Dr Huma Baqai

22nd May, 2022. 10:15 am

Economic woes of Sri Lanka and Pakistan

Political dynasties have always played an important role in South Asian politics; Sri Lanka is no exception. In 2020, at the height of the Rajapaksa dynasty, four brothers held positions of prominence which included the presidency, the prime minister as well as the finance, interior, and defence portfolios, among others; essentially meaning that important decision making was entirely family business.

For the last 20 years, members of the Rajapaksa family have controlled the highest reaches of Sri Lankan government. Under their watch, critics in the opposition and the media have called Sri Lanka a “soft dictatorship”. There has been an unprecedented concentration of power and mismanagement in the country. Within a time span of 30 months, the powerful Rajapaksa dynasty has bankrupted Sri Lanka. The Rajapaksa clan seemed invincible, but an economic crisis of their own making has led to their downfall. After months of intense civilian-led protests, it seems that the end of South Asia’s most powerful political family is imminent.

Sri Lanka maybe the first South Asian country to buckle under economic pressures heightened by the Covid-19 pandemic and Russia’s war on Ukraine, but it is not the last. Across the globe, low and middle-income countries are struggling with a three-pronged crisis: the pandemic, the rising cost of their debt, and the increase in food and energy prices.

Covid-19 brought about a massive negative shock as dollar earnings from tourism dried up. The Sri Lankan leadership understood that they needed to control their import bill. However, the Sri Lankan policymakers failed to rise to the challenge, often ordering quick economic repairs to save dollars in a knee-jerk reaction. Sri Lanka is now in the midst of a vicious economic meltdown. On April 12, 2022, having run out of dollars, Sri Lanka eventually defaulted on its external debt and sought IMF’s assistance.

Even the resignation of Prime Minister Mahinda Rajapaksa has failed to quell public anger, the people also want the president to step down. After months of intense protests over Sri Lanka’s deteriorating economy, President Gotabaya Rajapaksa has finally agreed to appoint a new council to form an interim government. The decision would help create a coalition made up of all parties in Parliament, consequently ending the grip of the Rajapaksa family dynasty currently ruling the country.

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The country’s economic future is at stake, which has been in shambles after defaulting on payments of foreign loans which are estimated to be worth $50 billion. This has happened for the first time since the country gained independence from the British in 1948.

Back in 2009, also the Rajapaksa brothers had allegedly given the shoot-to-kill order during the “White Flag” surrender against the Liberation Tigers of Tamil Eelam (LTTE). Fast forward 2022, the Sri Lankan authorities have yet again issued the ‘shoot-on-sight’ orders to disperse protesters as the island nation is rocked by deadly violence and rioting. Mobs are retaliating across the country, torching dozens of homes of ruling-party politicians and they even tried storming into the prime minister’s official residence. UN rights chief Michelle Bachelet said that she was “deeply troubled” by the violence committed both by supporters of the government and the subsequent “mob violence” against ruling party members. She also called for an investigation and urged the government to “engage in meaningful dialogue with all parts of society”.

Sri Lanka is cash strapped to a point where it is unable to pay for even food and fuel, leading to long petrol lines and even longer power cuts. Commodity prices have gone up by 200%. The country’s stock exchange is the world’s worst performing in the year 2022 even below Russia. The Rajapaksa family is trying to do damage control by desperately trying to ensure basic goods for the citizens while seeking emergency funds from the IMF, World Bank, China, and other lenders.

As coalition members defected, the Rajapaksas have lost their two-thirds majority in parliament and are now trying to sustain their hold on power. The financial woes make holding elections very tough. Moreover, opinion surveys suggest the Rajapaksas would lose in a landslide. The first “Mood of the nation” poll carried out in January 2022, showed that the government’s approval rating had dropped to 10 percent. The economic crisis has only worsened the situation.

Unfortunately, bearing a few tweaks, the situation in Pakistan mirrors that of Sri Lanka. Decades of poor economic governance, living beyond means and not being able to take difficult economic decision because of the political cost involved is taking its toll now.

Despite being in the office for over five weeks now, the new coalition government has failed to take tough economic decisions which are necessary to save the sinking economy. At the moment, it seems like Pakistan is on the same path as Sri Lanka. Many of the elements of the Sri Lankan crisis find echoes in Pakistan. Inflation is galloping, the Pakistani rupee, like its Sri Lankan counterpart, is struggling, and both fiscal and current account deficits have ballooned beyond control. With depleting foreign exchange reserves ($10.5 billion barely enough to buy six weeks of imports), soaring public, foreign, and circular debt, trade imbalance, fiscal deficit, current account deficit, extraordinary high inflation, Pakistan is on the verge of default.

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“Insecurity breeds insecurities… In Sri Lanka, an economic crisis has spawned a political crisis… In Pakistan, the ongoing political crisis is leading to an economic crisis” writes Dr. Abid Qaiyum Suleri, Head of the Sustainable Development Policy Institute. Both Pakistan and Sri Lanka need to regain international credibility, which can only be achieved through real economic reforms including adjustments in fuel and electricity prices, and tax reforms. The need of the hour is to urgently take decisions to put the economy of Pakistan back on track.

The political dilly-dallying is self-defeating and detrimental for the state of Pakistan. “The high cost of not doing it now” may bring the country down. Pakistan has never defaulted in the past, bailouts happened, this time that seems improbable, the only way forward is to get on with IMF and its conditionalities, no matter how politically unpalatable they maybe. If the elected coalition government is not in a position to do it or does not have the political will and spine to do so, perhaps an interim setup should do the needful and subsequently elections should be held. As per IMF rules, an interim government cannot go into fresh negotiations with the institution, however, it may do the needful to implement the conditions already agreed upon. Every passing day makes the economic dilemma of Pakistan more critical. The ongoing political paralysis is only adding insult to injury. You can’t run a country with two Prime Ministers and two Finance Ministers to begin with.

 

The writer is an Associate Professor of Social Sciences and Liberal Arts, IBA Karachi

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