as the forex regulator.
The country's tourism sector was negatively affected by the 2019 Easter bombings, and the COVID-19 pandemic prevented recovery. In later part of 2021 Positive signs of recovery are already being observed, proper taxation to build up self-dependence and to avoid high dependence on foreign debts in future has been highly encouraged.
In April 2021, President Gotabaya Rajapaksa announced that Sri Lanka will only allow organic farming totally banning inorganic fertilizers and agrochemicals-based fertilizers. The drop in tea production as a result of the fertilizer ban alone resulted in economic losses of around $425 million and created a 20% drop in rice production within the first six months alone reversing previously achieved self-sufficiency in rice production and the country was forced to import rice at a cost of $450 million.The banning of the trade of chemical fertilizers and pesticides produced a severe economic crisis, since the population expects to remain without income and without food, rising food prices and weeks of protests against the plan. the Russo-Ukrainian War is felt in the already sluggish economic conditions of Sri Lanka. Russia is the second biggest market to Sri Lanka in tea exports and Sri Lanka's tourism sector is heavily reliant upon these two nations as most of the tourist arrivals are from Russia and Ukraine.
The economic crises have resulted in declines in electricity, fuel and cooking gas consumption, resulting from shortages. Long queues have formed in recent months in front of petrol filling stations. The surge in global oil prices further aggravated the fuel shortage. In order to conserve energy, daily power cuts have been imposed.
President Gotabaya Rajapaksa's government has come under growing pressure for its mishandling of the economy, and the country has suspended foreign debt payments in an effort to preserve its paltry foreign exchange reserves.
Sri Lanka talks with the International Monetary Fund (IMF) for a recover programme, even as it seeks help from other countries, including neighbouring India, Japan and China.
Economic mismanagement by successive governments weakened Sri Lanka's public finances, leaving its national expenditure in excess of its income, and the production of tradable goods and services at an inadequate level.
The pandemic wiped out parts of its economy - mainly the lucrative tourism industry - while an inflexible foreign exchange rate sapped remittances from its foreign workers.
Rating agencies, concerned about government finances and its inability to repay large foreign debt, downgraded Sri Lanka's credit ratings from 2020 onwards, eventually locking the country out of international financial markets.
"People should know the truth. I don't know if people realise the gravity of the situation," Finance Minister Ali Sabry said.But People knew well but politicians and 225 MP don’t know the gravity of this economic situation last three months they play drama in parliament to ensure the membership in parliament with any single solution to current economic and people crisis.
Public anger has sparked sustained protests demanding the government’s resignation.Millions of workers stayed off work on Friday in the strike, organized by the country’s more than 2000 trade union movement. Train and state-owned bus services were disrupted. Industrial workers demonstrated outside their factories and black flags were hung across the country in an expression of anger against the government.The government has declared a state of emergency for the second time in five weeks, giving security forces sweeping powers as a nationwide strike by people demonstrators crippled the country.
Faced with a rapidly deteriorating economic environment, the government still chose to wait, instead of moving quickly and seeking help from the IMF and other sources.For months, all others urged the government to act, but it held its ground, hoping for tourism to bounce back and remittances to recover.
The IMF has requested Sri Lanka to implement a strict fiscal and monetary policy protecting the livelihoods of the most vulnerable poorest of the poor people. Fiscal policy should be devised on a revenue-based consolidation strategy that increases ability of the country to raise revenues and to address most critical spending needs while further tightening monetary policy.
Country wide are calling for a change in governance and economic undertaking, including the management of public and social goods like education, health and utilities. The protest is a result of the severe shortages brought on by an imminent economic crisis.
These protests currently underway should embrace and amplify these demands and recognize that many of the burning issues we currently face are consequences of structural, economic, political and ideological causes that we must seek to address if we are to ensure and not cosmetic or temporary change.
The high centralized form of governance, in which extensive power is vested in one person has weakened parliament and the hand of the elected representatives. The centralized authority has also led to negotiations and deals, where consultation and political participation of the people, particularly at the community level, have been completely undermined. Corruption and authoritarianism at higher levels have nurtured corruption and authoritarianism at the lower levels of governance.
The safeguarding of public goods and public entities, like education, health care provision, and essential utilities is imperative. Though austerity measures and years of hardship are touted as inevitable, further disenfranchisement of a suffering people, hit by skyrocketing prices and shortages, must be resisted. There is inadequate alternative economic thinking informing current economic policymaking in Sri Lanka. We should not become complaisant with the neoliberal consensus, that we can go back to business as usual with IMF. We must ensure that economic planning for the future will refrain from repeating the mistakes of the past that have led us to this crisis. Immediately the country needs remedial action for short-term and long term to recover otherwise worst and worst.
The country is in a deep economic crisis with the sovereign people bearing the brunt of difficulties in the form of runaway inflation, shortage of food and medicines, gas, fuel and other essentials plus crippling electricity cuts.
Knowing the crisis and realization of its implications is the first step in the search for the remedial action. But past few months the government does not seem to realise the gravity of the high-risk situation. In the past few weeks concerned citizens, political parties, religion leaders, professional, independent analysis have discussed and put forwarded several options in order to break the stalemate that has paralyzed the country. However, the government has shown no sign of urgency and continued its obstinate and indifferent ways, and try to ensure their survival by playing game in the parliament when faced with this national crisis.