Is Malaysia heading the way of crisis-ridden Sri Lanka?

 

I’ve never visited Sri Lanka but I’ve heard that it’s a beautiful place and every year, before the Covid-19 pandemic, more than a million people visited it.

According to Sri Lankan tourism department figures, 1.9 million people visited the island in 2019, earning it US$3.6 billion in revenue. In 2018, 2.3 million visitors helped it earn US$4.4 billion in foreign exchange.

It is often touted by proud Sri Lankans as “paradise” and “pearl of the orient”.

But no more. For Sri Lanka is now drowning in its worst ever economic crisis and is pleading for help from other nations to enable its people to stay afloat.

Following a 70% drop in foreign exchange reserves since January 2020, Sri Lanka has been struggling to even pay for essential imports such as food and fuel. It’s foreign currency reserves fell to US$2.31 billion in February, a fall of US$779 million just from December 2021 through January 2022.

The nation is reeling from food shortages and skyrocketing prices of food and fuel. Some reports say many are eating only one meal a day, and rationing has been introduced to cope with the shortages. For example, a Sri Lankan can now buy only 400gm of milk a day.

Residents have to put up with daily power cuts of up to 13 hours.

On March 20, several reports said Sri Lanka had cancelled examinations for millions of students because it had run out of printing paper and could not pay for imports. And on March 26, it was reported that two of Sri Lanka’s major newspapers – The Island, an English daily, and its sister Sinhala paper Divayina – had suspended print publication because of the escalating price of newsprint and shortage in supply, not because of falling circulation.

People have been forced to queue for hours for fuel, and petrol for buses and lorries has been rationed. AFP quoted officials on March 20 as saying that at least two people died while waiting in long queues for fuel at petrol stations.

It’s not surprising, therefore, that the anger and frustration that has been building up led to protests by the public and a declaration of a 36-hour nationwide curfew on April 2 by the government of president Gotabaya Rajapaksa.

Reuters reported that hundreds of protesters clashed on Thursday with police and the military outside Rajapaksa’s residence. Several police and army vehicles were torched and 53 people arrested. In recent days, the call for Rajapaksa to go is growing louder.

Yesterday, it was reported that Sri Lanka had even imposed a social media blackout amid the curfew and protests. The situation is expected to get worse in the next few days and weeks.

How did paradise become hell for most, if not all, Sri Lankans?

As I read more about the situation and what led to the present crisis, I couldn’t help noticing parallels between the political and economic situation in Sri Lanka and Malaysia. Sri Lanka, it seems to me, is showing us where we could be headed if we don’t address our own similar structural problems.

But before I get to the lessons for us, let me first write about the situation and the reasons for this tragedy that is afflicting “paradise”.

Briefly, the Sri Lankan rupee has fallen by almost 45% against the US dollar since the beginning of March. And essential food prices rose by 30.1% while overall inflation hit 18.7% in March.

The International Monetary Fund (IMF) said in early March that Sri Lanka’s public debt rose from 94% of gross domestic product (GDP) in 2019 to 119% of its GDP in 2021. Real GDP, it said, contracted by 3.6% in 2020, due to a loss of tourism receipts and the Covid-19 pandemic lockdown measures. Sri Lanka lost access to the international sovereign bond market at the onset of the pandemic.

The IMF said annual fiscal deficits exceeded 10% of GDP in 2020 and 2021, due to pre-pandemic tax cuts, weak revenue performance in the wake of the pandemic and expenditure measures to combat the pandemic. Also, limited availability of external financing for the government resulted in a large amount of central bank direct financing of the budget.

“The economic outlook is constrained by Sri Lanka’s debt overhang as well as persistently large fiscal and balance-of-payments financing needs. GDP growth is projected to be negatively affected by the impact of foreign exchange shortage and macroeconomic imbalances on economic activities and business confidence.”

The IMF added: “The outlook is subject to large uncertainties with risks tilted to the downside. Unless the fiscal and balance-of-payments financing needs are met, the country could experience significant contractions in imports and private credit growth, or monetary instability in case of further central bank financing of fiscal deficits. Additional downside risks include a Covid-19 resurgence, rising commodity prices, worse-than-expected agricultural production, a potential deterioration in banks’ asset quality, and extreme weather events. Upside risks include a faster-than-expected tourism recovery and stronger-than-projected FDI inflows.”

Sri Lanka is now seeking – perhaps “begging” is the proper word – aid from the IMF and other countries. “The Sri Lankan authorities have expressed interest in an IMF-supported financial programme,” Reuters quoted IMF spokesperson Gerry Rice as saying on March 31. “We plan to initiate those programme discussions with the Sri Lankan authorities… pretty much in the coming days.”

When the IMF comes in, Sri Lankans won’t be in full control of their economic destiny and the leadership will have to agree to various conditions.

Sri Lanka has already asked China to restructure its debt payments and for credit support. It has also sought a credit line of US$1.5 billion from India to import essential items such as food, fuel and medicine. This amount is in addition to the US$1 billion extended by India in February.

Indian traders, in fact, started loading 40,000 tonnes of rice for shipment to Sri Lanka on April 2 as part of the credit line.

Many reasons have been offered as to why Sri Lanka is in dire straits. The most obvious reason is the Covid-19 pandemic which has hit its economy hard. Also, the war in Ukraine has made it worse for fuel prices and supply.

But there are many others, some of them going back decades, even to the costly war against the Liberation Tigers of Tamil Eelam (LTTE) which sucked up much of the nation’s financial reserves. Political manoeuvring is one reason the country can’t get back on track. Importantly, successive governments have failed to reset deep-rooted structural economic problems.

The Week quoted K Don Vimanga, policy analyst at Advocata Institute, a think-tank in Colombo, as saying: “The origins of the crisis go back to the trade liberalisation in 1977. The major problem is macroeconomic instability, tax cuts and large budget deficits financed by printing more money. Subsequent debt downgrades shut Sri Lanka out of the capital markets. The country could not refinance maturing debts or finance the current account deficit that was growing rapidly due to fiscal expansion. They then tried to fix the exchange rate and control imports, which have led to the shortages.”

Many blame the government’s “reckless and mismanaged economic policies” for exaggerating the crisis.

Some economists say instead of introducing structural changes, successive governments took the easier route by borrowing, resulting in debt and interest payments amounting to almost US$12 billion. This year, it has to make US$4 billion in such payment. One report said it was expected to spend another US$25 billion between 2023 and 2026 on servicing its loans.

Some say pre-pandemic populist tax policy changes by the Rajapaksa government, including slashing the VAT rate, set off a decline in revenue at a time when public finances were already low.

On March 14, former deputy governor of the Central Bank of Sri Lanka, W A Wijewardena, wrote in the Colombo Telegraph: “The source of all these economic issues can be traced back to three policy errors made by the Gotabaya Rajapaksa administration. One is the offering of an unsolicited attractive tax concession to income taxpayers and value-added taxpayers causing an unrecoverable loss in tax revenues. The second is the attempt at converting the country’s agriculture to organic farming amidst wise counsel by scientists against it. The third is the refusal to seek assistance from the IMF to overcome the mounting external sector crisis and, instead, relying on an illusive ‘home-grown policy’ for the same.”

Commenters on online Sri Lanka newspapers and social media have offered many reasons too, one of them being the law of karma which posits that you reap what you sow. Some of them say the present crop of politicians and the majority Sinhalese are paying for the injustices against minorities over the years.

Some referred to UN Human Rights High Commissioner Michelle Bachelet’s recent report on Sri Lanka which highlighted these injustices. For instance, it speaks about the sufferings of the families of those – mostly Tamils – who simply disappeared during and after the war with the LTTE, and called on the government to “acknowledge their sufferings, urgently determine the fate or whereabouts of victims, provide reparations, and bring perpetrators to justice”.

The report said there was a trend toward militarisation and ethno-religious nationalism that “undermine democratic institutions, increase the anxiety of minorities, and impede reconciliation”.

It noted that “the pattern of surveillance and harassment by security forces of civil society organisations, human rights defenders, journalists and victims, highlighted in previous reports, has also continued, particularly in the north and east”.

As I mentioned earlier, there are many similarities between the problems faced by Sri Lanka, which led to its present predicament, and Malaysia’s politico-economic situation. We can avert a crisis like that faced by Sri Lanka if we are willing to learn the lessons offered by that island nation. - FMT

The views expressed are those of the writer and do not necessarily reflect those of MMKtT.