A Bleak Future for Sri Lanka
Photo courtesy of UN News
Since being granted independence in 1948, Sri Lanka has been run by three family dynasties whose unaccountable, corrupt and incompetent regimes have led the country into various crises: economic, political and social including in the form of constitutional riots, two insurrections and a thirty-year long civil war. Currently the country is bankrupt and under the whims of international financiers. These families have successfully hidden their venality and incompetency, by demanding and being granted extra powers like the ones enjoyed under the executive presidency, and other special legalisation. Thus they have made their decisions and extra judicial actions opaque and without being accountable.
Any hope that the economic meltdown and the popular protest movement (aragalaya) might usher change are fading by the day. The political elite, if the Rajapaksa clan is an indication, are busy finding scapegoats be they foreign elements or local for their incompetence and greed. Instead of making their actions open to scrutiny and thus accountable, they are back to their same old diversionary trickery. For example, take the proposed counter terrorism law which gives even wider powers to supress dissent and hide their extra judicial actions. Also, sadly, the discriminatory policies and exclusion of minorities persist, further fanning the flames of communal disharmony. Meanwhile the structural, political, economic and constitutional changes needed to ensure that there will be no further economic and political meltdowns are ignored.
The current socio-economic situation
Sri Lanka’s economy collapsed in 2022 and it was the worst economic crisis in the country’s history. Economic crises have been a recurring feature of the country since the 1950s. In May 2022, Sri Lanka defaulted on its sovereign debt for the first time due to a series of adverse events: a loss in fiscal revenue in 2019 due to terror attacks that impaired tourism and the global Covid-19 pandemic in 2020-2021. Compounding it were the bad economic policies adopted in 2021, notably a ban on imported chemical fertilizers as an attempt to halt an ongoing decline in foreign exchange (FX) reserves. This led to a rise in agricultural prices and dramatically low harvests. Foreign exchange reserves had fallen to less than $2 billion in early 2022. Without access to international financial markets since sovereign credit rating downgrades in 2020, the government had no choice but to call for a debt restructuring. In March 2023, the IMF approved a 48-month $2.9 billion Extended Fund Facility to help the country get back on track.
The government’s response to economic challenges in compliance with conditions set by the IMF has come under intense scrutiny. The response has embarked on a policy of undermining human rights and exacerbating the plight of the people rather than alleviating their hardship. This is reflected in the shocking revelation that more than 17 percent of the population are food insecure, requiring urgent assistance. According to the UN, an alarming 31 percent of children under the age of five are malnourished, highlighting the severity of the crisis. Nothing is being done to alleviate their hardship.
With ongoing issues of corruption, wastage and mismanagement being conveniently ignored, the economic burden that has been caused by the incompetence and greed of the ruling elite has been shifted to those who can ill afford it and played no role in the country’s economic collapse. Introduced are regressive policies such as increased VAT. From the beginning of 2024, VAT was increased from 15 to 18 percent and will be applied to 97 essential goods including essentials like fuel, cooking gas and fertilizer. An 18 percent VAT has been introduced even for basic necessities such as food and textbooks. Measures of social protection are not only inadequate but also politicized, leaving vulnerable communities in dire straits. Meanwhile the profitability of companies has been sacrosanct with more than half a million jobs being lost.
The indebtedness of ordinary people is on the rise; 31 percent of households depend on loans to make ends meet while 24 percent are dependent on money lenders and 23 percent on bank loans. As of June 2023, the country’s staggering household debt reached more than seven percent of the GDP. At the same time the top one percent of Sri Lankans own 31 percent of the total personal wealth while the bottom 50 percent only owns less than four percent of the overall wealth.
The military continues to occupy land in the North and the East that formerly belonged to Tamil and Muslim communities. In trying to circumvent international pressure on the regime concerning human rights violations during the days of the armed conflict, a National Unity and Reconciliation Commission has been established but its potential to enact meaningful change remains doubtful.
The government is trying hard to get the Anti-Terrorism Act (ATA) passed; it is presented as a new and improved version of the Prevention of Terrorism Act (PTA). The Bill gives the president, police, and the military broad powers with no accountability to detain people without evidence, criminalize speech without clearly defined parameters and arbitrarily ban mass gatherings. The regime got its Online Safety Bill through the parliament that will see the curtailing of free speech online. These developments clearly show that kicking out Sri Lanka’s political old guard has not necessarily translated into long term reforms when it comes to governance and human rights.
There is no need to remind people that the country’s armoury of draconian legislation and unaccountable powers of the executive president was astutely and repetitively used to suppress the nonviolent aragalaya movement.
The future
The IMF-dictated program for the sale (i.e., privatization) or closure of 430 public sector institutions will result in the loss of half a million jobs. Corporate taxes are being kept low while exorbitant taxes are levied on working people, the primary ones being higher income tax, VAT and various import duties.
The IMF staff report warned that the social unrest could re-emerge, fuelled by falling real incomes. Causes for unrest are the very policies the government is implementing such as a regressive tax rate hike and cost-recovery pricing in the energy sector, insufficient anti-corruption efforts and delayed local elections. The report also pointed to the impact of the worsening global situation. External risks arise in part from intensified regional conflicts, including Russia’s prolonged war in Ukraine and the conflict in the Middle East, resulting in commodity price volatility and a sharp global slowdown, which could reduce capital flows and lead to a sharp exchange rate depreciation.
Despite this forecast, the IMF stubbornly insists that its austerity program that includes many of the above policies must be implemented to the letter. Its concern is not with the wellbeing of Sri Lankans but to ensure the repayment of foreign debts and the boosting of the profits of investors. President Ranil Wickremesinghe is in complete agreement. “There is no alternative other than implementing IMF policies,” he said. Meanwhile those who can pay and are the cause of the crisis get off scot-free, once again.
The domestic debt restructuring plan passed by parliament mostly cuts the retirement savings of private sector workers, which critics claimed to have spared the banking sector, international creditors and individual domestic creditors from bearing their share of the economic burden. Moreover, wages have not kept up with rising costs, contributing to heightened poverty and food insecurity. Combined with the government’s efforts to raise revenue through increasing electricity bills and income taxes, economic recovery has been felt unevenly by different segments of its population, eliciting protests and even union strikes.
The external finances are fragile as reflected in continued annual current account deficits and a high level of external debt (estimated at around 80% of GDP). FX reserves as of mid-2023 covered less than one third of the external debt repayments due in the next 12 months (well below the adequate ratio of 100%) and less than two months of imports (well below the favourable ratio of four months).
To tackle these structural imbalances, no viable alternative economic development program has been developed. Production necessary to satisfy the basic needs of the people and an export diversification that moves away from the high dependence on the traditional sectors such as tea, rubber and coconut, textile, clothing and tourism sectors remains essential for long term economic viability. Yet again those items are not on the agenda. The main opposition parties parrot the same mantra and talks about renegotiating the IMF deal but the austerity agenda will not be subject to any negotiations.
Conclusion
As can be seen, the government has not taken the necessary steps for tackling the fundamental governance issues arising from rampant incompetence, wastage and corruption among the political and bureaucratic circles. There has been no structural, political and constitutional reform. It’s depressing human rights record remains just the same and is worsening. Humanitarian assistance and diplomatic efforts are essential to address the country’s pressing issues and ensure that the government adopts policies that will benefit all citizens.
Despite the mass struggle protests having kicked out the previous leaders, many of that regime’s economic and political realities remain the same. After coming to power through a parliamentary coup d’etat, President Wickremesinghe is primarily concerned with retaining power at any cost, with the expectation that the socio-economic woes will be lessened. To ensure his success at the next presidential election, he cynically and unscrupulously postponed local elections that were scheduled for early March 2024 indefinitely, citing a lack of funds. Yet the expenditure of the government on many other fronts did not indicate such a lack of funds.
His presidency continues to resort to familiar authoritarian and anti-democratic practices to quell dissent, not only against the minority communities, but also against all political dissent. With presidential elections set to take place in 2024, Sri Lanka is at an important crossroad regarding its economic and political future. There is a necessity to choose between implementing politically convenient band aid solutions or resolving the structural problems that predate the crisis.
If not, Sri Lanka’s outlook will remain grim with political stagnation and periodic economic crisis being the norm as in the past, making 2024 a critical year for Sri Lanka. As the government and the opposition gear up for elections, there is a danger that government in power like those in the past will squander acquired loan moneys for election gimmicks, leading to further bailouts from the IMF in the future and being forced yet again to enact unpopular structural reforms which will unfairly burden the citizenry.
As the economic catastrophe of 2022 and the periodic early ones, the long civil war, two insurrections, numerous riots and an increasing authoritarian tendency have amply shown, if the system of governance is not fixed, Sri Lanka will be forced to relive its past tragedies. As compatriots, it is incumbent upon us to ensure that this does not happen again. We need to support those political parties and currents that look at changing our system of governance and constitution, to make it less opaque and more accountable where the rule of law prevails and where the rights of all citizens are respected. In tandem, there must also be an insistence on a more viable and fairer economic system.
