Economic quandary in Sri Lanka could determine diplomatic efficacy

 

                                                                        

                   

                                        Tranquility in Sri Lanka; fervently striving for it, in its society                                                               

                                                                                                                                    

   An economic quandary has struck Sri Lanka with palpable force. Its tremors buffet the political ramparts of that country. Acute economic shortages of essential commodities are spreading in Sri Lankan society with haste; public outrage reflects a northward spiral in intensity. The ruling dispensation of President Gotabaya Rajapaksa has declared a state of emergency to cope with economic crisis and attendant public anger.           

   But, the populace, reeling under acute hardships in making daily ends meet, is expressing increasing dissatisfaction. Fuel, electricity, essential commodities, price levels and foreign exchanges reserves have all been affected grievously. The government has not yet administered correctives to the grave dilemma. 26 ministers of Rajapaksa’s cabinet have dramatically resigned as of now. Substantial Indian aid is being sent, as an immediate relief measure to the crisis-ridden emerald island nation.                                                          

   Roots of the present political and economic imbroglio in that country could be traced back to 2007. That year, significant commercial loans began to be obtained for non-revenue yielding projects; it continued. Further on, careless tax breaks were provided in 2019. Its aftermath was excessive net spending with scant attention to requisite revenue generation. Barbaric Easter Sunday terrorist attacks in 2019 hammered down Sri Lanka’s flourishing tourism industry, supplementing revenue contraction. The Covid-19 pandemic also played a part in aggravating economic deceleration. Collectively, the country registers a whopping $35 billion in external debt. With scant measures by the government to repay or even to begin repaying those loans, the supply chain has almost halted, thereby bringing the country’s economy to the brink of collapse.                    

   When Sri Lankan governments were presided over by the current President’s brother, former President, Mahinda Rajapaksa - who is currently the country’s Prime Minister -, a noticeably China-preferred foreign policy was pursued. It was a strategy, where dependence on India could be kept on check; it also acted as a thought-of trump card, to be utilized as an admonition to India. On that count, China became a leading provider of sundry high-interest commercial loans to build infrastructure. Distressingly, those loans have not been paid back to any extent, and Sri Lanka carries a Chinese debt trap. Financial obligations to China count for a notable 10 percent of Sri Lanka’s net debt, while nearly half the total debt is to capital markets. In all, it added collectively to a very glaring Current Account deficit: import of capital surpassing export of capital.        

   Indian assistance is providing some relief to Sri Lanka. The government of India has provided $1 billion credit line to facilitate easing of crippling shortages of essential items such as fuel, food and medicines; other relief items like 40,000 tonnes of rice and 40,000 metric tonnes of diesel for electricity generation have also been sent. They emphasize that despite some Sri Lankan frictions with India, pressing, required assistance, would first come through Indian initiatives.             

   In 2019, Gotabaya Rajapaksa was elected with a big mandate; he promised to reform and reorient his country’s economy and political institutions. It indicated that he was aware of a deep statist tradition in his country creating difficulties in terms of meaningful government functioning and effective devolution of power. That conveyed to New Delhi that its relations with Colombo, under the Gotabaya administration, could improve if Indo-Sri Lankan diplomacy went beyond the boundary of Tamil minority rights. But, somewhere along the track Gotabaya did not preside over meaningful economic reforms and neglected measures which could have prepared his country to withstand accumulating economic shocks.  

   However, all culpability cannot be put at Gotabaya’s door. His predecessor regime, led by President Sirisena, had spoken of reducing dependencies on China, and of administering rectification to economic policies, but had not done to the extent it should have. But, the present dispensation, elected in November, 2019, didn’t actuate remedies by either government measures or through public awareness programmes.                    

   The way forward is tortuous and torturous. A talked-of common minimum programme to create a two-year recovery plan, marked by steps to carry out far-reaching and significant reforms to revive growth is on the anvil. In addition, IMF is scheduled to start discussions this month with Sri Lanka’s finance minister for potential loan assistance. The IMF advisory surrounding the loan would in all probability aver that fiscal deficits – loss of government revenues – need to be rectified; furthermore, the country’s exchange rate mechanism would need to be weighed toward a floating exchange rate, whereby the nominal borrowing interest rate would have to be gradually determined by real levels of money availability, investor confidence, and the currency exchange rate.        

   Sri Lanka would have to manage its prevailing socio-economic turmoil and acquire aid and assistance from other nations and multilateral institutions. India could chart out a re-worked policy of effective diplomacy with that country. New Delhi should be seen as a friend of all communities in Sri Lanka and offer its good offices to resolve problems between themselves. Steady, incremental progress by Colombo on it, as a response, would relatively widen its space in diplomacy, and create expediencies for a keenly required economic amelioration and social cohesion. The intermittent frictions in Indo-Sri Lankan diplomacy around the Tamils of Sri Lanka, which began from the 1980s, would then be truly administered a satisfactory conclusion.