Photo courtesy of Twitter
Sri Lanka is set to commence its discussions with the IMF on Monday. The country has jumped off the plane of economic stability without a parachute and now we must hope that this fresh group of genuine experts can assemble a parachute mid-air before Sri Lanka crash lands. Driven to action by the demands of its citizens, the government has done a lot more this week to salvage the economy than it ever done in the past two years.
There appears to be a glimmer of hope among international observers, local analysts and the general public that we may still make it through by the skin on our teeth. It is, therefore, a good a time as any to remind ourselves why the blame for this complete mess can be placed squarely upon the satakaya-draped shoulders of the Rajapaksa clan.
To be sure, the debt crisis has been brewing for two decades; successive, profligate governments, headed for the most part, save for a brief four year period in 2015 to 19, by the Rajapaksas sought to expand their popularity through excessive government spending. Using debt, rather than unpopular taxation, to maintain such indulgences made sure that they continued to be popular among the electorate who had little idea or appreciation for the invisible debt that continued to balloon out of sight. No matter what feeble counter arguments are yelled out in parliament, it was, in fact, the Mahinda-led government in 2007 that borrowed through International Sovereign Bonds (ISBs) for the first time.
One need not look far to find the Rajapaksa white elephants – the projects built using debt that yield no return to the country. The Lotus Tower, a beacon of this profligacy for everyone living in Colombo and its suburbs. The Magam Ruhunupura International Convention Centre, the Mattala Rajapaksa International Airport, the Hambantota International Port, the Mahinda Rajapaksa International Cricket Stadium and the myriad of wide highways in the Southern Province that serve as beds for sleepy cows are reminders of this profligacy for the people in the South. The people of the North and the East are perhaps lucky not to have such visual reminders of the waste that we are paying dearly for.
It was also under Rajapaksa tenure that state sector employment grew from about 800,000 to over 1.1 million workers, not including the military. Despite massive fiscal deficits, President Gotabaya Rajapaksa thought fit to increase public sector employment further during the past two years. Public sector employment now hovers around 1.5 million people, including the military. The public sector salary and pensions bill eats up 70% of government revenue.
Mahinda Rajapaksa has continuously championed disastrous economic plans such as anti-privatization, anti-foreign investments (except easily corruptible construction projects), anti-competition, anti-liberalization, state intervention and behemoth state enterprises, much of which contributes today to the massive cost of living crisis Sri Lankans are facing.
Post-election victory in November 2019, the Rajapaksa administration took a series of decisions to carefully rebuild the necessary environment to ensure its recklessness remained unchecked. President Rajapaksa’s sweeping tax cuts in 2019, surely serving no purpose than to appease cronies and win public favour, was the catalyst to the present day crisis.
Although several business bigwigs are now up in arms against the government with public speeches and voice notes meant to appease their guilt, many in the business community and even tax administrators welcomed the 2019 tax cuts with open arms. Of course, I do not begrudge the business community of not wanting to pay their share of taxes but the job of a government is to look after the needs of the wider economy, of all and not one single individual, entity or community, which is exactly what it did instead.
Dr. Indrajit Coomaraswamy stepped down in December 2019, and Gotabaya appointed W.D. Lakshman to the post. While having no access to more foreign debt to finance budget deficits, the government now focused its borrowing attention on domestic lenders such as the Central Bank, commercial banks, state banks and the Employee’s Provident Fund.
It was under Professor Lakshman’s tenure that broad money was expanded by 40%. Total domestic debt grew by 33% in 2020. By the end of 2020, direct lending from the Central Bank to the government had grown by a whopping 182%. The Central Bank, which ought to serve as ‘lender of last resorts’ became the government’s personal ATM machine, doling out new money to meet the governments growing deficit. Instead of realising the imminent disaster, Professor Lakshman, under the watchful eye of the Rajapaksas sought short term currency swaps to offset the outflow of foreign exchange.
Independent monetary board members like Nihal Fonseka and Dr. Dushni Weerakoon were ousted by the president’s secretary, Dr. P.B. Jayasundera, in mid-2020 to further consolidate Rajapaksa rule by stifling any and all voices of opposition and sanity. By September 2021 consummate charlatan, Ajith Nivard Cabraal, who had thus far served as the State Minister of State Enterprise Reforms and Capital Markets was appointed as the governor of the Central Bank.
The Colombo stock market bubble, which Mr. Cabraal promoted heavily through a combination of ultra-low interest rates, hubris and a lot of manipulation is also now in shambles. The All Share Price Index (ASPI) has collapsed by 5,228 points since the pre-January bond settlement euphoria, the blue chip index has collapsed by 2,004 points, perhaps indicative of the casino-style gambling that was prevalent in the stock market.
This was also inevitable. Foreign investors in the stock market had started pulling out their investments since last year so net foreign outflows in 2021 amounted to Rs 50 billion and would have served as an indication of the views of serious investors to any observer. Unlike the local investors, foreign investors pulled out a net of Rs 1.6 billion in the first week of January, prior to the upcoming bond settlement. Mr. Cabraal’s stock market cabal proclaimed the bourse as the ‘only bet against inflation’, and many unknowingly fell bait to the sweet words of the pump-and-dump specialists.
Mr. Cabraal had previously served as governor for nine years under the Rajapaksas’ previous regime so he was well-versed in playing the accomplice at the Central Bank while the Rajapaksas fleeced the country dry. He was ably backed at the Monetary Board by the likes of Kenneth De Zilwa and Samantha Kumarasinghe who continued to extol the virtues of import substitution and ‘modern monetary theory’.
In October 2021, Mr. Cabraal presented his colourful six month roadmap that ended up being a road to nowhere. A post evaluationby the Factcheck and PublicFinance.lk platforms found that the roadmap failed to deliver on all six of its primary targets and only achieved one of eight of its secondary targets, categorising Mr. Cabraal’s early March 2022 statement hailing the roadmap as a ‘resounding success’ to be blatantly false. IMF’s recent report on Sri Lanka states that ‘the authorities have presented plans to tackle the crisis but these are unlikely to put the economy back on a stable and sustainable path’ in reference to the ill-fated roadmap.
Mr. Cabraal gloated about the settlement of a $500 million bond in end January even as shortages of gas and other essentials were abound. Reserves today are under $2 billion, much of it in the form of a currency swap with China.
There is no money left to pay for fuel, gas, medicines, food or raw materials. Hospitals have run out of stocks of life saving medications, people face long power cuts and stand in queues from 4 am to get fuel and gas. Inflation is skyrocketing, the lagged effects of Professor Lakshman’s and Mr. Cabraal’s ‘modern monetary theory’ are showing at 18.7% in March; this is the highest inflation Sri Lanka has ever experienced. Food inflation at 30.2% is another record high.
President Rajapaksa’s thoroughly misbegotten overnight organic agriculture policy, which was aimed at preserving foreign exchange reserves to repay loans, managed to reduce tea yields by a third. In addition with power cuts, tea processing plants are unable to run their factories to meet orders on time. The impact of the fertilizer shortage is now reverberating across domestic supply chains of other foods like vegetables too, products are not available and when they are, they are simply too expensive to afford.
The same is true for the apparel sector. Apparel manufacturers are not able to buy the raw materials they need due to import restrictions; they also find it difficult to repay their suppliers because of Sri Lanka’s forex shortage. Power cuts are greatly affecting their operations hours, diesel to run generators is hard to find and they are not able to meet orders on time.
The same can be said for Sri Lanka’s ICT industry and tourism industry. How can a software engineer work without power? How does a hotel operate without power? News report of tea, apparel and ICT industries being poached by neighbouring countries abound.
In the Rajapaksas’ pursuit to cater to their own selfish needs, and ‘never going to IMF’, they have crippled many industries and businesses far more than COVID ever did. In a failed bid to save forex to pay debts through import bans, they have effectively jeopardized dollar earning industries.
If Sri Lanka had been in an IMF debt restructuring programme by now, by entering into it two years ago like many economists said, our dollar earning industries would not be in peril today, our hospitals would not be issuing flyers requesting donations from well-wishers and relatives, friends visiting from overseas would not be asked to bring medicines instead of chocolates and there wouldn’t be protestors occupying Galle Face demanding that Gotabaya and his government go home.
There is no more debate about Sri Lanka defaulting, in fact there never should have been. It was clear that the Rajapaksa path of stemming the tide would fail to suffice but those with eyes wide shut failed to sound the alarm and branded those who did as ‘doomsayers’ and ‘mischievous elements’. The promised Vistas of Prosperity and Splendour never materialised and the bubble of hubris that sustained this regime thus far has exploded in citizens faces. The outlook is grim, especially as the Rajapaksa government remains woefully incapable of facing reality.
Urgent stabilisation measures are crucial. The road ahead, even with IMF at our side, is a tough and painful one. But there is so much more the government ought to be doing while the IMF side of things take shape. China appears to have given up on propping up the Rajapaksa government. India has won enough favour in the recent past by extending credit lines, debt deferrals and currency swaps. No one else has offered help.
Despite shortages in food and medicines, no one from the government has sought fit to seek out humanitarian assistance or food aid from friendly allies. They remain woefully inept and completely out of touch with the realities of the common man and perhaps that is why they all must go.