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EFSAS Commentary

As the grave economic and political crisis in Sri Lanka deepens, regional experts call for lessons to be learnt


The people of Sri Lanka are going through the most challenging time of their independent history, and the country’s successive family-dominated governments have taken them to a juncture where the burden of shouldering the consequences of the country’s inability to pay for imports of staple foods and fuel due to a devastating balance of payments crisis has fallen squarely upon the common man. They have consequently been left to desperately grapple with acute shortages, steeply escalating prices, and daily power cuts that extend for well beyond half the day. The gravity of the disaster that is unfolding in Sri Lanka, leaving in its wake much human suffering and heightened social discord, can be gauged from the doomsday-like scenario painted on 11 May by Nandalal Weerasinghe, the Governor of Sri Lanka’s Central Bank, that Sri Lanka’s economy would “collapse beyond redemption” unless a new government was appointed within two days to restore political stability. That a country which till only recently laid claim to being the most advanced economy in South Asia with a healthy per capita GDP of over $4 thousand could come to this so rapidly has shocked many. It has roused experts in other vulnerable countries of the region to call upon their own governments to draw the necessary lessons from Sri Lanka, and to heed them.

Since EFSAS’ last commentary on Sri Lanka, escalating peaceful nationwide protests had descended into a spiral of violence against the rule of the Rajapaksa family. Prime Minister Mahinda Rajapaksa was compelled to resign, and he had to be whisked away by security forces to the safety of a naval base in Trincomalee on the north-eastern coast. A state of emergency was put in place, but that did not prevent eight people from being killed and more than 200 being wounded as weeks of demonstrations degenerated into bloodied clashes between groups supporting and protesting against the government since Mahinda resigned on 9 May. The homes of the Rajapaksa family and those of several ministers and leaders were burnt by agitated protesters. The situation was so tense that military personnel patrolled the streets in armoured personnel carriers and were given shoot-at-sight orders to bring the violence under control.

The pressure of the need to regain control of a situation that was dangerously close to spiraling out of hand compelled beleaguered President Gotabaya Rajapaksa, Mahinda’s younger brother, to act. In a televised address to the nation on the night of 9 May, Gotabaya yielded to the weeks of nationwide protests by pledging to give up most of his executive powers and set up a new cabinet shortly. He, however, stopped short of acceding to the growing demand that he resign. “I will name a Prime Minister who will command a majority in parliament and the confidence of the people”, he announced. Analysts had long been underlining that the uncertainty around the country’s leadership was clouding any possibility of economic recovery. As Paikiasothy Saravanamuttu, executive director of the Center for Policy Alternatives in Colombo, said, “The political situation has to be resolved before anything can happen. You need a credible government. The presidency right now is a poisoned chalice”.

In this backdrop, after closed-door discussions over formation of a new government to address the economic crisis, opposition leader Ranil Wickremesinghe was sworn in by Gotabaya as Sri Lanka’s 26th Prime Minister on 10 May. Soon after his appointment, the 73-year-old United National Party (UNP) leader promised to end the national crisis and revive the island nation’s economy. A visibly relieved Gotabaya tweeted along with a picture of him and Wickremesinghe, “My best wishes to the newly appointed PM of #LKA, @RW_UNP, who stepped up to take on the challenging task of steering our country through a very turbulent time. I look forward to working together with him to make Sri Lanka strong again”. Mahinda too quickly congratulated Wickremesinghe, saying that he wished him the best as he navigated “these troubled times”.

While the “troubled times” that Mahinda referred too had been in the making for several years due to a number of reasons, the role that the Rajapaksas played in its arrival cannot be underestimated. As The Washington Post pointed out in a 11 May article, “The Rajapaksa clan had its hands on various apparatuses of State, from exerting control over the security forces to commanding influence over major sectors of the economy…That includes widespread and documented allegations of human rights abuses and war crimes that accompanied the Sri Lankan military’s 2009 offensive against Tamil rebels, where thousands of civilians were killed in the final stages of the war; years of violence toward and intimidation and harassment of journalists and civil society groups; and the stoking of ethno-religious tensions, including the tacit cultivation of orders of extremist militant Buddhist monks, who have launched attacks on the country’s minorities. Then there was their mismanagement of the economy. The Rajapaksas expanded funding for the military even in peacetime and engaged in a form of crony capitalism that likely enriched the family’s fortunes. They touted major Chinese-funded infrastructure projects — including a port in their family’s hometown of Hambantota — that not only turned into wasteful white elephants, but made Sri Lanka into one of the world’s leading exhibits of what happens when a nation gets indebted to Beijing”. The new Prime Minister Wickremesinghe now faces the task of reversing these years of economic mismanagement and corruption and winning popular support.

China has, over the years, been the single largest beneficiary of the grandiose plans and the ill-considered profligacy of the Rajapaksas, and this was especially true of Mahinda’s terms as President. As Darpan Singh noted in his article in India Today, “During the rule of the Rajapaksas, Sri Lanka also moved closer to China. Sri Lanka was sinking deeper and deeper into China’s development partnership model. A hand that fed was also eating into Sri Lanka's already vulnerable economy. Here is how it was unfolding –  Sri Lanka borrowed heavily from China to plug years of budget shortfalls and import goods needed to keep the country running. But it wasted large amounts on building expensive and unviable aviation, shipping, highway, hospitality, and other such facilities that further squeezed public finances. And much of what was built remains abandoned after making huge losses and failing to service Chinese loans that kept growing in size. Only China, Sri Lanka's biggest bilateral lender, is the winner. Contracts went to Chinese companies and China gets the real estate in the form of equity”.

Mahinda is, therefore, a well-liked Sri Lankan leader in China for promoting large-scale Chinese investments in the strategically located Indian Ocean island nation, often disregarding criticism and warnings over Beijing’s debt-trap diplomacy. China’s Foreign Minister Wang Yi during his meeting with Mahinda in Colombo in January showered praise on him saying that “you are an old friend to the Chinese people. You paid six visits to China. We hold this special friendship dear and this story will be enshrined in the history of China-Sri Lanka relations”. Yet, in a true reflection of China’s interests and nature, Chinese Foreign Ministry spokesman Zhao Lijian in a media briefing in Beijing on 11 May declined to comment on Mahinda being forced by mounting protests to resign as Prime Minister. Skirting questions on Mahinda’s resignation, Lijian simply said that “we have noted the latest developments in Sri Lanka”

China’s apathy did not stop at Mahinda; it extended to the embattled Sri Lanka as a whole. China’s Ambassador to Colombo Qi Zhenhong was recently quoted in the Sri Lankan media criticizing Sri Lanka's decision to approach the Washington-based International Monetary Fund (IMF) to bail it out. This, despite China having contributed significantly and directly to Sri Lanka’s current devastating economic crisis. Also, while seeking to prevent Colombo from approaching the IMF, it is not as though China has offered any alternative or has itself earnestly tried to help Sri Lanka tide through its most difficult crisis. Ambassador Zhenhong, in fact, has been completely silent on the matter after announcing many weeks ago that China was considering a $2.5 billion credit facility to Sri Lanka.

The Sri Lankan quagmire has caught the attention of experts across South Asia, leading to debates and suggestions on what other countries needed to do to avoid turning into another Sri Lanka. In Bangladesh, the South Asian Institute of Policy and Governance (SIPG) and North South University (NSU) jointly organized a webinar on 24 April on the theme ‘Current Sri Lankan Economic Crisis: Lessons for other South Asian Countries’. Speakers told the webinar that Sri Lanka’s financial crisis was a classic example of what populist policies, corruption and mismanagement could lead a country to. This, they felt, was a lesson for South Asian countries that lacked good governance and had politicized administrations. Former Bangladeshi Foreign Secretary Shahidul Haque was of the opinion that Sri Lanka had always been at the centre of geopolitics, but it had traditionally maintained a neutral stance in global and regional diplomacy. However, in recent decades the country appeared “quite tilted towards one side, especially in project financing from China”. He cautioned that “One needs to be very clever in terms of rebalancing relationship with the global powers”.

Dr. Golam Rasul, professor in the Department of Economics at the International University of Business Agriculture and Technology (IUBAT) and former Chief Economist at the International Centre for Integrated Mountain Development (ICIMOD), meanwhile, highlighted the virtues of democracy and rule of law. He stressed that instead of encouraging debate and consultation, the Gotabaya government, following in the footsteps of his brother Mahinda’s, had only been trying to consolidate power and increase the family’s influence. Dr. Rasul was of the opinion that a multiparty democratic system is critically important as a country’s policy decisions are based on its political system. In an authoritarian country, for example, decisions are made from the top. In a democratic political system, on the other hand, power is allocated at various levels and decisions are made in a participatory manner, involving all important stakeholders, and weighing all possible options and implications. Dr. Rasul pointed to other important lessons for Bangladesh from the Sri Lankan situation. He wrote that economics and politics were interrelated and influenced each other, and quoted Nobel-laureate Milton Friedman while asserting that political freedom was fundamental for economic freedom. Dr. Rasul also cautioned against overdependence on foreign loans, which he felt could make countries vulnerable.

Aashish Kiphayet, writing for moderndiplomacy.eu, warned that Bangladesh was too heavily dependent upon just two sources of foreign earnings, readymade garment exports and remittances, much like Sri Lanka, whose reliance was on tourism and remittances. He urged special attention to address Bangladesh’s “considerable weaknesses in its economy and good governance process”. Md. Maruf Mozumder in his article in The Daily Observer also recommended strongly that Bangladesh draw serious lessons from Sri Lanka. He suggested that Sri Lanka’s tendency to sometimes lean more towards China than India was problematic, adding that “it is important to note that due to Debt Trap diplomacy, China is building a geopolitically strong position with huge profits by providing small loans to developing countries in South Asia”.

Aarya Rijal in her article ‘The Sri Lankan crisis and learnings for Nepal’ for nepaleconomicforum.org argued that Sri Lanka had failed to identify weak projections regarding its political and economic trajectory and that the country had failed to introduce effective regulations and policies that could have potentially mitigated the situation from escalating. Hence, it was important for Nepal to learn lessons from Sri Lanka’s situation and initiate relevant regulations to prevent the economy from becoming weaker and eventually crashing.

Pakistani recommendations on the lessons to be drawn from Sri Lanka have been interesting. Dr. Abid Qaiyum Suleri, who heads the Sustainable Development Policy Institute, welcomed Sri Lanka into the Pakistani club by writing, “Pakistan is not the only country in the region going through political turmoil. Sri Lanka, too, is facing a political impasse. Insecurity breeds insecurities. In Sri Lanka, an economic crisis has spawned a political crisis. In Pakistan, the ongoing political crisis is leading to an economic crisis”. He warned against gaining political popularity at the cost of macroeconomic stability, which he felt will lead to a vicious ‘economic crisis-political instability’ cycle.

Aqdas Afzal, writing in Dawn, expressed the view that Pakistan’s new government was already facing similar economic challenges as Sri Lanka’s was. Drawing attention to recent allegations that interest payments on Chinese infrastructure project loans had created steep dollar liabilities and thus were to blame for the crisis in Sri Lanka, Afzal added that Pakistan’s new Prime Minister was confronting the challenge of an economy that was also facing very strong headwinds. He concluded that economic stabilization in Pakistan will not be sustainable unless supported by a wider political dialogue.

Dr. Moonis Ahmar, former Dean of the Faculty of Social Science at the University of Karachi, lamented in his article in The Express Tribune titled ‘Lessons from Sri Lanka’s economic fiasco’ that “Besides India, no other South Asian countries have offered any form of support or assistance to Sri Lanka, which raises alarm over the absence of regional cooperation in South Asia”. He added that “South Asian countries, particularly Pakistan, must take the Sri Lankan crisis as a learning lesson. Considering the present situation of Pakistan, the country’s leadership, elites, and the masses must come together and prevent the country from descending into a grave economic and political crisis. Also, Pakistan must make momentous efforts to improve relations with regional countries”.

While each of these suggestions has merit in its individual national context, what all of these countries really need to do to avoid Sri Lanka’s fate is to ensure that leaders with authoritarian tendencies combined with lack of vision and economic sense are never again elected to power, and that autocratic predators such as China are at all times kept at an arm’s length.