By Eran Wickramaratne President Gotabaya Rajapaksa’s “Vistas of Prosperity and Splendour” policy framework has brought us directly to the current economic crisis. Sri Lanka is currently going through two critical crises: Economic and Covid. Fortunately, with the increased speed of vaccination across the country and the national lockdown, we have seen a fall in the number of Covid deaths and infections. However, this Government’s mismanagement has created another humanitarian crisis – one driven by poor economic policy. Economic challenges Sri Lanka’s current crisis is a fundamental structural problem that has existed for decades. Our twin deficits mean that our national expenditure is higher than our income, and that we do not produce enough tradable goods and services compared to the amount we import. We have faced a fiscal deficit that has averaged 7.6% of GDP (gross domestic product) since 1990. Our revenue-to-GDP has been in decline since 2000. In the name of patriotism, the (previous) Rajapaksa Government brought our tax revenue-to-GDP ratio from 14.6% in 2006 down to 10.4% in 2014. This was one of the lowest in the world. In contrast, when the last Government left office, revenue-to-GDP rose to 12.6%. Our second structural issue is our persistent Balance of Payments (BOP) and current account deficits. Exports as a percentage of GDP have collapsed since the year 2000. One of the few times we experienced a current account surplus was in 1977. By importing more than we export, we put pressure on both our currency and our reserves. These two deficits have compelled us to borrow locally and internationally. This leads to high levels of debt, a reliance on foreign capital inflows, and depreciation of our currency. The first Rajapaksa Government didn’t try to fix these two structural problems. Instead, they worsened it. To finance the deficit, then Central Bank Governor Ajith Nivard Cabraal went to international markets in 2007 and issued our first-ever international sovereign bond (ISB), borrowing $ 500 million. This opened a new source of borrowing with expensive commercial dollar-denominated debt. Borrowing expensive external commercial debt is fine, as long as we invest in productive assets. The present Government often blames the economic policies of the previous Government for the present crisis. The truth is, from 2015-2019, we implemented difficult reforms to fix these persistent problems. This Government, instead of understanding the challenges that Sri Lanka faces, has been following a senseless policy that puts our already vulnerable economy on its deathbed. Government revenue collapsed from December 2019, that is before Covid, because of its irresponsible tax cuts to the rich and wealthy. The Government is hiding behind the convenient idea that Covid is the problem. It is not. We have to repay over $ 29 billion in debt over the next five years. However, this Government lost access to the foreign debt markets, and has since tried to manage the shortage of foreign exchange by controlling imports rather than increasing exports. In the meantime, with the precipitous fall in our revenues, interest payments as a function of revenue have increased to 72% of revenue. The only country that is doing worse than us is Lebanon – a country with fuel shortages, soaring food prices, a run on banks, and protests on the streets. Food crisis Over the past 21 months, President Rajapaksa issued seven extraordinary gazettes merely on rice. The price controls on rice, dhal, milk powder, and sugar have distorted the market. Importers, who bought these commodities at increasing prices, have been unable to sustainably sell them in the local market, leading to severe shortages. The Sri Lankan rice market is controlled by a few, highly politically connected families. By creating a supply shortage through price controls, the President has made rice supply captive to the private mafia. Instead of acknowledging the food crisis, the Government continued to insist that there were no shortages, denying the fact that some families were reduced to surviving on two meals a day and children were going hungry. Instead of relying on experts, the supply of essential items has been militarised, with an Army official in charge of the Consumer Affairs Authority (CAA). Unfortunately, our President still does not realise that this is not a war. One cannot solve our food crisis using force or threats. This method of burying one’s head in the sand when there is a crisis was the same “technocratic” governance that the Government followed with Covid. The result was the loss of thousands of lives. Agriculture crisis In late April, President Rajapaksa announced a sudden ban on the importation of chemical fertilisers, as part of a broader transition of all agriculture to organic fertiliser. Instead of consulting with local farmers and implementing this ambitious policy agenda over time, the President stood by his ban, despite protests. This move was justified from a health perspective, saying that it will reduce the incidence of kidney disease. However, it is widely held that the ban on chemical fertilisers had more to do with the shortage of foreign exchange and less to do with health issues. This brings us back to our lurking macroeconomic crisis. We exported agricultural products worth almost $ 2 billion in 2020, including tea, cereals, fruits, and vegetables. The lack of chemical fertilisers will lead to lower agricultural exports and a shortage of food locally. A reduction in domestic agricultural production would lead to an increase in the importation of food, at a time when we are running short of foreign exchange, which would be counterproductive. The Sri Lanka’s Planters’ Association estimates that their tea output could fall by 40% in 2022, and that rubber output will fall by 20% by the end of 2021. The fall in yield will be even more severe next year because of leaf disease. According to the President of Sri Lanka’s Planters’ Association, this disease has spread through 20,000 hectares in the tea plantations. Rubber plantation experts estimate that leaf disease has already become an epidemic on rubber plantations. It is a similar story with paddy. Our rice yields will fall, driving more people to starvation. President Rajapaksa’s economic policy will have long-term consequences. If we cannot produce enough tea to fulfil contracts next year, we will lose the markets that we have worked so hard to maintain. The international tea market is highly competitive, with increasing numbers of companies who can produce at a lower cost to us. If we disregard these contracts, it may be hard to regain them. Ceylon Tea will no longer be a source of national pride, but instead a symbol of national failure. These crop losses will affect the lives of our farming families and tea pluckers. It will impact the plantation companies and export revenues. Foreign currency crisis The Government is currently trying to manage its reserves carefully, so that it can both repay upcoming debt payments and pay for imports. In December 2019, we had reserves of $ 7.6 billion. This fell by $ 2 billion to $ 5.6 billion in December 2020. As of August 2021, we are at a historic low of $ 3.5 billion. We have been locked out of the international markets for a while, since Fitch and Standard and Poor’s (S&P) downgraded us for our deteriorating fiscal position. With current levels of public information, it is likely that foreign reserves will deteriorate further by the end of the year. The Government is managing its short-term liquidity needs through multiple swap agreements with Bangladesh, China, and India. The Chinese swap facility is in yuan. The negotiations for the South Asian Association for Regional Co-operation (SAARC) swap and the facility with India are yet to be concluded. We cannot continue piecing together small scraps for too long, as counterparts will insist on fiscal consolidation and International Monetary Fund (IMF) financial discipline. Remittances have also fallen, driven by the return of migrant workers during Covid and the pegged exchange rate. The worker remittances we received in August 2020 was a mere $ 450 million, a 33% fall from the same month last year. While tourism may pick up with the easing of Covid restrictions, it is highly unlikely that it will make up for the shortfall of foreign remittances. Financial markets work on credibility and confidence. Sri Lanka can only restore market confidence by upholding the rule of law. It is imperative that Sri Lanka honours its international treaty obligations, commits to build a Sri Lankan identity, improves its foreign relations, focuses on fiscal consolidation, and integrates with international markets by opening the economy. Clearly a change of policy direction will need to be preceded by economic leadership changes in government ministries. The way forward The problems that the Government faces can only be addressed through difficult, sustained reform. There are five things they need to do immediately. Commit to progressive reform Progressive reform will inspire confidence in our own citizens, the global stage, and international markets. This means enforcing the rule of law and respecting human rights. Reform the Prevention of Terrorism Act (PTA) and bring it in line with our Constitution and international treaty obligations. Have zero tolerance for corruption and emphasise clean government. Re-align our foreign policy. Let’s reinterpret Madam (Sirimavo) Bandaranaike’s non-aligned perspective and commit to an independent foreign policy. We must not be victims of the global competition for maritime and trade routes that is accelerating in the Indian Ocean. We should stand strong in defending open access. We also need to be economically integrated into the rest of the world. This means putting foreign service professionals at the forefront and training them in economic diplomacy. Prioritise a soft restructuring The Rajapaksa Government has put us in a financial straitjacket. We need more breathing space so that we can prioritise the needs of our citizens instead of saving foreign exchange to repay debt holders only. At a time when Covid continues to ravage internationally, there is leeway for us to conduct a soft restructuring, improve our cash flows, and move away from a hard default. Build a stable macroeconomy Focus on fiscal consolidation. Increasing tax revenue is an absolute necessity. This can be done by rationalising the tax code. We need to lower the cost of doing business and revisit expenditure. Instead of putting money into building roads and highways, we need to invest in human resources. Our people are our talent. A large chunk of our expenses is recurrent, made up of interest payments, pensions, and public sector wages. This will also need reform. Ultimately, this fiscal consolidation will ease the burden on the poor and increase investor confidence. Widen our export base The best way for us to earn foreign exchange is by expanding our export base. This will give citizens good, high-quality jobs. Restricting imports will not help to save our economy, as 80% of our imports go into intermediate goods and capital goods. We need to take Sri Lankan small and medium-scale enterprises (SMEs) to the global market. In agriculture, instead of providing fertiliser as a subsidy, let’s provide technology as a subsidy. Providing technology to SMEs can improve the quality of production. Connect SMEs with global markets. Attract foreign investment Finally, instead of only focusing on selling Sri Lanka as a tourism destination, let’s elevate ourselves to be an investment destination. We need to reduce the barriers to entry and introduce time limits for registrations, approvals, and provision of government services to investors. (The writer is a banker by profession and currently a Member of Parliament. He previously served as the State Minister of Finance and Deputy Minister of Investment Promotion and Highways)