During his election campaign in 2019, Gotabya Rajapaksa talked about vistas of prosperity and splendour and enunciated repeatedly that Sri Lanka’s per capita income will rise to $ 6,500 by 2025. This did not materialise. During his two year and eight-month administration, the Sri Lankan economy that was at the cusp of upper middle-class income status (above US$ 4,000) regressed so that GDP growth entered negative territory and per capita incomes declined. The Sri Lankan economy is likely to contract by at least -6% in 2022 and per capita income in 2022 will be less than in 2019. There are also an additional 750,000 ‘new poor’ created due to the economic hit of the pandemic and economic mismanagement under the Rajapaksa administration. There is a risk of further economic backsliding, if policy reforms are not undertaken by the incoming administration of President Ranil Wickremesinghe who was elected by Parliament on 20 July 2022.
Three key reforms are necessary. The first is concluding negotiations on a US$3.5 billion IMF programme implemented over, say five years. This will increase taxes and utility prices to raise much-needed government revenue and increase interest rates to control hyperinflation while preserving social welfare expenditures to protect the poor. An IMF programme will provide some new money and bring confidence in the Sri Lankan economy which is at a low point. It will also enable Sri Lanka to avail of new bilateral and multilateral assistance. It will take some time, however, to conclude an IMF programme as Sri Lanka has to first demonstrate debt sustainability.
In the interim, Sri Lanka urgently needs bridging finance from friendly countries like India.
The second set of reforms are structural in nature. The economy needs to be more open and business-friendly. That really means getting government out of many areas in the Sri Lankan economy; there is too much bureaucratic red tape and much governmental interference, too many loss-making state-owned enterprises like Sri Lankan Airlines, the Ceylon Petroleum Cooperation, and the Bank of Ceylon, and the trade unions are very strong.
The third is to have reforms of the political system and governance. Gotabaya Rajapaksa won a two-thirds majority and used it to greatly strengthen the power of the president. Mismanagement, political interference, cronyism and corruption has become rife. There are calls for the executive presidency to be abolished and replaced with a Westminster style system of government. Anti-corruption should be strengthened with asset declarations by parliamentarians and a strong anti-corruption office assisted by the United Nations. There are also calls for funds obtained through rent-seeking behaviour to be recovered.
These are the issues Sri Lanka needs to tackle, if it wants to prosper as a modern democratic middle-income economy in South Asia.
The big question facing all Sri Lankans is this: do they want a failed state model, which is something that Pakistan or Myanmar emulates, or do they want to be a prosperous country, like Singapore, Thailand and India?
In terms of assistance, India coming in as a first responder to Sri Lanka, has been greatly appreciated by the people of Sri Lanka. India is the country that came in with food, fuel, and most importantly, cash. The cash came with the RBI swap, then there was a bilateral swap to help shore up the country’s reserves. There have also been Indian credit facilities for fuel imports and food and medicine aid.
The Chinese? Well, they were happy to provide commercial loans at 6% interest rates for infrastructure projects like the controversial Hambantota Port and Mattala Airport but seem less willing to provide debt moratoria or write off of debt, as expected by the Rajapaksa brothers particularly Mahinda Rajapaksa who had a pro-China stance.
There is growing interest in what kind of monitoring and evaluation methods India is putting in place for how that aid is being distributed in Sri Lanka. Hopefully it should go to the poor and all over Sri Lanka, not just to certain parts of Sri Lanka. Similarly, it would be prudent to have appropriate controls in place to ensure that leakages and wastage do not occur.
Second, increased Indian aid will be very useful, because Sri Lanka needs at least half a billion US dollars a month to stay afloat for essential inputs like food and fuel, until an IMF programme can be implemented and other assistance flows in.
Third, this is a very good opportunity, to really build an India-Sri Lanka trade-investment nexus, and not an aid dependency relationship. This can be a win-win for both India and Sri Lanka, having seen the Hong Kong-China model, the South Africa model with its neighbours, the larger configurations, even in Latin America, Brazil and its neighbours. Sri Lanka-India is a natural configuration because of the geography. And an upgraded bilateral trade agreement can add a rules-based regime to open markets and foster business confidence.
People know the example of the ambulance service India built in Sri Lanka. The public health system in Sri Lanka comprises 1,000 plus hospitals and a limited local ambulance service meant that people had difficulty getting to public hospitals. India came with a wonderful $20 million aid project for an ambulance service, with 400 plus Tata ambulances, and just changed the game. India should be proud about being first aid responders in Sri Lanka.
At a recent discussion between Mumbai think tank Gateway House and Columbo think tank Geopolitical Cartographer, a reference was made to 1991, to PV Narasimha Rao and his finance minister Dr. Manmohan Singh who pulled India out of the gravest economic crisis, and whether Sri Lanka’s then Prime Minister Ranil Wickremesinghe can seize a similar opportunity.
Rao and Singh will go down in history as leaders who opened up the sluggish inward-oriented Indian economy to foreign trade and investment with impressive results. It is perhaps premature to make this comparison as Ranil Wickremasinghe – a six-time PM – had only been in office for a few weeks in 2022 and faces an uphill task of tackling the terrible debt and economic crises in Sri Lanka.
Some initial steps he has undertaken so far include (1) providing honest facts about the depth of the economic crisis facing Sri Lanka, (2) the appointment of an international law firm and a debt advisor and (3) an in-person visit of an IMF team to Sri Lanka for discussions on a staff level agreement. Beyond that, significant market-oriented economic reforms to make the Sri Lankan economy more attractive to investors and competitive may be a future agenda item for new President Ranil Wickremasinghe.
Dr. Ganeshan Wignaraja is a Sri Lankan economist, and Visiting Fellow at Gateway House and Non-Resident Senior Fellow at the National University of Singapore.
A version of this article was published on the The Indian Express.
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