The debt trap

By Prof. Sunil Shantha 

Sri Lanka was a rich country with foreign exchange when it gained independence 70 years ago. The reserves were then enough for more than three years of survival. Sri Lanka was only second to Japan when considering this economic sustainability in the region.

But the welfare structure of the State turned this economic phenomenon upside down. It increased the recurrent expenditures of the country. Free education, free health, basic infrastructure and also the development of sectors such as agriculture, irrigation added a massive bill to State coffers. 

Another factor that impacted the rich economy of Sri Lanka was the heavy imports of food and items that brought our foreign exchange reserves down. In contrast we were able to reach high standards of human resources compared to Asian countries such as China, India, Malaysia, Singapore, and Thailand. By the ’60s there was immense contribution to this particular sector in Sri Lanka. 

The attention of the then governments was mainly to develop sectors such as agriculture, irrigation and resettlement, bringing the recurrent expenditures of the government into unexpected higher scales. 

Then the ’70s witnessed a heavy global economic crisis, added to this was a national policy on import replacements creating a massive shortage of goods within the country. However, the turning point was the 1977 economic revolution that opened the country’s economy up through competitive market economic policies. No government could deviate from this phenomenon, rather getting more aligned into it and supporting open market economic policies. 

But, social welfare systems were never neglected even under open economic policies, or in contrary were rather strengthened. Free education, free health, free school uniforms, free text books, housing schemes, massive development programs such as Mahaweli, Moragahakanda and Colombo Port became highlights. 

Why this debt trap? 

But why this debt trap? This is a result of a mix of several factors. Global economic trends, poor performance of our export economy, wrong strategic directions on massive infrastructure developments, decrease of foreign remittances to the country were among them, but added to this was the wrong economic policies between 2005 and 2015. These adverse trends were further fueled by short-term foreign policies those were entirely against basic democratic norms and principles. 

This particular period was a mix of confusions and contradictions. Mega-scale development projects were funded through foreign commercial loans with unexpected levels of interest rates while the industrial sector did not reach expected targets. Though paddy cultivation noticed a commendable improvement, export oriented crops such as tea, rubber and spices were not performing at all. 

The development of basic infrastructure through mega-scale projects was not planned according to national economic plans and most importantly the high interest rate commercial loans were not a healthy feature for State coffers. 

This increased the vulnerabilities of the balance sheet of the country’s economy. In the absence of a sound foreign exchange revenue generating mechanism, commercial loans were also utilised to repay other loans. 

This phenomenon created an extremely detrimental economic environment in the country and slowly started building up a mountain of debts. The total income of the country was not sufficient to repay the interest of foreign loans. Foreign exchange generating avenues such as GSP Plus were blocked and European markets were not accessible for Sri Lankan fishing products, resulting in the emptying of State reserves. 

Many accused the involvement of the Chinese in major development projects such as Hambantota Port, Mattala Airport, Southern Expressway and the Airport Highway. These massive development projects were not the results of expert need assessments or mega development strategies of the country, but were funded through loans from Chinese commercial banks. In fact, the then political interests of Sri Lanka matched well with the global strategic thinking of China. The most critical stage of this situation emerged in 2016.

New strategic approaches 

Just after the elections in 2015, the new Government took measures to increase the salaries of Government servants while reducing the prices of many essentials including fuel, gas and several essential food items. This resulted in more hardships to the economy. The new Government which was already facing challenges on foreign exchange reserves had to find new strategic approaches to face the emerging situations.

While repairing the already-damaged international image of the country, measures were taken to bring back the GSP Plus and access to European market for our fisheries products. Indian investments were invited to balance with China, while some massive Chinese investments were renegotiated for the benefit of Sri Lanka. These strategic decisions were well-calculated and carefully designed.

How can we come out of this massive debt trap? This is the most challenging million-dollar question we have in front of the country today. Can we go back to the old-school system of nationalistic closed economic policies or adopt new economic strategies based on competitive market policies and get the economy out of this mess?

No country in the world would now rely on the old Soviet style economic systems. We need to revive from our own strategies through open economic systems. We need to generate employment through encouraging FDIs, modernising the financial market, restructuring the fiscal policies, bringing new technologies to our systems while emphasising on social safety nets. 

If we manage to maintain 6% economic growth for the next 10 years, it would bring us to the stage where Sri Lanka’s economy will be one of the most powerful in the entirety of Asia. For this, Sri Lanka needs a strong political environment with a coherent economic strategy. 

(The writer is attached to the Department of Economics and Statistics, University of Sabaragamuwa.)