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Economy found itself with meagre foreign exchange reserves of $1.5 billion; sharp decline in value of Sri Lankan rupee

The 22 million people of Sri Lanka have been exposed to a grave economic crisis with soaring inflation and daily power cuts that last for hours. In the absence of governance and rule of law, Sri Lanka is fast-moving toward a failed state. The government imposed a state of emergency, curfew and a ban on social media in response to the mass demonstrations and public outrage against President Gotabaya Rajapaksa’s regime.

The Sri Lankan economy took a big hit because of the Covid pandemic, which had a detrimental impact on several industries, especially the tourism industry. Resultantly, the economy found itself with meagre foreign exchange reserves of $1.5 billion and a sharp decline in the value of the Sri Lankan rupee. The decrease in remittances and economic mismanagement further contributed to the current meltdown, which has caused a severe shortage of essential items. Instead of managing the crisis by bringing all stakeholders together to formulate a strategy, the government decided to crack down on popular protests outside the presidential palace. The police used brutal force to disperse protestors, which angered the opposition. Consequently, they broadened their movement by demanding resignation from the President and his clique, particularly his family members who occupy the post of Prime Minister and other cabinet portfolios.

The report “Sri Lanka’s economy into the ground” rightly suggests that “when Gotabaya Rajapaksa became president of Sri Lanka in 2019, he inherited an economy in bad shape. Terrorist attacks and political crises had hit the country hard. Growth was at its lowest since 2001. Tourist arrivals, a big source of foreign currency, were down by nearly a fifth after steadily rising for a decade.” The report further explained that “tourism was hit by an even bigger shock in the form of Covid-19. Even as foreign currency receipts plunged, import bills were climbing. Dollars became hard to come, impeding imports that in turn led to the shortages of diesel and cooking gas. The lack of fuel also crippled electricity generation which because of a drought that has diminished output from hydropower plants is increasingly dependent on oil and coal.”

By the end of February, Sri Lanka’s foreign exchange reserves shrank to $735 million, which downgraded its credit rating. The already depleted foreign exchange reserves suffered from yet another blow after a rise in global crude prices. Prices of basic food items like bread, milk, lentils, sugar, wheat, and rice also quadrupled. In March, the government increased the prices of petrol by 43.5% and diesel by 45.5% further burdening the public. Even though the country recently received a $1 billion bailout package from India, it will be insufficient to meet the import of essential items. The country also needs to pay a debt of over $6 billion soon.

One cannot help but wonder how Sri Lanka went from being the most educated nation in South Asia to becoming plunged into a severe economic crisis that is crushing the population. Why did the Sri Lankan leadership fail to anticipate the economic crisis and undertake measures to salvage their country from colossal hardships? For years, Sri Lankans demonstrated resilience and courage in combatting a civil war and terrorism, yet they failed to prudently deal with issues that triggered an economic crisis. Perhaps, it is the structural fault lines in Sri Lanka that made it difficult for the incumbent regime to provide relief to the people.

Three major lessons can be learned from the ongoing turmoil in Sri Lanka in terms of economic management, planning, leadership qualities for good governance, rule of law, accountability, and eradicating corruption.

First, despite the regime’s imposition of curfew, bans, and the use of force to quash popular protests against the Rajapaksa family, the people have continued to defy the regime. The opposition-led alliance Samagi Jana Balawegaya (SJB) has condemned both the President and Prime Minister for their incompetence. They have also refused to join the National Unity Government proposed by the beleaguered President. Even though the Rajapaksa regime has committed serious human rights violations, the people have demonstrated sheer resilience and will by continuing demonstrations against the government. The popular revolt is much like the ‘Arab Spring’ and may bear fruit for the downtrodden population as it indicates that the tide has turned on Rajapaksa’s autocratic rule.

Second, the Sri Lankan elites who have long benefitted from a system based on political patronage and corruption will not be spared by the ongoing crises. Despite having accumulated significant wealth over the years, the elites have remained adamant about making any sacrifices for the country. They have refused to support or side with the masses. Sooner rather than later, the elites will begin feeling the impact of the crises and will need to make crucial decisions.

Third, Sri Lanka is a major test case for democracy, governance, rule of law, and accountability. If the military along with other security agencies takes control and restricts the Rajapaksa family, democracy will be derailed, and the future of political forces will become weaker. Unfortunately, however, the government has already lost popular support and credibility because of which the country now finds itself at a critical juncture. The absence of a crisis management mechanism has created a power vacuum, which threatens both the present and the future of the country. Had there been political will and determination amongst the political forces of the country, Sri Lanka could have undertaken measures for recovery.

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. Even the South Asian Association for Regional Cooperation (SAARC) has long been non-functional. 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.

Dr Moonis Ahmar is former Dean Faculty of Social Science, University of Karachi.

This article was originally published on The Express Tribune.
Views in this article are author’s own and do not necessarily reflect CGS policy.