Editorial: Lessons from Lanka
The virtual collapse of the Sri Lankan economy comes as a wake-up call for the south Asian region with many nations battling similar woes and being sucked into the vortex of unmanageable debt. Colombo’s crisis has been in the making for more than a decade, largely due to the country’s excessive dependence on imports and […]
The virtual collapse of the Sri Lankan economy comes as a wake-up call for the south Asian region with many nations battling similar woes and being sucked into the vortex of unmanageable debt. Colombo’s crisis has been in the making for more than a decade, largely due to the country’s excessive dependence on imports and borrowings for a raft of massive infrastructure projects. It highlights how unbridled borrowing for big-ticket infra projects such as those under China’s Belt and Road Initiative (BRI) can lead to terrible complications. The government’s ill-advised switch over to organic agriculture and badly-timed tax cuts squeezed revenues. The coronavirus pandemic has dealt a further blow with revenues from tourism and remittances, the two key sources for earning foreign exchange, hitting rock bottom. Sri Lanka, a tiny nation of 22 million people who had endured a prolonged civil war, stands as an example of how fiscal profligacy and foreign debt overload can wreck the economy. The situation came to such a pass, with critically low forex reserves and mounting public anger on the streets, that the government has announced that it would default on its entire external debt of $51billion, pending a bailout package from the International Monetary Fund (IMF). This was the last resort to prevent further deterioration of the country’s financial position. International rating agencies had downgraded Sri Lanka last year, effectively blocking the country from accessing foreign capital markets to raise much-needed loans to finance imports.
The straw that broke the camel’s back was the abrupt ban on the import of chemical fertilizers leading to a collapse in food production. On the other hand, India has taken a cautious approach, refusing to blindly plunge into it. India’s agriculture sector has been a source of strength during the turbulence of the last couple of years. The key lessons from Sri Lanka’s unprecedented crisis are: avoid extravagance during good times, build resilience, increase reserves and continuously reform the economy and keep it well diversified. Almost all the oil Sri Lanka needs for transportation and energy is imported. The price spike caused by the Ukraine war made matters worse. The country also undertook the risky path of floating a sovereign dollar bond, and since 2007 has accumulated dollar-bond debt alone of nearly $12 billion. Of this, $4.5 billion is due to be paid this year, but the country’s forex reserves are down to just around $2 billion. Under the present circumstances, no foreign lender today will touch Sri Lanka willingly, given its inflation of more than 19%. In the late 1970s, Sri Lanka had replaced its socialist model with an open economy, which delivered positive results for successive decades. But the dream run appears to be over now and it has become a victim of China’s debt-trap policy.
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