INDIA'S
DISTRESSED NEIGHBOURHOOD
Amidst the din of the Ukraine war, the happenings in India's neighbourhood, mainly Pakistan and Sri Lanka, hogged both the headlines in newspapers and the prime time on TV networks across India. The Imran khan saga was running like a continuous soap with every TV channel deeply interested, having found associated local journalists from Pakistan giving them running commentary. Pakistan took prime time, yet Sri Lanka was running through the worst economic crisis the island nation had ever seen. Such is the memory span in the media that not long back everyone thought Myanmar would be the flashpoint in South Asia. Today it is related to inside pages.
This piece focuses on Sri Lanka, and Pakistan would soon follow it. By then, the new dispensation in Pakistan would hopefully be sworn in, and some certainty would return to the country's politics.
Troubled Sri-Lanka
It's hard to summarise what's wrong with Sri Lanka. Once a prosperous island nation with a booming economy known as the 'Pearl of the Indian ocean'. Replete with natural beauty and abundant flora and fauna made Sri Lanka a dream destination for tourists till it fell in bad times. Today a grave economic crisis confronts the island. Sri Lanka, which was known to be a middle-income group nation, has been hit with a crippling energy crisis and a debilitating food crisis. The power cuts range from anything up to 10 hours and above. The petrol pumps have long queues for gasoline which is rationed and yet hard to get. Most Sri Lankans find it hard to get fresh vegetables and staple rice to make two square meals a day. The food inflation is over 20%. Food is expensive and hard to find. Medicines are in short supply, and so are other essential goods. The state of affairs is brought upon by successive governments and has none else to blame but they themselves. It's an economic crisis of gigantic proportion.
The above paragraph may seem exaggerated as it has described the situation as nothing short of catastrophic. If it is not so, it will be, as there is very little that Sri Lanka can do in the short term to reverse the situation. It is a harsh portrayal to make the reader understand the grave socio-economic crisis confronting the island nation. One of the known persons to the author in Sri Lanka stated it on a 'Whats-App' message: “The Sri Lankans are very mild people. Hence, all demonstrations are peaceful despite the extreme provocations due to shortages. Whatever violence is reported is thanks to the thugs hired by the government. There would be mass-scale looting and rioting on the streets in any other nation by now.” The question that crosses every mind is how Sri Lanka has come to this passé. Usually, it's either a long-drawn war or famine or extreme natural calamity which brings such a consequence upon a nation. Yet in Sri Lanka's case, none of it has happened in the near past. There has been a talk of Hambantota being sold out to the Chinese on 99 years lease due to the inability of the Sri Lankan government to pay back the loan taken from China. The Rajapaksas: The ruling family was always accused of selling out the interests in Sri Lanka to the Chinese. They allowed Chinese investments to come into Sri Lanka immediately after the LTTE war. China's investment share reached a record high of 14 billion US dollars when India's share was a dismal 1.2 billion US dollars. Most of the investments were in ODA: Official Development Assistance, which was almost 12 billion US dollars and FDI was worth 2 billion US dollars from 2010 to 2015. The ODA sucked out Sri Lanka as the Chinese took infrastructure projects at no cost to themselves, built projects with Chinese money, technology, and Chinese expertise, and heaved loads of debt on the Srilankan governments. The local Sri Lankans had minimal stake or benefit except that they were robbed of their resources by the Chinese. Since the Chinese had not enabled local industry or labour thus, the Sri Lankan economy was dependent on the Chinese for even basic goods. The lack of self-sustaining capability is the crux of the Sri Lankan current economic crisis. The Chinese loans are not the biggest part of their debt burden. As a percentage of foreign debt, the Chinese debt is around 5%. But the Chinese ensured that Sri Lanka ever remained dependent on imports with no domestic industry to support even daily needs products like dairy, medicines, and food products.
Tourism Industry
The Sri-Lankan economy was left with two primary revenue earning sectors as the Chinese made inroads in the goods & services and infrastructure sectors of the economy. These were tourism and agriculture. Being a nation of around 22 million people and a GDP of 80 billion, Sri Lanka would not have been so hard hit if the tourist and agriculture industry flourished. The tourism revenue peaked in December 2019 and was at 450 million dollars in the US. In 2019 the share of the tourism sector in the country's GDP was 12.6%. Agriculture contributes around 8.6% to the GDP in 2020. These two are the two main revenue generators for the Sri-Lankan economy. But this was before the pandemic hit the world. In January of 2020, coronavirus struck, and by March-end 2020, the world was locked inside its own houses. Tourists vanished out of Sri Lanka slowly but steadily. By the end of the tourist season, the tourism industry had come to a grinding halt. As if this was not enough, foreign remittances from expatriate Sri-Lankans also dried. The foreign exchange shortage due to foreign loan servicing, mainly Chinese, and the lack of remittances from abroad created a foreign exchange crisis. During the pandemic years, very little FDI came into Sri Lanka, catapulting the situation into a full-grown foreign exchange crisis that directly impacted the import of oil and gas into Sri Lanka, which resulted in shortages and finally rationing. The lack of foreign exchange has developed into a full-scale energy crisis. Dependent entirely on oil imports from foreign sources and very little indigenous oil and power generation capacity, the power cuts were the only answer to share the meagre energy resource available to the stricken nation. The foreign currency reserves of Sri Lanka are estimated to be around 2.18 billion dollars, and the fuel bill for Sri Lanka is approximately 2 billion dollars at the current oil prices. With no end to the Ukraine war, barrel prices are likely to hit above 100 $ US a barrel which will wipe out their entire foreign currency reserves within one year.
The above indicates the grave foreign currency and energy crisis that grips Sri Lanka today. There is unlikely to be any change in this situation in the immediate future as, despite the pandemic threat reducing in most parts of the world, Sri Lanka is unlikely to get its usual tourist flow due to the inability of the hospitality industry to service their guests in terms of electricity and air-conditioning 24 by 7. The catch 22 situation haunts the island nation.
Agriculture sector
Agriculture is a principal contributor to the economy, as reiterated earlier. Tea is one of the chief components of this sector and contributes handsomely to the export earnings of the island nation. Rice is the second staple crop, and it feeds a large section of our population. In June of 2021, President Gotabaya Rajapaksa announced to a bewildered Sri-Lankan public that Sri Lanka is going organic in its food crops. Consequently, the government banned all the imports of pesticides and fertilisers in the country and farmers were asked to resort to organic farming. While this move was in the election manifesto of the Rajapaksa's party yet, no public debate on it had ensued. When the policy was announced, it surprised everyone and threw the farmers in disarray. The switch from non-organic to complete organic is a herculean transformation and requires preparation and planning. The crops started to perish with no chemical fertilisers and pesticides, and yield decreased drastically. In six months, food shortages hit the stores and retail markets. There was no scientific reason for the change in policy except the desire to be a leader in the world of organic crops. The policy change had disastrous consequences, as were predicted.
Realising the foolishness of the decision, the government took another measure. The folly was compounded by promising the farmers organic manure for their crops. A shipload was ordered for the Sri-Lankan farmers from China. Before distribution, elementary testing in the labs indicated that the manure contained substances that could harm the Sri-Lankan soil and yield. The manure was never distributed and returned to China, which refused to accept the consignment or waiving the payment. There was a mini-crisis between China and Sri Lanka because of this incident, and relations began to cool off. Sri-Lankan markets are perilously short of food products, and food inflation is as high as 21% as food production has gone down on an average by 30%. Tea Production threatened to come down by a whopping 50% because of the the ‘All Organic’ decision.
Conclusion
It sounds like a sordid tale of politicians who bungled big time in running government policies based on personal whims and fancies. President Gotabaya Rajapaksa and brother Mahinda Rajapaksa had struck an axe on their own feet when they started reducing the tax on goods on their arrival. It reduced the already shallow revenue kitty with the government. The two of them remain steadfast as 26 cabinet ministers have resigned from the cabinet, calling their government a failure. The President and Prime Minister refuse to budge from the opposition's demands to resign and accept the failure of their government's policies. There is a movement gaining momentum amongst the opposition parties to have a 'No Trust Motion' passed in the parliament against the SLPP (Sri-Lanka Podjuna Peramuna), the Rajapaksa’s party which rules the country. No Trust Motion will not be straightforward as the SLPP has 116 seats in the parliament out of 225, a clear majority. There is also a move to have an interim all-party consultative government. The latter is more likely than the former. Yet many in Sri-Lankan fear that dissolving the parliament at this stage would only deepen the crisis. A bad government is better than no government. It's sad to realise that the state of affairs is not likely to improve in the near term as the sovereign debt is mounting, and Sri Lanka may default on payment on the sovereign bond of 1 billion dollars coming up in July 2022. Defaulting interest payments can mean harsh economic measures and stricter IMF conditions for a bailout. Going to IMF looks to be the only option left for Sri Lanka. But IMF bailout comes at very high economic costs, usually not palatable to local politicians.
India has answered the Sri-Lankan SOS calls and extended generous help. India has provided 2.5 billion dollars in financial aid to Sri Lanka in the last few months. India has
also agreed to pay a credit line of 500 Million $ US for one tranche of the oil supply. India is sending 18.500 crore INR worth of rice to Sri Lanka to tide over its food shortages. The Rajapaksas have called New Delhi on four separate occasions in the last six months, thus indicating the shift in their focus on geopolitical relationships. Now is not a time to leverage Sri-Lanka's helplessness but to act as a good and responsible neighbour. If this bears fruit in future, it will be good politics and good economics.
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