Sri Lanka in Deepening Turmoil: Between Crisis and Opportunities

 Sri Lanka

The economic and political turmoil in Sri Lanka has turned worse with the people’s protests assuming violent bouts, snowballing across the island nation. Predictably, the ruling Rajapaksa family has become the principal target of attacks, and there are reports that Mahindra Rajapaksa—who resigned as prime minister—and his family had to flee from the capital even as President Gotabaya remained adamant, refusing to quit office. In the wake of violent protests, the Sri Lankan government has granted its military and police emergency powers to arrest people and issued orders for troops to shoot on sight. The crisis in Sri Lanka is unprecedented in its scale and intensity albeit the long years of civil war since the 1980s had triggered structural problems within the ethnicized society. However, the 22 million people on the island nation today have justifiable angst against a government that did nothing to assuage the burgeoning agonies of its citizens.

Protests in Colombo and elsewhere began to assume a new dimension in April with an unprecedented surge in prices accompanied by an acute shortage in food, medicines, fuel, and other essential commodities. In less than one year, food prices have skyrocketed so much so that many people were even forced to cut down their daily intake. Understandably, with the outbreak of COVID-19, tourism and its associated service sectors—the mainstay of the economy—have witnessed a total breakdown which accentuated the economic crisis. The health system of the country is also undergoing a serious crisis with a lack of medicines and inadequate hospital services amid reports of a continuing pandemic. Sri Lanka Medical Association (SLMA) has warned that if the hospitals are deprived of vital drugs and medical tools, “the casualties will be far worse than from the pandemic.” SLMA also sounded an alarm, “We are made to make very difficult choices. We have to decide who gets treatment and who will not.

While fuel shortage—accompanied by escalating prices—has led to a panic situation, power cuts and disruption in financial services paralyzed the economy. As reports from the domestic and international sources suggest, the primary cause of the tottering economy is horrid mismanagement of the financial system and rampant corruption resorted to by the ruling coterie led by the Rajapaksa family. The island nation’s foreign currency reserves have dwindled over months, if not years, and the import-dependent sectors of the economy, including food and fuel, have suffered the most. However, the ruling dispensation and its benefactors laboured to justify everything related to the meltdown—pointing to the “consequences of the pandemic and the bombings of churches.” But the pandemic is not an exclusive problem of the island nation. Also, bombings were not alien to Lanka in the 80s, 90s, and even in the first decade of the new century. They did not affect tourism and foreign remittance in any significant way amid long years of civil war and violent ethnic conflicts. Then why today?

Reports of a deepening crisis in Sri Lanka’s economy were already available much before the Easter bombings and the outbreak of the pandemic. But most of them sought to analyse it from the point of view of draining foreign exchange reserves and external debts.  Seldom did the enduring characteristics of the island nation’s political economy and its role in the making of the present meltdown emerge in media debates and academic analyses. Nor did the policy regime of the successive regimes—which was instrumental in making the economy more susceptible to setbacks—become a subject of discussion within the country. However, we would recollect today that the island nation’s economy was already susceptible to crisis ever since the UNP government under J. R. Jayawardena launched economic liberalisation—the first South Asian country to experience a structural adjustment programme which eventually led to a neoliberal path of the economic regime. The UNP policy regime was essentially against workers and peasants and tens of thousands of them were rendered jobless in the 1980s, not to speak of the conditions of Tamils in the North and Northeast. With the outbreak of the civil war, the economic liberalisation process could not make much headway. After the ‘successful’ 2009 ‘war on tigers’ by the Mahindra government, the Sri Lankan economy began to pick up with international capital making its presence albeit in speculative areas.

Ahilan Kadirgamar, a political economist, wrote that this was “reinforced by the tremendous flow of capital to the emerging markets after the Great Financial Crisis of 2008. Sri Lanka was considered both an emerging market and a post-conflict economy, and the value of the stock market in Colombo quadrupled in the 18 months after the war.” Kadirgamar called “these political-economic changes after the war with an authoritarian regime and their pro-market policies as the second wave of neoliberalism in Sri Lanka. It is that second wave of mounting financialization that has thrown Sri Lanka deep into the current crisis albeit pushed over the cliff by the disruptions of the pandemic.”

The views of Kadirgamar hold relevance today even as the ruling dispensation in Colombo started negotiations with the International Monetary Fund (IMF) for a major bailout.

Earlier, the government was asserting it would not go for an IMF option, but they were actually “exploring avenues,” as Kadirgamar noted. He compared the scale of the Sri Lankan crisis to the conditions of the Great Depression in the 1930s. However, Kadirgamar says that “there needs to be a radical departure from our past policies. But that is not happening. “Sri Lankan economists have become lazy, regurgitating the policy prescriptions put forward by the IMF, World Bank and other international agencies, and have lost their capacity to rise up to the challenge to address this historic crisis.” Kadirgamar warns that the “IMF may only provide a facility on the order of USD 2 billion or at most USD 3 billion, but the trade deficit in 2021 was USD 8.1 billion. Those pushing for an IMF agreement believe that will allow Sri Lanka to borrow again from the international capital markets to bridge the trade deficit until such time that tourism takes off. In reality, the cost of borrowing is going to be out of the reach of Sri Lanka, particularly as global conditions have changed, with the Federal Reserve in the United States set to raise interest rates. Furthermore, borrowing in the capital markets and rolling over debt will only prolong the debt crisis that has trapped Sri Lanka,” he noted.

There are also voices of opposition to an IMF-led solution. Prof. Tissa Vitarana (TV) and Vasudeva Nanayakkara (VN), both MPs, have expressed their reservation. However, advocates for an IMF-led solution are now gaining momentum today. Sanjeewa Jayaweera, for example, wrote that the former Governors of the Central Bank, Professor W D Lakshman and Nivard Cabraal, and the Treasury Secretary S.R. Attygalle and P B Jayasundara, the Secretary to the President (Gang of Four), were “responsible for the economic catastrophe that we are currently enduring.” According to Jayaweera, “Their policy decisions to reduce taxes, print money, and maintain low-interest rates and a forced exchange rate that was unrealistic are now acknowledged by many as the cause of the destruction of the country’s economy and the immense suffering we are undergoing. They steadfastly refused to seek the assistance of the IMF and restructure the foreign currency debt. Those who argued against such policies were ignored and labelled as ‘doomsday advocates.’” Jayaweera’s views may sound like an attempt to absolve the political leadership and put the entire blame on the ‘Gang of Four.’ However, he is equally critical of the role of the political dispensation.

Jayaweera says: “There is no doubt that the President, Prime Minister, and the Cabinet need to accept full responsibility for the disaster that has befallen the country. Attempting to wash their hands off by stating that the Gang of Four is responsible will not do. Their incompetence and arrogance have resulted in causing so much anguish and suffering to the people. The goodwill and even adulation that existed for the President and the PM for ending the civil war has been replaced with anger and hatred. To believe otherwise would be a monumental mistake.” He added: “Similar to the Gang of Four, politicians too should be subjected to a commission of inquiry and punished for crimes ranging from incompetence to corruption.”

However, Prabhat Patnaik, the Indian political economist, reminds  that we tend to “ignore the role of neoliberalism in precipitating the Sri Lankan crisis.” He noted: “To say this is not to repeat a mantra. Under neoliberalism, apart from the distress of the working people even in the best of times, apart from the structural crisis arising from the increase in the share of economic surplus in output in every economy and in the world economy, there is a third kind of crisis that particularly afflicts small economies, whose fortunes can change in the fraction of a moment.” Patnaik called this “the ‘contingent crisis’ unleashed by neoliberalism. It is ‘contingent,’ as opposed to ‘structural,’ because it afflicts not the world economy as a whole, nor even a huge swathe of it, but particular countries that happen to get caught in it at certain times. A hallmark of it is that wisdom invariably comes to everyone after the event.”

Patnaik says that there “are two unambiguous lessons one can learn from the Sri Lankan experience. The first is that a welfare state is totally incompatible with a neoliberal regime. Sri Lanka in the past had built up a welfare state that was quite enviable in a third world context. In a non-neoliberal regime, such a welfare state can withstand a sudden drop in foreign exchange earnings, even without enlarging the country’s external debt, by cutting down on a variety of non-essential imports. Under neoliberalism, however, the government either has to cut back its expenditure, thereby attenuating its welfare state measures, in order to reduce aggregate demand and hence imports, or to keep its expenditure going, including on welfare state measures, by increasing the external debt. In the latter case, however, if there is some delay in the recovery of foreign exchange earnings, then within a very short time the debt terms become onerous and the country is caught in a debt trap, making any continuation of the welfare state measures an absolute impossibility. In other words, even if it may appear for a while that a country can combine welfare state measures with a neo-liberal regime, the incompatibility between the two comes to the fore, at the first shock to the system; the shock in short exposes the incompatibility even if it is camouflaged for some time under normal circumstances.”

According to Patnaik, the “second lesson from the Sri Lankan experience is that every country is vulnerable to such a ‘contingency crisis’ under neoliberalism. What has happened to Sri Lanka can happen to any country that remains embroiled within a neoliberal regime. The way out lies not in cutting down public expenditure and reducing welfare state measures within the neo-liberal regime…but rather in getting out of the neoliberal regime altogether. To be sure, this would not be easy, but there is no alternative to it. The Sri Lankan government’s culpability can be said to lie in taking that country into the clutches of neoliberalism, though there of course governments scarcely have any choice,” he added.

Even as the debates on the soft and hard economic options get underway amid political upheaval, many are equally worried about the future of the political system and its sustainability. Sri Lankan political scientist, Jayadeva Uyangoda, says that “Sri Lanka has reached a moment of crisis with a great deal of potential for change, and the conditions for significant change are rife except for leadership.” Uyangoda noted that “what is noteworthy about the recent spate of protests is their apparent spontaneity. In the past, economic crises did not really make life difficult for the middle classes. But this time, the middle classes are also victims. It’s a generalised social crisis. The poor, the workers, and the middle classes, across the board are finding it very difficult to survive. It’s a social discontent that’s being expressed openly. Interestingly, political parties are not mobilizing this. These protests are taking place spontaneously and independent of political parties,” he said. But Uyangoda felt that “sooner rather than later, parties would be forced to take a stand on this issue. Usually, political parties are quite opportunistic. So, they will realise that the time has come for them to make use of this opening,” he added.

Obviously, the island nation in South Asia is poised for an inevitable transformation—dictated by the worsening internal conditions and external challenges. Many would call this a “Lankan Spring” with great potential for democratization of the polity and society.

The Sri Lankan economic crisis is also a reminder that much-vaunted alternative international routes, such as BRICS, would remain a pipedream. One of the major aims of BRICS (with major players like China, India, and Russia) was to help poor countries cope with, and overcome the shocks and setbacks of the economic crisis and to prevent them from falling into the trap of international financial agencies such as IMF. The Lankan crisis has shown that even primary players like China and India are incapable of making such ‘alternative routes’ at least relevant for their immediate stakeholders in South Asia.

First published in Eurasia Review

The author, an ICSSR Senior Fellow, is Director, Inter University Centre for Social Science Research and Extension (IUCSSRE), Mahatma Gandhi University, Kerala.  


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