Home ›› 22 Apr 2022 ›› Editorial
Sri Lanka, an island nation of 22 million, faces an economic and political crisis, with protesters taking to the streets in defiance of curfews and government ministers stepping down en masse. Driving the discontent is the worst economic downturn since the South Asian country gained independence in 1948, with crippling inflation sending the cost of basic goods skyrocketing. The GDP growth rate of Sri Lanka was 3.3 per cent in (2018), 2.3 per cent in (2019), 3.6 per cent in (2020), four per cent in (2021). GDP per capita was $3682 (nominal in 2020) and $3920 (nominal estimated in 2021). GDP by sectors: Agriculture 84 per cent, industry 26.2 per cent and services 59.2 per cent. The main contributing sectors of the Sri Lankan economy are tourism, tea exports, apparel and textiles, rice production, and other agricultural products. In addition to these economic sectors, overseas employment contributes to earning foreign currency. 90 per cent of expatriate Sri Lankans residing in the Middle East.
The present economic crisis is attributed to debt in billions of dollars due to years of accumulated borrowing, record inflation, and lack of foreign exchange reserves. Crucial sectors are witnessing a sharp fall in demand, and the alleged government mismanagement and currency depreciation are among the reasons that have dragged Sri Lanka into an unprecedented economic crisis. Since 2010 Sri Lanka’s foreign debt has more than doubled by 2020. While foreign debt was about 42 per cent of the GDP in 2020, it rose to 119 per cent of its GDP in 2021. By the end of 2022, the country will pay $4 billion to debtors. In contrast, in April 2022, foreign exchange reserves were around $2.3 billion.
In a situation like this, a question naturally arises about Sri Lanka’s economic stability. Sri Lanka is a lower-middle-income country with a GDP per capita of $3852 (2019) and a population of 22 million. According to experts, the crisis has been years in the making driven by government mismanagement. Over the past decade, the Sri Lankan government has borrowed vast sums of money from foreign lenders to fund public services. This borrowing spree has coincided with a series of hammer blows to the Sri Lankan economy, from natural disasters such as heavy monsoons to manmade catastrophes, including government ban on the use of chemical fertilizer that decimated farmers’ harvests. These problems were compounded in 2018 when the president’s dismissal of the prime minister sparked a constitutional crisis. The following year hundreds of people at churches and luxury hotels were killed in terror attacks. To compound the problems, there was the Covid-19 pandemic.
Facing a massive budget deficit, the president slashed taxes in a doomed attempt to stimulate the economy. But the move backfired instead of hitting the government’s revenue target. That prompted the rating agencies to downgrade Sri Lanka to near default levels meaning the country lost access to overseas markets. Sri Lanka then had to fall back on its foreign exchange reserves to pay off government debt shrinking the reserve from $6.9 billion in 2018 to $ 2.3 billion in 2022. This impacted imports of fuels and other commodities, which sent prices soaring. Topping all that, in March this year, the government floated Sri Lanka Rupee-meaning its price was to be determined based on the demand and supply of the foreign exchange market. That move aimed to devalue the currency to qualify for a loan from the IMF and encourage remittances. The plunging of the rupee against the US dollar only made things worse for ordinary Sri Lankans.
The impact of the crisis on the people has been devastating. For the Sri Lankans, the crisis has turned their daily lives into an endless cycle of waiting in lines for essential goods, many of which are rationed. In recent weeks many shops have been forced to close down because they cannot run fridges, air-conditioners or fans due to an acute shortage of electricity. Soldiers have been stationed in the gas stations to calm customers who lined up for hours in the seaming heat to fill their fuel tanks. The government rationed fuel and prompted taxi drivers to say that the fuel supply was too meager to make a living. Even members of the middle-class with savings are frustrated, fearing they could run out of essentials like gas and medicines. Life has been more complicated by frequent power cuts that plunge Colombo into darkness for more than 10 hours at a stretch.
Let us have a close look between Bangladesh and Sri Lanka in such a backdrop. Bangladesh’s foreign debt now stands at $4945.00 million ($ 49.45 billion), whereas Sri Lanka’s foreign debt is stood now at $3300.00 million or $33.00 billion. Bangladesh has a population of around 170 million. The per capita debt/ foreign loan stands at $292.00, whereas Sri Lanka’s per capita debt/foreign loan stands at $1650, which is 5.5 times higher than Bangladesh. Sri Lanka’s foreign debt is 42.8 per cent of its GDP, while that of Bangladesh is less than 13 per cent of its GDP. Bangladesh’s exports stand at $47.6 billion as of March, 2022, whereas exports of Sri Lanka as of March, 2022 stand at $1.1 billion. Bangladesh’s foreign exchange reserve stands at $44.4 billion, whereas for Sri Lanka, it stands at $2.3 billion. Bangladesh’s inflation most of the time had been between 5.86 per cent to 6.17 per cent, while that of Sri Lanka was 9.2 per cent to 20 per cent in 2022. In the past, Bangladesh’s mega projects started yielding positive results.
In contrast, mega projects on completion in Sri Lanka proved unproductive because of highly inefficient management. While picking up mega projects, Bangladesh followed prudent decision-making, assessing the pros and cons of the projects and going for the cost-benefit analysis. Megaprojects like the Padma Bridge, Ruppoor Power Project, Bangabandhu Tunnel under Karnafully river, and many others will hopefully yield positive results on completion.
In contrast, Sri Lanka’s mega projects undertaken with huge borrowed money failed to provide benefits as the selection of the projects appeared to be void-ab-initio. Investment in unproductive mega projects always proved disastrous, as had happened in 1997 in Singapore. Bangladesh was cautious in seeking a loan. As such, Padma Bridge is being built with its own money. It was made possible by the stubborn attitude of the prime minister is not borrowing from others but funding from our own money. As such, she deserves a salute from the nation. In a recent question and answer session, she categorically stated that Bangladesh is a stable economy and can never be said to be vulnerable to economic shocks.
However, we cannot be complacent. For the last 40 years, we have been hearing that we need diversification of export products without any concrete outcome. We are now where we were 40 years back, highly dependent on low valued readymade garments with two major markets as our products’ destinations the US and the EU. According to experts, despite repeated warnings, so far, no major stride has been taken toward diversification of products range and export markets. For a sustainable economy, diversification of both products and markets is necessary and not an option. Although Bangladesh’s economy is doing well, the Sri Lankan economic crisis clearly signals our policymakers to evaluate megaprojects before undertaking such projects. Projects that are not economically viable should not be taken up, which would create pressure on repayments. The Sri Lanka government ignored the suggestions of Sri Lanka’s economists, and the country failed to diversify its product base. Besides product diversification, skill development is essential for the macro-economy.
Once Bangladesh steps into the middle-income country status, it would be difficult to get loans from overseas sources. Therefore, projects should be undertaken considering their economic viability.
The writer is former Director General of EPB. He can be contacted at hassan.youngconsultants@gmail.com
