Sri Lanka, as a country, moves into 2023 with controversies, public grievances, political chaos, and, more importantly, a gruesome debt burden.
The Government is in a bind on a number of issues and is under intense pressure. According to Treasury Department sources, the Government is battling to find recurring monthly expenditures such as public service salaries, medicine, and other public welfare expenses. The bitter truth is that the economic revival remains uncertain at this point and will deteriorate further if a collective effort and contribution come about without any delay.
Although the Central Bank is optimistic that a recovery in economic activity will occur by the second half of the year, the World Bank has predicted that the economy will contract by about 4.2 percent in 2023. Contrarily, the IMF has projected that Sri Lanka’s GDP will show positive growth only by 2027.
According to Government sources, discussions on the US$ 2.9 billion Extended Fund Facility (EFF) are going well, even though the IMF has not even indicated when it will release the first installment of the loan.
This will perhaps be the only substantial external help Sri Lanka will receive to improve the country’s insecure and unstable foreign reserves.
Sri Lanka expects that IMF assistance can facilitate bilateral and international financial assistance to get the economy back on track. What counts is the program’s capacity to inspire trust in other official lenders, private investors, and creditors.
Sustainable path
The IMF often sets conditions for the loan, such as fiscal and monetary policy adjustments, in order to ensure that the country is on a sustainable path to economic recovery. Naturally, the loan will come with conditions for the Sri Lankan Government to implement economic reforms and strengthen financial sector supervision. The reforms were designed to improve public finances.
In this context, the Government appears to be attempting to follow the IMF’s conditions, despite strong opposition from various factions to tax reforms and price increases on essential supplies and services.
Also, the two most important lenders, China and India, although they time and again declare cooperation, have not come up with a specific restructuring plan as yet. The loan’s initial disbursement date of December 2022 has now been pushed back to a shaky March 2023.
To make matters worse, the World Bank has predicted a global recession in 2023. This can have a significant impact on Sri Lanka, as the country is heavily dependent on foreign trade and tourism. A decrease in international trade would likely lead to a decline in exports, which would negatively impact the country’s export sector, on which the country is enormously dependent.
Also, the decrease in tourism would have a negative impact on the country’s service sector, as tourism is one of the three major sources of foreign exchange earnings for the country.
Also, the global recession could lead to a decrease in Foreign Direct Investment (FDI) in Sri Lanka, as foreign financiers may be less likely to invest in a country during an economic downturn. This would negatively impact the country’s economy, as it is not only one of the most important sources of economic growth, but FDI also diversifies and increases exports.
Gradual decline
Another factor that needs immediate attention is the gradual decline in export earnings, particularly in apparel and textiles, tea, and rubber and coconut-based products. For example, the garment industry, which accounts for nearly half of the country’s export earnings, shows a clear decline.
According to the industry veterans this writer spoke to, a sharp decline in orders from foreign buyers is imminent due to multiple factors, such as the ongoing global recession and the worldwide energy and inflation crises triggered by the Russia-Ukraine conflict, among others.
If all stakeholders, including the Government, do not address this critical issue immediately, the country will not only lose a major source of foreign exchange earnings, but it will also create a major problem in job losses in the apparel industry, which could lead to a dangerous social tragedy.
The expectation of the Government was to improve the balance of payments predominantly through exports, tourism, and ex-pat remittances.
However, except for tourism, which shows an improvement, the other two sectors seemingly will not be able to contribute as expected this year. Even the travel and tourism sectors can run into temporary setbacks for a couple of months due to the impending local Government elections.
Historically, any Sri Lankan election held in the past several decades has created chaos in the country for months, mainly during the pre-election period.
If not all the battling factions consciously understand the current situation and particularly the importance of tourism at this point, expected foreign currency earnings will take a further dip.
No sane citizen opposes or challenges the constitutional obligation of a democratic Government to conduct timely elections. Yet, the enormous amounts of State expenditure (SLR 10 billion, according to the Government) and campaign expenses of individual candidates can lead to a colossal amount of money. Recently, a group of independent economic analysts revealed that an estimated Rs. 72 billion will be spent by the main political parties on their respective election campaigns.
This will undoubtedly aggravate the current financial crisis. The irony is that only Opposition political parties who want to test their electoral strengths are vehemently canvassing for LG elections. None of these politicians who are demanding elections discuss or offer solutions to the prevailing crisis.
Notwithstanding the enthusiasm of political parties, the public’s interest is minimal, as they not only have lost faith in politicians at this point in time but also know that the result of the LG elections will not make any difference to the current situation. To many of them, it’s a colossal waste of public funds that can be utilised more effectively for public welfare.
Despite President Wickremesinghe’s declaration in his New Year’s message that the worst of the hardships and uncertainties have passed, the immediate future remains uncertain.
The responsibility completely lies with the entire citizenry to put the country back in a stable position. If the political parties and politicians create mayhem through unjustifiable and unreasonable trade union actions, as witnessed even at the highest point in the crisis, the situation can further deteriorate this year.
People faced desperate hardships due to the looming economic crisis for nearly the entire year 2022.Although the acute shortages of essential goods including fuel, LP gas, medicine, and power cuts have disappeared, the spiraling price inflation of essential goods still makes day-to-day living extremely difficult. With the expected drop in exports and slow improvement in expatriate remittances, all these issues, particularly imports of fuel and LP gas, can resurface at any time unless a concrete solution is found soon.
Those who work in the public sector and demand the pound of flesh on their benefits and engage in trade union actions must reconsider their position compassionately.
It is no secret that public service-affiliated trade unions continue to cause chaos and waste public funds through their actions. Most of the activists engaged in these disruptive actions do not wish to sacrifice any of their conveniences for the sake of the country.
The expected start of recovery predicted by the Central Bank by the second half of 2023 can be an unrealised dream if the Opposition political parties keep on disrupting the flow of governance for cheap political gains.
Therefore, the whole nation expects all political parties, including those in the ruling factions, to get together at this crucial time, leaving petty politics aside, even temporarily, until the country is back on its feet.