Sri Lanka’s Economic Crisis as a Warning to High Debt Countries
On Tuesday, July 26th 2022, Asian African Youth Government held an international webinar under the theme of “Sri Lanka’s Economic Crisis as a Warning to High Debt Countries.”
With the aim of discussing what can be learned from Sri Lanka’s case of economic crisis, Hussein Gibreel Musa, the Vice President of Asian African Youth Government 2021-2026, gave some welcoming remarks on behalf of AAYG.
He stated that Sri Lanka’s economic crisis is a combination of external economic shocks and policy missteps. This can be a lesson to other developing countries, especially in Asian-African region, to be more careful and aware about what is happening in Sri Lanka.
“Sri Lanka’s economic crisis can be seen as a great discussion that is able to promote new insights regarding strategic economic policies to Asian-African countries in order to prepare themselves from the impact of COVID-19 pandemic and the global crisis that is currently happening,” he said.
Deputy Minister of External Affairs and Diplomatic Relations Sri Lanka Youth Parliament Ahmath Sadique opened his presentation by explaining how Sri Lanka’s economic performance during the start of COVID-19 pandemic was highly unstable in the very first place, with a lot of fiscal and external imbalances as well as high level of debts.
He continued that the impact of these economic problems was the reduced access to essential goods and services such as the health and education system which were very crucial during the pandemic, while the food system, tourism, agriculture, textiles, and other important sectors suffered from mismanagement of resources due to travel restrictions.
“Some of the causes of the Sri Lanka crisis are very big tax cuts, external debts, debt traps, full of foreign remittances, agricultural crisis, tourism, and all have been a compounding factor against the bankruptcy. My research found that the resettlement of a large amount of loans, the Ukraine-Russia war, and mismanagement and corruption in the government have also caused Sri Lanka’s bankruptcy,” Sadique added.
Sadique also suggested that Sri Lanka should start improving its banking system, encouraging foreign investment, tourism, and other important sectors, as well as minimizing unwanted government employees that take a large portion of the government budget as a long term strategy to revive Sri Lanka’s economy.
“Other countries can learn from Sri Lanka’s crisis that we shouldn’t invest in non-income assets, do not take big amounts of debts, going to the IMF early is advised as it results in net benefits, and strengthen safety nets to mitigate poverty,” he insisted.
On the other hand, Hudda Najeeb Luni, a scholar at Applied Economics Research Center, brought a new perspective to the table by explaining how one of the underlying causes of Sri Lanka’s bankruptcy was the result of nepotism by the Rajapaksa dynasty who managed to overtake almost all parts of the government.
“This dynastic rule contributed to many fiscal mismanagement that eventually led to unprompted income tax cuts in 2019, leading to significant losses in government revenue and draining Sri Lanka’s overall economy,” she explained.
Luni emphasized the interconnectedness of politics and economy. She said, “we cannot talk abt Sri Lanka without talking about its political crisis. Economy and politics are intertwined to understand the roots of the economic crisis in Sri Lanka as a result of a populist regime and nepotism that Sri Lanka was in.”
Luni, who took inspiration from El Salvador’s experience, mentioned that Sri Lanka can adopt the strategy of cutting down all the non essential items in order to reduce the nation’s expense, rationing petroleum to reduce the import bill, increasing the oil price burden right on the customers to curb oil imports in the short term to recover the economy first.
After doing so, the second step Sri Lanka can take is increasing their revenue by applying direct transactions and increasing their tax nets. Increasing safety nets instead of subsidies to cushion the most vulnerable populations and stopping them from falling to extreme poverty is also highly recommended.
“The long term solution in Sri Lanka requires a comprehensive structural economy plan in place by improving their institutional structures, creating a sustainable and long term strategy by increasing export bases in order to be more competitive in the future to bring some dollars home through exports,” Luni concluded.
NOTES
Thank you so much for joining us in this event. We come from Asia Africa region to discuss about the impact of COVID-19 to developing countries.
We all know that Asia Africa region or developing countries are heavily impacted significantly in the social and development by the COVID-19 pandemic since 2020
Negatively impacted countries whose countries rely on tourism sector. One of the example is Sri Lanka and Egypt in North Africa. Because of COVID-19, this sector are impacted because tourists cannot travel abroad.
As we know, the Sri lanka economic crisis is a combination of external economic shocks and policy missteps. Today we come here today to learn from Sri Lanka’s case and to draw attention to the other countries, especially in Asian-African region to be more careful and aware about what is happening in Sri Lanka.
Sri Lanka’s crisis are caused by severe economic shoc contracted by 3.6% by ___. Many fell into poverty. The case happening in Sri Lanka is not new, as many has fallen to bankruptcy, ex Venezuela in 2017. They should think creatively and innovatively to come out of this crisis, including Egypt.
Egypt inflation rate by nearly 15% by 2022. This put Egypt in dangerous situation. Countries like Myanmar, Laos, Afghan, are also facing the same bankruptcy risk. They should be aware and think about the strategic steps to come out of this risk.
My brother and sisters, we consider these events and initiatives as a great discussion in this event to find a solution and promote solutions to Asian-African countries to be more aware about what will happen in the future during the COVID-19 pandemic and due to the global crisis that is happening around us..
So we hope that we can discuss together and share our thoughts, experiences, and knowledge without any borders with our greatest speakers here, Ms. Hudda and Ahmath, to come out with solutions and great knowledge to provide developing countries in Asian-African region to take lessons.
Ahmath Sadique., B.B.M – UOK , CIM – UK(R).
Deputy Minister of External Affairs and Diplomatic Relations Sri Lanka Youth Parliament.
Actually, we cant simply explain about this topic because its been the first crisis after the independence of Sri Lanka in 1948. So this is the very first crisis in Sri Lanka’s after independence. First of all we can see that the C19 pandemic have impacted secio-economic destruction.
The UN warns that C19 is more than a health crisis, buat also impacting society and economy as it will increase poverty and inequality. C19 will likely impact fiscal defisit and menoetary burden, reduce income from travel. AS countries are heavily impacted, such as unemployment and economic growth falling significantly, while most are predicted to fall into recession.
On C19, only two members were allowed in funeral, and this impacted out tradition and cultures. SMEs are further impacted, which is bad bcs 60% of SL economy is SMEs.
The economic performance in SL during the start of C19, SL faces unbalanced debat and challenges, due to the fiscal and external imbalances. During the start of pandemic SL is on a very bad condition bcs it disrupted the education system which are forced to be done online. After the C19, they improved the online learning system. The C19 pandemic are a heavy toll to health system. Health and education sector–the two sectors who are free for society.
Sector of health, it takes some risk in the C19 pandemic. The mismanagement of food system, exports, textiles, agriculture, etc are spoiled The prices of goods rise and thus the economy fall into recession Now SL is facing a very big financial burst crisis and many essential things. Ex lack of petrol and gas for cooking, electricity, → b4 the pandemic they used to cut 5 hours per day for electricity in houses. During the pandemic, this gets worse and now even the education system cannot run well.
Some of the causes of Sri Lanka crisis are very big tax cuts, external debts, debt traps, full of foreign remittances, agricultural crisis, tourism, and all have been a compounding factor against the bankruptcy. My research found that the resettlement of a large amount of loans, the Ukraine-Russia war, and mismanagement and corruption in the government have also have caused Sri Lanka’s bankruptcy.
The resettlement of big amount of loan is also a major source of SL economic crisis. Ukraine and Russian war also plays a major part as SL export went to those two countries. SL inflation now is 50%, very high compared to others. The BBC news mentioned some of the causes that blame the government for the fall of tourism and export sector
So currently, SL total debt is 51 dollars USD. Tourism sector are heavily impacted. Its foreign currency also dropped and 7.6 billion USD and currently only have 250 million USD. Import more than export is also one of the cause. Big tax cuts → cut 1.5 billion in tax payment from corruption.
Some of theoretical revival strategies Economic performance → sri lanka has not quite been in Asian miracle group, but has performed better than developing countries on average. Other countries can learn from Sri Lanka’s crisis that we shouldn’t invest in non-income assets, do not take big amounts of debts, going to the IMF early is advised as it results in net benefits, and strengthen safety nets to mitigate poverty.
In the future, Sri Lanka can adopt strategies such as improving its banking system, encouraging foreign investment, tourism, and other important sectors, as well as minimizing unwanted government employees that take a large portion of the government budget as a long term strategy to revive Sri Lanka’s economy.
Some of our point of views are :
- The strategy in reviving the economy. SL needs sacrificing the government and work together on long term strategies
- Minimize unwanted gov employees. If SL has more employees, they would take up the budget.
- Foreign investment should be encouraged
- Tourism sector should be encouraged
The IMF requested many policies, one of them requires a stable gov, but right now the president and PM of SL are prisoned. Almost most gov have resigned. The new PM and party and pres right now in the gov cannot fulfill the stable gov requirement by IMF to give 3 billion loan. SL ask Russia and Qatar to supply oil at low prices to help and reduce cost on petrol, and G7 through the countries have promote support for SL to reduce its debt payments and encourage giving loans to SL in the upcoming years. Some of the embassies are helping some essential needs such as health, food, and other sectors. These are the help of intl communities to help overcome the economic crisis.
Other countries in Asia can learn that we are getting some big debts for our countries. Other countries can earn by SL crisis that there are no investment in non-income assets by the low investment and low income sucha s train infrastructure. No big amount of debts should be taken because of political reasons. Strengthen safety nets – Developing bank system. The encouragement of internal and external impacts on the banks. Go to the IMF early is advised. Because from SL’s experience, they come too late bcs of the gov parties issues that are not ready to accept the IMF requirement.
Hudda Najeeb Luni.
MPhil Scholar at Applied Economics Research Center.
C19 has affected everyone and especially the communities.The important sector that i would like to look into as an economist is how the lockdown has caused 400 million people to lost their jobs in 2002 and resulted in the loss of 3.7$ trillion in labor income. The overall economy falls into recession which eventually may lead to depression. If the economy keeps on getting worse, it might trigger hunger crisis in the Global South.
The world’s economy contracted by almost 3.5%.
Lockdowns helps because it prevents people form falling into extreme poverty.
SL has not gotten any income support during the COVID-19 pandemic, contrast to other South Asia countries who to some degrees still give income support.
We cannot talk abt Sri Lanka without talking about its political crisis. Economy and politics are intertwined to understand the roots of the economic crisis in Sri Lanka as a result of a populist regime and nepotism that Sri Lanka was in.
After the Rajapaksa family overtook the government through nepotism, the dynastic rule initiated a lot of ill-economic decisions that eventually led to unprompted income tax cuts in 2019, leading to significant losses in government revenue and draining the already cash-strapped country. The terrorist attack that came on the same year also impacted the tourist sector negatively, adding more damage to the economy.
Before 2019, SL faced a long civil war based on two ethnic groups, Tamil and Sinhala groups, in which the Rajapaksa brothers tried to overtook all of the government offices through nepotism. The current deficits happen because of the higher rate of import than export in 2019. Their major tax cuts are also cutting the revenues. When the revenue fall short, you cannot finance your expenditures. If a country is alr indebted but have to pay some percentage of my GDP in return, countries will try to find other financial institutions to fill the gap but end up in debt trap. In 2019, there was a terrorist attack in SL which impacted the tourism sector.
These underlying causes are the reason why economic crisis happened. COVID-19 just exposed all of the problems, but the underlying causes from political, economical, and social sector are the base of this crisis. In 2021, they are completely depleted of their resources. If oil is stop in a country, what happened to countries who rely on oil for it is extreme poverty which happens in SL which is followed by high inflation.
SL owes only a part of their loans to China, but most are toJapan and othe finance institutions.
What we can learn from SL’s crisis is that its such a tragedy that a certain clan has overtook the government and cause catastrophe.
Looking at the experience of El Salvador, what countries in economic crises such as Sri Lanka should do to manage their economy in the short term is cutting down all the non essential items in order to reduce the expense, rationing petroleum to reduce the import bill, increasing the oil price buden right on the customers to curb oil imports in order to recover the economy.
The second step they can take is increasing their revenue by applying direct transactions and increasing their tax nets. Other things that they can do is cushion, by increasing safety nets instead of increasing subsidies to cushion the most vulnerable populations and stopping them from falling to extreme poverty.
The long term solution in Sri Lanka requires a comprehensive structural economy plan in place by improving their institutional structures, creating a sustainable and long term strategy by increasing export bases in order to be more competitive in the future to bring some dollars home through exports.
Strategy for sustainable and long term economic growth and investing in human capital, only then they can recover
How can nepotism harm a country that caused economic crisis such as in Sri Lanka right now?
