Col R Hariharan
Sri
Lanka Perspectives September 2021| South Asia Security Trends Oct
2021 | www.security-risk.com
The lighting up of the state of the
art New Kelani suspension bridge, linking Colombo and Katuanayake airport, was
perhaps the only bright spot in Sri Lanka during the month. The country reeled
under shortage of essential food items due to runaway inflation and President
Gotabaya Rajapaksa declared an economic emergency on September 1. This is not
surprising as the country’s foreign reserves had depleted to $four billion at
the end of 2020. After meeting foreign debt obligations in March, foreign
reserves further declined; now it is estimated at $2.3 billion, below the
benchmark of three months requirement. These are reserve levels never experienced by
Sri Lanka in modern times.
Despite stringent import controls, imports in the
first seven months of 2021 amounted to $11.73 billion as against $8.97 billion
for the same period last year, increasing the trade deficit. Higher
international oil prices, medical imports to combat COVID, demand for essential
raw material and food items increased the import expenditure. At the same
time, decline in remittances from abroad and steep fall in tourism industry
resulted in fall in income. Ill-timed ban on chemical fertilisers and pesticides,
particularly when the economy was on steep decline, have affected food
production and tea industry which may take time to recover. These have sent the
pentup demand for food imports to a steep rise, adding to the cash crunch. On
top of it, import of 96,000 tons of organic fertiliser from China was found
contaminated with harmful bacteria, rendering it unfit for use.
After declaring economic emergency, in keeping
with his style, the President appointed an army general as the commissioner of
essential services, armed with powers to seize stocks of food stuff,
particularly rice and sugar, held by traders and distribute it to the public.
But that did not provide immediate relief because 800 containers of imported
food stuff were stuck in port, awaiting clearance. The importers lamented they
did not have the money to pay as banks faced shortage of dollars. Prime
Minister Mahinda Rajapaksa had to go into a damage control mode and issue
orders to clear 500 containers of sugar. Importers who met him sought a long term
solution to the dollar crunch and failure to do so would lead to further food
shortages and price rise. After the meeting , the PM has instructed the
governor of the Central Bank of Sri Lanka to minimise current import
restrictions as much as possible on non-essential goods and equipment to ease
the plight of entrepreneurs.
The persistent balance of payment problem calls
for economic reforms and not band-aid measures adopted by the government. Sri
Lanka needs to urgently find a solution to get out of the foreign currency
crisis. Country’s high risk rating has precluded borrowing in the international
market. International assistance from India, Bangladesh and China in the form
of currency swap and yuan loan have been partially successful to tide over the situation
temporarily. But that option is also running out.
The only feasible option is to get an extended
facility from the International Monetary Fund (IMF) to gain balance of payment
support. The low rate of interest and longer duration for repayment make IMF
funding attractive. It would also help regain international confidence as it
could upgrade the international credit rating of Sri Lanka.
Milinda Moragoda (present Sri Lanka High
Commissioner in New Delhi)’s public policy think tank, Pathfinder Foundation,
in the last economic policy commentary has emphasised the importance of moving
towards an IMF-led programme to manage the declining reserves. It stated
the combination of decades of weak economic management and the unprecedented
adverse impact of the pandemic means that Sri Lanka does not have any easy
options. “Sri Lanka’s immediate priority is stabilising the economy by
restoring fiscal sustainability in the medium term, primarily through revenue
enhancement, and restoring debt sustainability by reprofiling debt servicing.”
Though Sri Lanka has benefited from IMF
assistance over a dozen times in the past, the Rajapaksa government has been
reluctant to approach the IMF for assistance because it comes with conditions.
Essentially, they are based on good economic management and structural reforms
to improve accountability essential for economic stability and growth. These
measures will help generate liberal international assistance from agencies like
the World Bank. Apparently, the Rajapaksa government’s reluctance stems from
the President’s reservations in accepting any international intervention
directly or indirectly that cramps his style of governance.
It
was in this critical backdrop at home, President Gotabaya Rajapaksa delivered
his first-ever address at the 76th UN General Assembly session on
September 22. In a brief speech, he covered Sri Lanka’s efforts to tackle
issues the world was confronting: COVID pandemic and the economic difficulties
in its wake and sustainable agriculture to overcome environmental degradation.
The
President emphasised “fostering greater accountability, restorative justice and
meaningful reconciliation through domestic institutions was essential to
achieve lasting peace. So too is ensuring more equitable participation in the
fruits of economic development.” He further added that his government was
focusing on extensive legal, regulatory, administrative and educational reforms
to facilitate and deliver prosperity to the people.
In
fact, he has identified accountability in governance, fidelity of domestic
institutions, delivery of equitable justice and ethnic reconciliation as the
four essentials for economic development. What he has left out is the need for
his government to regain international credibility. Sri Lanka needs the
good will of the international community, particularly when the country is
passing through critical times.
Three
months ago, the European Parliament passed a
resolution that the GSP Plus concession of duty -free exports granted to Sri
Lanka should be withdrawn if it did not show signs of progress in its
protection of human rights. The resolution expressed “deep concerns over Sri Lanka’s
alarming path towards recurrence of grave human rights violations as described
by the most recent UN report on the country, which lists among the early
warning signals the accelerating militarisation of civilian governmental
functions, reversal of important constitutional safeguards, political
obstruction of accountability, exclusionary rhetoric, intimidation of civil
society, and the use of anti-terrorism laws.” Many in Sri Lanka would also
concur with the EU parliament's perception of the Rajapaksa government.
Probably, the resolution was triggered by Sri Lanka’s use of Prevention of
Terrorism Act (PTA) to ban 11 organisations in March 2021, ill timed to
coincide with the UN Human Rights Commissioner Council (UNHCRC) meeting.
Many international investors would agree with the US State
Department report on investment that Sri Lanka is a challenging place to do
business “with high transaction costs, aggravated by an unpredictable economic
policy environment, inefficient delivery of government services, and opaque
government procurement practices.” Public sector corruption is a significant
challenge in Sri Lanka and a constraint on foreign investment, it adds. While
the country generally has adequate laws and regulations to combat corruption,
enforcement was weak, inconsistent, and selective.
Almost
every project is mired in controversy, whether it is Colombo Eastern Carrier
terminal or the latest project on the block - US corporate giant New Fortress
Energy (NEF)’s proposal to build a new offshore LNG terminal in Colombo for
receiving, storing and re-gasification. There are widespread allegations that a
framework agreement on NEF project has been signed though details are shrouded
in secrecy.
This
has created a climate of mistrust in the government processes, because lack of
transparency has been a hallmark of almost all governments -past and present.
Militarisation of bureaucracy has further aggravated the trust deficit in the
government's handling of issues.
Is
President Rajapaksa prepared to clean up his act and adopt more democratic ways
of operation? That would mean reviewing wide powers the executive presidency
has acquired, more accountability to the people, crackdown on corruption,
tone down militarisation, snuff out cronyism and kickstart transitional justice
process and get ready for ethnic reconciliation talks. If he can do all these,
he can be truly the terminator, as hailed by his admirers.
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