Sri Lankan self-deprecating politics

Disasters are nothing new to Sri Lanka. In the previous 20 years alone, there have been a number of significant events, including the devastating tsunami disaster in 2004, the intensification of the civil war until its end in 2009, instances of extreme weather and associated natural disasters, and socioeconomic and political upheavals. Nevertheless, despite all of this conflict, growth was fluctuating but still present. The colonial forgotten child advanced from being a low-income nation to lower middle-income status in 1997 before reaching upper middle-income level today.

According to the World Bank’s stated classification of nations, Sri Lanka attained this status in July 2019. Based on per-capita Gross National Income (GNI), the World Bank divides nations into four income brackets: low income, lower middle income, upper middle income and high income. For the sake of easier funding, the Government now wants to downgrade its economic standing to lower income levels. While moving from a lower middle-income country to an upper middle-income one, the country saw average GDP growth of above 5%. 

The status change, according to the office of President Ranil Wickremesinghe, would not take place. The term “middle-income trap” describes the 7 to 40-year transition period that countries go through to shift from higher middle-income levels to high income levels. Although economists disagree on the exact causes of why countries fall into this middle-income trap, literature points to the slowdown in productivity as the main cause. 

Lack of economic diversification, restrictive and ineffective labour markets, inability to access modern infrastructure, shoddy institutions and a dearth of innovation are the root causes of this.

The World Bank will ultimately decide whether Sri Lanka will continue to be a middle-income nation and hence allow Sri Lanka eligibility for loans from the International Development Association (IDA). The IDA is a division of the World Bank that offers grants and loans with zero or low interest rates to the world’s poorest nations in an effort to combat poverty.  The Colombo branch of the World Bank did not immediately respond to a request from Sri Lanka. The priority, according to the statement, is to press on with debt restructuring and economic reforms in order to restart the nation’s growth.

Last year, the Government estimated Sri Lanka’s GDP to be worth $ 89 billion. Even with a projected 8.7 % decline in GDP this year and adjusting for currency depreciation, the economy will still be roughly 75 billion. This leave per-capita income at about $ 3,400. According to the World Bank, low-income nations are those with a 2021 per-capita income of $ 1,085 or less. In September, Sri Lanka and the IMF struck a preliminary deal for a $ 2.9 billion rescue package, however as the funding can be given conditional that the economy gets the debt burden on a sustainable course – this is now being questioned.

The tourism-dependent economy suffered from the COVID-19 pandemic, which also reduced remittances sent home by foreign workers. Additionally, it increased gasoline costs, sparked populist tax cuts, and precipitated a seven-month import embargo on chemical fertilisers last year, which wreaked havoc on agriculture. 

There is no doubt that the IMF should have been sought out much sooner, while there are allegations of the GNI figure being too good to be true. The island has struggled with a severe dollar shortage, a collapse in the value of the rupee, and out-of-control inflation in addition to having to import essential food, fuel, and medicine. 

Regarding the effectiveness of the labour market and the degree of economic diversification, Sri Lanka remained in the bottom 20 % globally. To ensure sustainable growth and shared prosperity in the years to come, actions are needed to address the problems arising from these regions while also emphasising concerns like income inequality and poverty alleviation. We should not be changing the yardstick of success when, the bar of success should be raised.