4 January 2022 12:08 am Views - 810
The ever-worsening economic crisis caused by the depleting foreign reserves against a mountain of outstanding foreign debt payment is by far the greatest worry. However, the continuous mismanagement of the economic crisis and self-serving manoeuvrings portend a much greater long term concern that Sri Lanka should watch over in the year 2022.
The ripple effect of the mismanagement of the external debt crisis has already tested the domestic economy to the limits of its endurance. However, if the recent history of international political economy is any guide, rarely has a country broken beyond the limit of redemption simply because of a default or a debt restructuring. Some of the Latin American economies, which have a history of default, such as Argentina, though a test case of economic underachievement, has never been an economic basket case. A country is broken beyond repair when the economic maladies are mixed with political maladies. Those are a unique mix of which of personalized political calculations of self-preservation that comes at the expense of the nation. Consider Zimbabwe, once Africa’s breadbasket, or Venezuela, the second richest South American nation only a decade ago. It was not just economic maladies that brought those countries to the knee and have since made the recovery near impossible. It is a toxic mixture of aforesaid factors.
Sri Lanka’s current trajectory perilously fit into the path taken by those countries.
There is another particular vulnerability in the Sri Lankan political structure that would make it increasingly susceptible. Many folks draw a comparison between Sri Lanka and Lebanon, the latter defaulted and is in the throes of long queues and rising food prices similar to Sri Lanka. However, Lebanon has been a feuding political system, in part due to the constitutional accommodations made for its three main ethnic groups. The country has been without a functioning government in recent times. Sri Lanka is different. The current government is not just cohesive, it enjoys near two-thirds majority in Parliament. Gotabaya Rajapaksa, the executive president not only has extensive power, but he also concentrated furthermore in his office through the 20th amendment, effectively disempowering the country’s independent institutions. In its political control, the government of Sri Lanka is more in line with its peers in Venezuela than Lebanon. In the ideal circumstance, a powerful government should be able to act decisively to find solutions to the country’s economic troubles. However, as the experience elsewhere has proved, it could also be a liability. Arrogant incompetence and ignorance with which the country is misgoverned right now are made possible in part due to the near-absolute political control of the incumbent government.
Economy
Few scenarios would unfold in the year 2022. The country is facing foreign-currency debt service payments, including principal and interest, of US $ $ 6.9 billion in 2022, equivalent to nearly 430% of official gross international reserves as of November 2021. Foreign reserves have since been propped up to US$3.1 billion with a US$ 1.5 billion currency swap from China. None of those short term fixes would solve the debt crisis. These short term measures have become an object of publicity stunt aimed at the domestic audience, much less for the foreign investors or the would-be creditors.
The government would likely opt for a debt restructuring programme under the IMF this year, rather than defaulting on its foreign debt. However, there is a manifest vacillation to go that way and political calculations will continue to blur economic rationalism. A Cabinet meeting with the Central Bank governor and Treasury Secretary that was scheduled for yesterday was postponed. It was initially believed that at that meeting the cabinet would decide to seek IMF assistance. The absence of a sense of urgency is yet another proof that political calculations of the leadership have loomed over the existential economic crisis.
However, until an IMF programme is agreed upon, which would also entail some politically unpalatable requirements, Sri Lanka would slowly but steady slip into economic oblivion. The ripple effect of the debt crisis and the near absence of hard currency would test the domestic economy beyond its endurance. Regular shortage of intermediary goods, construction materials, fuel, and raw materials would aggravate and long queues for gas, milk powder, rice would become part of Sri Lankan life.
IMF conditions, which may include the floating of the Sri Lankan rupee would see a rapid devaluation (US$ is already traded at 245-250 LKR in the black market) and would erode the purchasing power of salaries of savings.
Pandering the beast
Implementing these unpalatable policy measures would be anathema to the government, but it would still be a necessary evil.
There may be political machinations to distract the public from the grim economic reality. Some of this manoeuvring would be noticeable sinister and invoke some of the least desirable traits of the stakeholders of this government. There will be politically orchestrated moves to seek regime legitimacy by pandering to exclusivist Sinhala Buddhist ideology. Gotabaya Rajapaksa who proudly claims he was elected by the Sinhala Buddhist majority vote shows no qualms to whip up this parochial nationalism.
Constitution: Remaking the country in their image
There is also a greater danger of remaking the Sri Lankan state and its institutions along the line of this ideology. The president earlier appointed a committee headed by Romesh De Silva PC to draft a new constitution. Foreign Minister Prof. GL Peiris had previously said that the draft constitution will be ready to be taken up by Parliament by January this year. The proposed constitution has been subject to zero public consultation, unlike the previous efforts at constitution-making. There is an inherent danger that the government would use its near two-thirds majority to reengineer the Sri Lankan state in its image. Not least because this is the worst possible time to temper with the state. Nonetheless, this is what exactly happened in Venezuela or Zimbabwe, where the regime leaders who had ruined their nations, then went to alter the state to perpetuate their power.
Sense of detachment
There is a palpable sense of detachment of the political leadership from the masses, even from their once ardent constituency. This effectively led to the political leadership further into an echo chamber of yes men and sycophants. Efforts would be made to supplement the depleting regime legitimacy through pandering to an exclusivist sense of Sinhala Buddhist-ness at the expense of other communities. The president kicked off the New Year, being felicitated by the Kotte Sanga Sabha, which bestowed him with the honorary title ‘Sri
Lankadheeshwara Padma Vibhushana’. Destitute farmers, who have been forced into poverty by a presidential ban on chemical fertilizer may feel different.
Sri Lanka is facing make or break choices this year. I however feel an overwhelming sense of gloom.
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