Lessons From Sri Lankan Crisis

Narayan Upadhyay

Infuriated Sri Lankans last Saturday stormed the presidential palace and set ablaze the Prime Minister's residence in the capital city, Colombo. Unhappy over the rulers’ handling of the country's economy, which left their lives in tatters, the enraged mob sent the ruling elites into hiding and the Emerald Island on an edge.

After frustrated Lankans arrived in the capital in hordes from other parts, members of the Rajapaksa cabinet including President Gotabaya Rajapaksa, Finance Minister Basil Rajapaksa and other Rajapaksa brothers such as former President Mahinda Rajapaksa, and Finance Minister Basil fled the capital to save themselves from the wrath of the people. Absconding president Gotabaya and PM Ranil Wickremesinghe agreed to step down on July 13, to facilitate an all-party government. Before this, the security forces asked the irate masses to help them maintain law and order.

Worst crisis 

Having experienced decades of Tamil insurgency, the island nation of South Asia has now been grappling with the worst economic crisis, putting the people at a receiving end. Due to economic mismanagement, the country's foreign exchange reserves depleted to the level that it could not pay for necessary items such as fuel, medicines and daily commodities. Despite being willing to pay exorbitant prices, Lankans nowadays need to stand in serpentine queues in front of fuel stations and food stores while they have to pass their days and nights in sweltering conditions. Shortage of fuel and coal, an outcome of the dearth of foreign currencies, has led to about 14 hours of power cuts, which has also caused a downfall in industrial production.

It is surprising to see that a nation that once boasted of having the strongest economy, highest per capita income and higher education level among the nations in South Asia, has suffered the worst economic crisis since it got its independence in 1948 from Britain. Several reasons have led to the severe economic crisis in Sri Lanka, a top tourist destination in the region. The outbreak of the COVID-19 pandemic delivered a telling blow to the country's economy that relied heavily on tourism. It slackened remittance inflows and hit hard major exports such as tea. Easter bombings in churches and luxury hotels by suicidal Islamists in April 2019 caused an adverse impact on the nation's tourist arrivals in later years. 

In addition, the nation's agriculture output took a hit after President Rajapaksa's government turned the nation's agriculture sector into an organic one. The dearth of tourist arrivals dented its foreign exchange reserves while lesser agriculture products, an outcome of the government's decision to adhere to make organic agriculture, forced the authorities to import agricultural items from abroad by paying foreign currencies. The government also took unappealing measures to make it popular among the people. Instead of broadening its tax, the government decreased value-added taxes and failed to streamline the tax system, which depleted its revenues. 

In the meantime, heavy borrowing from abroad, even at higher interest rates, caused the country's economy to suffer. After signing the Belt and Road agreement with China, the Rajapaksa rulers received loans from China but were unable to pay them off. As a result, they were forced to hand over their Hambantota seaport to China on lease for 99 years. In the meantime, they rejected the US offer of Millennium Challenge Corporation (MCC) aid after much dilly dallying, which must have infuriated the USA. For many, the two events - heavy loans to China and denial of accepting the MCC - have played their part in further depleting the foreign exchange reserves, inviting serious economic and other crises in Sri Lanka. Everyone agrees that the economic mismanagement by the Rajapaksas is the leading cause that put the island nation into its worst economic crisis.

Many back in Nepal indicate several similarities between the economy of Lanka and Nepal. Economists warn that our authorities must take clues from the Lankan crisis so that the Nepali economy will be saved from facing the fate of the island nation. Nepal faced the same crisis as it faced in Lanka after the outbreak of the pandemic. Its tourism sector received a hit and industrial output declined. At present, like in Sri Lanka, we have to tackle rising prices caused by a rise in fuel prices in the international market.  The outbreak of the Russia-Ukraine war has made the matter worse for both nations. Meanwhile, alarming trade deficits, heavy spending, rising debt, declining agriculture and rampant corruption have also threatened our economy.

Despite naysayers raising doubts about our economy, many think that our economy is stronger than that of Sri Lanka, where the Rajapaksa brothers mismanaged their economy owing to their rigidity and autocratic way of handling governance. Nepali leaders must not act in the way the Rajapaksa brothers and relatives acted in the face of the growing crisis. Meanwhile, economists in Nepal provide a significant tip for Nepali authorities: They should not overlook our economy's small size and vulnerability. Because of this, risk-taking capacity is always low. 

Limited production

Our economy, like that of Sri Lanka, has limited production and export of certain goods and services. These economies do not have the ability of Chinese or Indian economies and thus cannot survive risks created by external or international events. Sri Lanka seemed reckless in making its economy risk-free. Sri Lankan rulers, who were successful in decimating Tamil rebels, grew arrogant in recent years. The ruling elites must have thought that if they could wipe out the dreaded terrorists, they could well handle any crisis facing the nation. Nevertheless, they failed to notice that managing the economy is a completely new game. 

After failing to address the fallout from the pandemic, rising international debts, skyrocketing fuel prices, declining agriculture products and bad tax policy - they made another mistake - they took suggestions and inputs provided by their 'yes-men' while handling the looming worst economic crisis that ultimately left a telling blow to their hopes of clinging to power for long. Every politician must remember that no action, not even the use of brute force, can keep down the people who are made to suffer someone else’s faults. 

(Upadhyay is Managing Editor of this daily)