Chulanee Attanayake: The Economic Plight in Sri Lanka and Its Impacts on Domestic Politics

Speaker: 

Dr. Chulanee Attanayake, Institute of South Asian Studies, National University of Singapore.

Presenter:

Dr. Nian Peng, Director of RCAS, China.

Nian Peng: Dr. Chulanee, thanks very much for accepting our interview request. Today, we invite Dr. Chulanee from National University of Singapore to give us a short talk on the recent Sri Lanka economic plight. So, the first question is, what are the main reasons of the economic plight in Sri Lanka?

Chulanee Attanayake: Oh, thank you for having me here. The current economic plight is not something that happened overnight, and it was in the making for a longer period. what we see today is a result of both indigenous and exogenous factors. So, these indigenous factors are both historical and contemporaries. So, I’ll try to briefly explain both these factors.

Firstly, for the case, Sri Lanka has experienced microeconomic instability and economic stagnation, volatile business environment, etc. For a long period of time. As a result of this, Sri Lanka is suffering from between deficit problem, which is a balance of payment problem and a foreign exchange deficit problem.

Now, due to years of economic, these are result of years of economic mismanagement and corruption by successive governments. Even though Sri Lanka opened the economy nearly in the 1990s, it was like it did not become an export led economy. Instead, it became an import-led economy. And the external deficit problem is a result of high imports law and rising in debt. Also, since 1990s, successive government followed an economic policy that provided tax exemption and tax reductions for multinational corporations, business community, etc.

As a result of this, government’s revenue collection has been very low, in steady decline, and in 2021, its tax revenue was only 9.6% of the GDP, against the expenditure, close to 20% of the GDP. So, these are basically the historical law like long period issues that was there for a long period of time.

Now this get aggravated because of some misplaced policies of this present government. This government again further reduced taxes when it came to power in 2019, despite the warnings of by many economists that this is this will affect Sri Lanka’s economy. And also, it placed some overnight ban, like chemical fertilizer ban, which is affected the food shortage, etc.

Finally, there are external factors, such as the Covid-19 pandemic and the Ukraine crisis, that intensified the issue. Now, as a result of the pandemic Sri Lanka lost its primary sources of foreign currency, which is tourism and foreign remittance from the migrant purpose.

Tourism was anyway badly affected due to the Easter attack in 2019. Now, as a result of the pandemic, many Sri Lankans also returned from abroad after losing their jobs, which affected the unemployment, rising unemployment and urban poverty, etc.

Nian Peng: Now, all these factors affected the Sri Lanka right now. As you mentioned, a lot of people lost job. So, how has the economic plight affect the political situation in Sri Lanka, as we know that the opposition parties has organized the anti-government protest since the early April?

Chulanee Attanayake: OK. First of all, I should say that the protests were not initially organized by any political party. They were self-organized by people because of their frustrations.

Now, prior to this, there were months of months people having to wait in long queues to obtain full over ten-hour power cut with, so people were without electricity. All these things happened for a long period of time, which led for people to come into the street, so they not initially organizing by any political party. Right now, of course, there are protests organized by political parties and trade unions, but I should say that at the beginning, it was not like that.

Now the effects are to affect such tremendous, they are effect impacting both the economy and political stability.

First of all, they lack of work and basic essentials are disturbed, disrupting the day to day life of all the Sri Lankans. We saw cases where people died of exertion, waiting in the old people died of exertion, waiting in the queue for long hours.

The factories and businesses cannot run as usual because of frequent power cuts. Then the tourists cannot, even though they are interested in come to Sri Lanka, now they cannot come because of the lack of transport , then there’s no electricity, internet or etc.

So this is affecting the economic service. On the other hand, public is generally frustrated. Their frustration is increasing as the time goes by. So, in some areas, we saw the protest turning a bit violent when the when the protesters collided with the police. So this has also destabilized the general security of the country.

So I would say, like Sri Lanka is facing one of the biggest crisis of its time. And everyday we see new developments.

Nian Peng: Ok, thanks very much Dr. Chulanee, thanks for clarifying it. So far, we see that the Sri Lanka government negotiated with the IMF on receiving loans, and the other foreign countries, like India, it claimed to provide the financial assistance to Sri Lanka. So, how has the foreign countries help Sri Lanka overcome this economic crisis?

Chulanee Attanayake: Now, yes, Sri Lanka approached higher IMF in an effort to get an emergency funding. But IMF has a great plan that includes Sri Lanka in one of its long-term plants. This comes with some conditions, including that restructuring, that restructuring is the main condition. And, Sri Lanka is in the process of discussing with China, Japan, and other bilateral partners on debt restructuring. In the meantime, a majority of the debt is with the commercial creditors, so they have to see a way of how to restructure that part.

It has also approached World Bank for some freely funding to facilitate and obtain essential food and medicine additionally. As you rightly mention, Sri Lanka as approach partners like India and China for credit lines and currency swaps. Now, both countries, during the past two years, have provided these credit lines, currency, and emergency loans from time to time to get required essentials and strengthen the weakening Foreign Exchange Reserve. Sri Lanka has approached multiple partners, and it is still in a very negotiation space.

So we do not know, for sure, what will happen in the next couple of months. Well, what we know is that the World Bank has agreed to provide emergency funding, which is expected to come in the next few weeks, according to the Finance Ministry.

Nian Peng: Ok, the last question is what measures can be expected for the Chinese government to help Sri Lanka overcome this economic difficulty?

Chulanee Attanayake: Well, I think China will have one of the biggest roles to play in the current crisis. The reason I am saying this is China is also one of the biggest bilateral creditors of Sri Lanka. As I mentioned, IMF already is has put a pre-condition of the debt restructuring, and Sri Lankan government have to the restructure. So now is that China has offered to provide additional loans instead of debt restructuring. But this will definitely will not be of help to Sri Lanka’s case, because right now, Sri Lanka badly need the IMF funding.

So if China do not come forward and assist Sri Lanka in that restructuring, then the Western allegations only will get strengthened, and it will be as if that China is willingly providing more ammunition to support their allegations. And also it will affect China s image as a global power.

As a global power, I don’t think China would want to be seen as a country, as a power that do not come forward and assist one of his biggest partners. On the other hand, China has massive investment in Sri Lanka. Obviously only if Sri Lanka’s economy comes back on track that it will be able to reap the benefit from these investments, including the port city project.

So I think that what China do right now, in terms of Sri Lanka’s economic crisis, will have tremendous impact on both bilateral relationship, its relationship with the ah Sri Lanka, and also its global image.

Nian Peng: Ok, thanks very much for accepting our interview. We do hope that Sri Lanka overcome the economic crisis and have a bright future. So, thank you very much and see you later. I will send you the videos once it is finished. Ok, thanks so much. Let's keep in touch, see you.

Chulanee Attanayake: Thank you. 

RCAS TALK-The Economic Plight in Sri Lanka and Its Impacts on Domestic Politics.pdf