Economic Crisis in Sri Lanka; Lessons for Pakistan
Short Introduction of Sri Lanka
Sri Lanka is an island country in South Asia
Located in the Indian Ocean, southeast of the Bay of Bengal and southeast of the Arabian Sea
Separated from the Indian Subcontinent by the Gulf of Mannar and the Palk Strait
Great Strategic importance due to the Maritime Silk Road
Trades in luxury goods and spices
Nation's Population includes Sinhalese, Tamils, Moors, Burghers, Malays, Chinese & Vedda
Background of the Economic Crisis in Sri Lanka
- The 22 Million people of Sri Lanka have been exposed to a grave economic crisis with soaring inflation and daily power cuts that last for hours. in the absence of good governance rule of law, Sri Lanka is fast-moving towards a failed state.?
- The government imposed a state of emergency, curfew and a ban on social media in response to the mass demonstrations and public outrage against President Gotabaya Rajapaksa’s regime.
How the crisis began?
- Gotabaya Rajapaksa Regime Change-2019
- Inheritance of Depleted Economy
- Terrorist attacks and political crises
- Already miserable situation worsen further by COVID
- Climbing Import bills and impeded imports
- Fuel and power shortage
Major Events towards Economic Crisis
- Covid Pandemic
- Sharp depreciation of Sri Lankan Rupee
- Poor Economic Planning
- Political Instability
- Decrease in International trade and depletion of foreign exchange
- Constitutional Crisis
- Shut down of industries particularly tourism, garments
- Debt Sustainability
- Alienation of Key Partners
- Policy Mis-steps like huge tax cuts, subsidies, Fixed Exchange Rate
How the crisis worsened...
- Foreign exchange from tourism and from garment exports dried up.
- Negligent decisions by the ruling group
- Non-qualification for the debt service from the World Bank
- Engagement in the structuring of debt repayments with IMF failed
- Strategic blunder by riling over the giant economic rivals of South Asia
- Printing money excessively led to poverty and inflation led to Fixed Exchange rate
- Flow of remittances in the country through black markets trended
- Exporters discouraged and decided not to remit and kept the money abroad
Structural issues of Sri Lankan Economy
- Domestic Economy and Tax Cuts
- Economics over politics
- Balance of Payment Deficit
- Employing idealism with the IMF
- Agricultural Reforms
- FOREX Crunch, and Inflation
- Downfall of Tourism
- External Debt
Taxes Abolished in Sri Lanka 2019-20
Salient features of Pakistan's Economy
A glance at Pakistan's Economy:
- 24th Largest economy in the world
- Semi-industrialized Economy
- Country Group: Developing Economy (Lower Middle income)
- GDP Rank: 44th (Nominal; 2021)
Major Contributors to Pakistan Economy
- Agriculture (3rd largest Exporter of Rice)
- Dairy Farming and Fish Farming (3rd Largest Milk exporter in the world)
- Manufacturing & Industry
- Textiles and clothing
- Steel
- Transport Equipment
- Construction (Cement)
- Paper products
- Minerals and Mining (Coal, Natural gas etc)
- Fertilizer
- Services
- Telecommunication
Challenges to Pakistan's Economy
- Imports ratio higher than exports
- Consumption more than saving
- Government Spends more than it earns as revenues
- Share in the world trade is shrinking
- Shortage of Energy and Water
- Crisis of Governance and Implementation Weaknesses
- Political Instability
- War on terror
- Deteriorating Law & Order Situation/ Security
- Lag behind in Social Indicators (Literacy, infant mortality, fertility rates etc)
Lessons for Pakistan
Sri Lanka’s experience offers major lessons for other indebted developing countries especially Pakistan to mitigate the economic and social costs of a crisis
- Net benefits can result from going to the IMF earlyHesitation and delaying tactics from seeking IMF assistance to solve its balance of payments difficulties.Discouragement of raft of home grown remediates (e.g. loose monetary policy, stringent import controls etc)Agreement with the politically unpopular austerity policies (e.g public expenditure cuts, higher taxes, floating exchange rate, removal of fuel subsidies).
- Strengthen safety nets to mitigate poverty and political instabilityDecisive revision of Welfare Systems providing free health care and educationTemporary rationing system for basic food and fuelDonor-funded relief mechanisms targeted to the poorest.
- A parallel requirement is effective crisis management capabilitiesCentral and decisive Crisis Management Capabilities for effective economic decision-making.Dissuasion regarding constitution of fragmented committees/ teams?Constitution of Council of Economic Advisors supported by a National Economic Monitoring Unit for conclusive decisions and measures
- A strong macroeconomic and financial regulatory structure is necessary to reduce the economic costs of a crisisAutonomous State Bank’s monetary policy and exchange rate to avoid short-term political pressures.Appointment of Governor of State Bank in consultation with constitutional councilThe Monetary Board must have multiple competent officers to redress economic decisions
- Conduct honest public communication to avoid the spread of misinformationHonest dissemination of information to the public to avoid public confusion and misunderstandingProhibition on social media regarding spread of incomplete and fake informationA lean government information unit may be created staffed by media professionals dedicated to honest messaging about the economy.
- Living with available resourcesOne should live within one’s meansNon-investment in unproductive solutions and developmentsUtilize own resources to the topPromote domestic brands, exports and industries
- Competent leadership and mature behavior of the elitesCareful imposition of curfew, bansNon-violation of human rightsPolitical Patronage and corruption to the elites must be hinderedAdamant elites not sacrificing for the country welfare must be cornered
- Rule of law and just accountabilityDemocracy, governance, rule of law, and accountability must be promotedStrategic Regulation over Military and security agencies to empower the political forceEnhancing Credibility and morale of the institutionsEmpowerment of crisis management mechanism to evade power vacuum
- Regional ties and coordinationPromotion of Regional ties and economiesRegular and emergent convention of Regional Economic Conferences and forums (e.g SAARC, OIC etc)Effective liaison among the political parties, elites and economistsStimulating of Momentous efforts to improve relations with regional countries.
Initiatives taken by Pakistan to evade economic crisis
- Political Stability
- Increase in retail prices of Cooking Oil, Palm oil
- Rollback in fuel subsidies
- BISP targeted subsidies to counter social unrest
- SBP increase in the Policy rate
- Close coordination of fiscal and monetary policy
- Setting targets for fiscal and current account deficits and cut costs accordingly
- Urging the IMF for debt relief by following a sound plan for “economic growth and correction of elite privilege”
- Abolishing imports of non-essential goods and increase in exports
- Access of external debt to only finance projects that ensure GDP and export growth
- Increasing domestic sources of energy & mineral resources
- Parliamentary review of all international agreements of economic nature
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