There is a raging debate in society and the media over the present economic situation. While Sri Lanka is by no means a unique case as Covid-19 has adversely affected both developed and developing economies, there are some aspects that have exacerbated the economic constraints.
Sri Lanka is heavily dependent on tourism for earning foreign exchange. This industry collapsed totally in the midst of Covid-19. This affected practically every country that earned a living from tourism. Sri Lanka is no exception. Quite apart from the loss of tourism dollars, the lack of tourists also drove thousands out of employment. This was a double whammy that Sri Lanka could ill afford.
The other factor was a drastic reduction in remittances by Sri Lankan expatriates, most of whom returned to the country in the wake of Covid-19. Given that both tourism and expat remittances collectively contributed around US$ 12 billion annually to the coffers, it was a massive loss to the economy. There was also a dip in exports in the initial 12 months of the pandemic that aggravated the earnings situation.
In spite of this loss, there was no discernible reduction in the country’s imports apart from motor vehicles and certain other luxury items. Besides, we have to import certain essentials including fuel, which alone costs around US$ 6 billion a year. Certain foodstuffs are also imported either because the local harvest is not sufficient or because the crops are not cultivated locally. Herein lays the genesis of the present economic imbroglio whereby Sri Lanka is suffering from a serious dollar crunch.
The good news is that all three sectors mentioned above – tourism, expatriate remittances and exports – are picking up gradually. More than 30,000 tourists have visited Sri Lanka in the first few weeks of 2022, ushering in a ray of hope for the beleaguered industry. Moreover, more than 100,000 Sri Lankans have either returned to their former overseas jobs or found new ones during 2021 alone. The export sector has broken record upon record during the last few months of 2021. These are good signs for 2022 that an economic recovery is imminent.
Amidst the economic impasse, there is an emerging school of thought that the Government should give priority to food and fuel imports at the expense of almost everything else. On the face of it, there is some validity in this argument as food security and energy security are of utmost importance.
Although there is no danger of food shortages per se at the moment, a crisis is brewing in the power sector caused by the loss of hydropower due to the drought and the inability to procure large quantities of fuel at once due to the dollar crisis. The relevant authorities are working around the clock to resolve these critical issues. In this respect, the recent US$ 500 million Indian Credit Line for fuel purchases could not have come at a more opportune time.
Hence the argument that Sri Lanka could have defaulted on the International Sovereign Bond (ISB) that matured on January 18 and instead used the US$ 500 million to finance food and/or oil imports. However, as Central Bank Governor Ajith Nivard Cabraal explained, that particular road is fraught with danger for the country’s future prospects in the international arena. Once a country is identified as a defaulter, it is very difficult to literally get back into the good books of investors and lending agencies. Sri Lanka has never ever defaulted on foreign loan and ISB repayments at any point in history, not even when its foreign reserves fell to just US$ 900 million at the height of the 30-year-old war. It is not an option that we should resort to now.
Another opinion that has been expressed rather forcefully by some politicians and media commentators is that Sri Lanka should stop all ongoing and new development projects and use such monies primarily for food and fuel imports, at least for the next couple of years. Again, this does not at first sound like a bad idea. After all, development projects need huge financial allocations which we might not be able to secure at the moment.
But there are several equally powerful arguments against such a move. For starters, many development projects such as the Central Expressway project are already under way. It does not make any sense to stop them midway and in any case, a future Government will have to recommence the projects again, perhaps at greater expense, given the inflationary trends. Some development projects are in any case foreign-funded, which means local funds are not required, a recent example being the flyover project initiated with Hungarian funds. Sometimes, there is a local monetary component, which is fully justified when considering the ultimate benefits of a given project.
Nevertheless, the authorities could reassess certain development projects to check the level of urgency and importance. For example, there is no use carpeting an already well-paved stretch of a city road. Such funds can instead be diverted to build a road or a bridge in a remote area that suffers from a lack of such facilities, as often seen during TV news bulletins.
The authorities should also strive to seek foreign funds, possibly grants (not loans) for certain development projects for which local funds have already been earmarked. Then there will be no burden to the Exchequer.
We need to take a holistic view on the whole development process, identify the immediate priorities and secure funds accordingly. That will help address the present financial constraints while maintaining a steady pace of progress.