Time for drastic measures

It is no longer possible to hide the fact that Sri Lanka’s financial situation is extremely dire. While the global pandemic has had a devastating impact on many economies, the situation in Sri Lanka is a unique self-made calamity, brought about by bad judgment, immature, irresponsible policies and gross economic mismanagement. Politically motivated, unsound policy-making, runaway spending, blatant corruption, indiscipline and a lack of rudimentary knowledge of economics on the part of the ruling administration have led the country to this economic precipice. 

In 2019, the Government of President Gotabaya Rajapaksa started work by reducing taxes sharply. While there is no doubt high taxation stifles production, innovation, investments and overall growth, ill-timed and badly planned tax cuts significantly reduced Government revenue. The highly irrational decision forced the transformation to organic farming overnight, a feat never attempted anywhere in the world, has resulted in the very real prospect of famine in the country in 2022. Prolific money printing and the artificial exchange rate imposed by the Central Bank have threatened the stability of the whole monitory system.

Even amidst these crises, the Government has continued irrational spending, swelling the public sector by 100,000 personnel based on some reports, and increasing defence spending – in peace time – by 16% for next year alone. In the meantime, public investment has been stagnant at a time when the authorities need to get a handle on the COVID-19 pandemic in order to ease some of the economic strain. Exacerbating these bad policies is increasing corruption right across the spectrum.

The importation of essential commodities such as sugar, coconut oil and fertiliser to mega development projects in the energy and ports sectors are reeking with accusations of large-scale corruption. Such crimes have eroded confidence in the Government and prevented genuine investments from coming into the country.

And so, Sri Lanka is where it is today. Staring down at the real possibility of famine and food scarcity in 2022, with insufficient foreign currency to import basic commodities and energy to keep the lights on and vehicles moving, and a widely speculated sovereign default for the first time in Sri Lankan history. Past time for the Government to get its act together, economists would agree. There are no popular ways out of the mess that is largely of the Government’s own making.

A first step would be to either reverse or halt all the disastrous policies that have brought the country to the brink of economic ruin. It would be wise to prioritise the foreign currency crisis, the source of many problems. The Government must realise that the artificial exchange rate creates far more problems than it resolves. The decision to stop defending the rupee and allow the true exchange rate to take hold will have painful consequences in the short term, but eventually give the economy a fighting chance by stabilising the situation. 

However unsavoury and unpalatable to the current rulers, it might also be time for the Government to seek a comprehensive bailout from international lenders including the International Monetary Fund. Such a bailout will come with a string of austerity conditions, restrictions on spending and monetary discipline.

Undoubtedly these conditions will be politically humiliating for a regime which has railed against such measures and infringements on their fiscal policy. But the time for egotism and expediency is behind us now. This fight now is about economic survival.

History will not be kind to President Gotabaya Rajapaksa if he does not act decisively to save the Sri Lankan economy. There had been much harm in the short two years of his presidency. He has three years left to get the economy out of the mess. For him and us, it is now or never.