What does the Sri Lankan crisis show?

Sep 26, 2022

Today they, tomorrow we?

Today it is Sri Lanka. Yesterday it was Greece. Tomorrow it may be Pakistan, Nepal, Bhutan, some South American or African countries. Who knows? Nevertheless, no economy in the world, including India, is too big enough to resist an economic collapse. The reason is simple: today’s world is interdependent with vulnerability to volatility in the global economy.

After the Covid-19 pandemic, only Sri Lanka has fallen into such a big crisis. Even before the pandemic, it was showing the symptoms of collapse. The last time when Rajapakse was the president, Sri Lanka took a huge loan from China. China-funded it happily knowing the fact it would be able to repay the liability. Everyone knows about China’s tactic of forcing small economies to make their “Samanthas” through big loans. The same tragedy is awaiting Bhutan and Nepal. They had tried to keep their distance from their long-time friend India after China’s aid.  Small countries like Sri Lanka and Nepal with the huge necessity of imports cannot stand alone. Large size import dependence is a big risk factor. They are at the mercy of the exporting countries. A country with a healthy trade balance and strong foreign exchange reserve for meeting their long term import needs can naturally stem the rot of the global crisis to a great extent. Such an economy can sustain the global economic crisis. Under the free trade regime of WTO, densely populated small countries have become dumping grounds for developed economies.

Why are countries landing in a big financial crunch and people fleeing their homeland? Import dependence is not the only factor that cripples small economies. Efficient economic management, discreet policies and prudent spending plans can save an economy even if it is over-depended on imports for the time being. Imprudent economic management leads to high public debts and foreign exchange deficits. These ultimately lead to high inflation. No surprise then that the poor Sri Lankans pay Rs 450 for a kilogram of rice. There is no exam paper available in schools forcing the government to cancel exams. Restaurants and bakeries have closed their kitchens. Housewives run for hours to refill their cooking gas. All street lights are off. There is no power for 13 hours a day in the sweltering heat. The economic crisis is real beyond the books of the government and banking regulator of Sri Lanka.

What made Sri Lank fall into such an abyss of economic crisis? Economic mismanagement and poor planning. The government did a serious miscalculation in every policy it took. When it banned chemical fertilisers to make the country the first in the world to be rated for fully organic planning, it couldn’t foresee the possible fall in farm yields. Food production fell to half the mark to trigger a massive hunger.

Sri Lanka could have been safer had the government considered the Tamil version. Ethnic Tamilians went to Sri Lanka to work on tea plantations for their livelihood. Their generations found their home in Sri Lanka as their country, which the sons of the soil rejected. That led to the rise of LTTE and the subsequent bloody civil war that killed thousands of people and displaced several thousand people.

After flowing the Tamil blood, the Sri Lankan government resorted to heavy overseas borrowing out of its major miscalculation. Today it has a foreign currency loan three times more than its foreign exchange reserves. With borrowed money, no commercial projects came up. It did not need an airport at the cost of the borrowed money. Its reclamation project is a futile attempt. All these accelerated its fall. When the crises broke at all levels, the government became helpless. Its call for help from neighbours is just natural though it adds to the already overloaded liabilities. But that is not going to be a permanent solution. It needs bold economic planning to exploit the local strength and environment.

Sri Lanka has a burdensome legacy. A decade-long civil war had ruined the country from which it was struggling to recover. The war had pushed the country several years behind. It handled the rebels with an iron hand as every country does. The Tamil rebels were not against the people but the government policies and principles. Sri Lanka allowed foreign influence to rule it and adopt new policies in handling the Tamils. In every economy, strong foreign influence and strident domestic policy do equally good and bad for people. Over a period a predominant foreign influence makes the economy stay dependent on external forces.

Many countries in the world suffer the worst from the Russia-Ukraine war even if many of the sufferers do not share a border with them. This shows that the collapse of any government in the world or any war declared by any country puts the rest of the world in trouble. If the world was not one, Covid-19 would have finished within one district of China. But it travelled around the world within weeks.

In two years, the world has received three lessons. All these lessons have links with globalisation, nationalism, rulers’ miscalculations, the foul economic policy of certain rulers, etc. The war-torn Ukraine, economically troubled Sri Lanka, and heavily miscalculated Russia could devastate millions of people.

This is a new lesson for the entire world. We are also not very safe after all India is heavily dependent on oil imports and weapons, which eat away a huge foreign exchange reserve. Until we become a trade surplus the shadow of a financial crisis looms large over our head.