Sri Lanka At 70: Light At The End of the Tunnel

COLOMBO: In its 70 years of existence as an independent country, Sri Lanka has notched up impressive progress in terms of social development indicators. The lead it enjoyed over its South Asia neighbors at the time of independence in 1948 in terms of human development, is being maintained.

In the Human Development Index of 2015, calculated from data for 2014, Sri Lanka had been placed at number 73. India, its nearest neighbor, was ranked at 130. Maldives was at 104 and Bangladesh was ranked at 142. Nepal was ranked at 145, Afghanistan at 174 and Pakistan at 147.

Sri Lanka was ranked as first in the South Asian region in the Global Food Security Index 2017. It was 66th in a list of 113 countries. Bangladesh and Nepal ranked 80th and Myanmar had been reported as 81st in the index. Pakistan is at 77 and India at 74.

Sri Lanka is self-sufficient in rice, the staple food. But back in 1950, 50% of its food requirements were imported. In fact it was forced to go for a desperate “Rice for Rubber” barter deal with Communist China to stave off starvation. Sri Lanka’s per capital GDP is US$ 3835 while that of India is just over US$ 1700. Literacy is 90% while the average life expectancy is 75 thanks to a free and good public health system.

On the overall economic front, Sri Lanka has maintained a GDP growth rate of over 4% with short periods of greater growth. But economists feel that growth could be much higher if infrastructure and political and administrative conditions improve.

Opportunities for rapid growth arose or were provided, but these were either not seized willfully or attention was diverted to other domestic issues which militated against economic development.

In the 1970s, nationalist politics led to the nationalization of tea plantations which resulted in the British tea planters migrating to Kenya where the government encouraged them and Kenyan tea began to be sold by multinationals. Soon, Kenya outstripped Sri Lanka in the world market.

It was much later in the 1990s and 2000s that Sri Lanka realized the folly of nationalization and privatized the plantations. But even this did not help to the fullest extent because the companies were not replanting as they should.

The advent of radical socialism in the 1970s, brought the economy down but it was revived by the Open Door policy adopted in 1978. However, progress was disrupted by the inability or unwillingness to solve the ethnic (Tamil-Sinhala) issue peacefully. Militancy and war became the order of the day from 1983 onwards. A golden opportunity to settle the issue politically through give and take was cynically spurned by both the Sinhalese and the Tamils.

War and political instability resulted in negative growth in 2001. Both the Sinhala-majority South and the Tamil-majority North suffered economically because of the armed conflict, though the North suffered the most.

With the end of the war in May 2009, Sri Lanka began to develop rapidly with China and India contributing to infrastructural development, with China especially infusing huge amounts of money to build highways, rail tracks, harbors and an ultra-modern Colombo Financial City.

But corruption, authoritarianism, inability to solve the Tamil political question and the alienation of the Muslims, combined with the unwillingness to address war-time human rights issues, alienated the then government of President Mahinda Rajapaksa from the people and also from the international community.

Rajapaksa lost the January 8, 2015 Presidential and August 2015 parliamentary elections to the United National Party and a breakaway group of his own Sri Lanka Freedom Party (SLFP).

The change of guard restored democracy and secured international approval. But the economy suffered because the Chinese projects were suspended for investigating corruption charges. While the Chinese projects were subsequently resumed with revised agreements, other projects did not take off. A number of Indian and Japanese projects project proposals are gathering dust.

This is because of policy confusion, clash of ideologies within the principal coalition partners – the SLFP and UNP – and lack of consensus in decision making leading to frequent backtracking.

Neo-liberal decisions made by the UNP are overturned by the left and liberal oriented President. While the neo-liberals want Sri Lanka to economically integrate with India and the rest of the world through Free Trade Agreements (FTAs) and international value chains, the conservatives within the government and the opposition would have none of it. With the result, the India-Sri Lanka FTA is not working to its full potential and India-Pakistan FTA exists only on paper.

The government is not enthusiastic about signing the Economic and Technical Cooperation Agreement (ETCA) with India. Earlier the previous regime had rejected a Comprehensive Economic Partnership Agreement (CEPA) with India for fear of Indian domination.

But hoping for an attitudinal change among local politicians and businessmen, the present government has signed an FTA with Singapore and is planning to sign one with China this year.

In the meanwhile the health of the economy has been causing concern. The level of foreign borrowing is very high. According to the “Joint Opposition” leader Mahinda Rajapaksa, the incumbent National Unity Government has borrowed US$ 14.6 billion in just three years, while in his nine years in office, the foreign borrowing was only US$ 3.6 billion.

And as Rajapaksa pointed out, for all the borrowing it has done, the incumbent regime “has not even built a culvert”. While he is being blamed for dragging Sri Lanka into a debt trap, the present government is the one which is actually doing so, Rajapaksa contended. He also charged that money is being borrowed to replay loan installments and not to build infrastructure. .

On January 26, President Sirisena revealed that out of LKR 10 trillion taken as loans, only about Rs 1 trillion could be properly accounted for in the assets as per documents at the Finance Ministry. Furthermore, a large sum of funds that should have been deposited in the Treasury has gone to private companies and institutions, he alleged.

The National Unity government, which is meant to fight corruption, began badly by allowing the then Central Bank Governor, Arjuna Mahendran and his son-in-law, to indulge in what is called the “bond scam” involving a loss of Rs.11.450 million to the government.

According to the current Central Bank Governor, Indrajit Coomaraswamy, the debt to GDP ratio is now 76% while it is 56.4% in Malaysia and 41% in Thailand. Debt servicing is 90% of revenue. And the debt servicing burden is increasing because government is now taking short term loans. External debt servicing, as a percentage of expert earnings, is 27% while the norm is 20%.

Sri Lanka is seeing a sharp fall in revenue. It was 20% of GDP in 2014 but is now 13%. This, despite an increase in VAT from 11% to 15%. In Malaysia revenue is 23% of GDP.

Sri Lanka’s export performance has been poor. It has risen from US$ 1 billion in 1990 to US$ 10 billion now. But during the same period, exports from Vietnam had grown from US$ 2.4 billion to US$ 162 billion. Sri Lanka has to diversify its market and its export basket.

The Governor further pointed out that according to the World Bank, Sri Lanka is as closed today as it was in 1970! Although there is a lot of song and dance about Sri Lanka’s getting US$ 1.63 billion as FDI in 2017, FDI is only 1.5% of the Sri Lanka’s GDP. Malaysia, Vietnam and Thailand get 3 to 4 times more FDI.

Policy discontinuity, lack of decision making and tardy decision making, bureaucratic hurdles and crippling para-tariffs keep foreign investors away. Local entrepreneurs are averse to entering new areas and innovative tie ups with foreign companies. Sri Lanka is ranked 110 in the World Bank Ease of Doing Business Index.

Lack of imagination and commitment to work has resulted in money allotted to government ministries going unspent. According to President Sirisena, 50-60 % of the monies allotted to a ministry is unspent. Money is also diverted to cronies of ministers in the private sector ,he said.

Though manufacturing and services have outstripped agriculture in their contribution to the GDP, far too many people continue to be employed in agriculture, Coomarakswamy said.

It is said that there is a labor shortage in Sri Lanka, with 500,000 vacancies in the private sector alone. There are calls from the construction sector for the import of labor from Bangladesh. But Commaraswamy said Sri Lanka has a sufficient labor force but it is in the wrong sector. There are far too many in the unproductive agriculture sector, he pointed out.

However, a silver lining in the dark cloud is the upcoming Colombo Financial City, the US$ 1.4 billion Chinese funded and executive project. This is expected to bring in FDI as well jobs for 250,000 floating population. The Financial City already accounted for 48% of the FDI in 2017.

The Chinese are developing the Hambantota harbor and economic zone there over 15,000 acres. All this is expected to bring in FDI and jobs for locals. The Chinese could involve local and foreign companies in their industrial value chain. Thus, there is light at the end of the tunnel for Sri Lanka.