Sri Lanka’s Problems Are A Result Of Gross Fiscal Mismanagement And Misappropriation, Not Because Of China Debt Traps, Covid, Or Ukraine

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Sri Lanka’s economic salvation lies in opening up the economy to Asian free trade, instead of constantly squeezing the domestic market 

Much has been written about the current economic situation in Sri Lanka, with Western media laying the blame, depending upon who you read, on China (debt traps), while most (but not all) Lankan media has written it up as a combination of a triple whammy of 2019’s terrorist bombings, Covid, and now Ukraine. On the street however, the story is rather different – the ordinary Sri Lankan people just want the ruling Rajapaksa family to leave.

Although it remains true that Sri Lanka’s problems have been exacerbated by events over the past three years, the real problems are rather more endemic, deep rooted – and institutionalized.

The Rajapaksa family has included over 20 family members holding, over the course of the past 17 years, the following positions: President, Prime Minister, Speaker of Parliament, and the following Ministerial level positions: Finance, Economic Development, Defense, Law & Order, Labour, Irrigation and Water Management, Ports & Aviation, Port Development, Plantation Industries, Fisheries & Aquatic Resources, and the Ministry of Sports.

In addition to the above, various Rajapaksa members have held Chair, Vice-Chair or Executive Director positions with Government owned institutions such as Sri Lanka Telecom, Sri Lanka Airlines, Sri Lanka Ports Authority, Securities & Exchange Commission, Carlton TV, Lanka Logistics, Lanka Hospitals, Government Medical Officers,  National Aquaculture Development, and Ceylon Fisheries & Harbours.

In short, Sri Lanka has been run by one family clan who have inserted themselves into nearly all aspects of Government and its State-Owned Industries and Institutions. Wherever one turns, in any aspect of Sri Lankan politics – and business – a Rajapaksa is apparent. Sri Lanka has become, in the past twenty-plus years, a complete family fiefdom, masquerading as a democracy. Many – including the current President, Gotabaya Rajapaksa – hold dual nationalities. In Gotabaya’s case, this is with the United States, begging the question why such divided loyalties can be allowed to rule a sovereign nation. It also explains the significance of the ‘Gota Go Home’ banners seen across the country. Sri Lankan’s want their President to depart for the United States and never return.

The issue with such political abuse is that while for the most part, the average Sri Lankan will put up with ruling Government members taking a reasonable (if still illegal) cut, when their basic lives are disrupted, they begin to get upset. Power cuts have lasted on occasion for 12-14 hours. That creates uncomfortable living conditions during Sri Lanka’s hot steamy evenings. Fuel shortages have meant that back-up generators (for those who can afford them) to deal with electricity cuts also sit idle. Fisherman cannot buy fuel to go out to sea. Tractors cannot plough the fields. Crops run short, and are now failing, and even where produce is grown it cannot enter the distribution chain because there are very limited supplies of diesel. These are all the impacts of Sri Lanka running out of foreign reserves and not being able to pay its essential bills. The country is ticking over – just – but more serious problems and shortages are likely to be on the way.

A ‘Unity’ Government has been formed, with a new, non-Rajapaksa Prime Minister put into position, the experienced politician Ranil Wickremesinghe, although Gota Rajapaksa appears immovable as President. Yet the Wickremesinghe family is problematic too – they have inter-married with the Rajapaksa’s and have also held positions as President, Prime Minister, and Ministerial roles as well as executive directorships with numerous State-Owned companies including the national airline, and a budget air carrier.

These political family dynasties would be fine – to some extent – if they delivered. Instead, they have inserted themselves into all aspects of Sri Lanka’s supply chains, and take a cut from being within that. Import duties may be an officially declared amount for certain products, but without a Ministerial signature (typically obtained for 20% of the total value) actual import is barred.

Development-suppressing monopolies exist. The ubiquitous Tuk-Tuk, Sri Lanka’s motorized three-wheeler, of which some one million ply their trade around the country, are all imported from India, because one family holds the concession. A new Tuk-Tuk today costs about Rs2 million (US$5,600) in Sri Lanka. In India, a new Tuk-Tuk costs INR100,000 (US$1,300) – less than a third of the Sri Lankan price. Tuk-Tuk’s are a very basic form of motorised transport, and could easily be manufactured in Sri Lanka, employing local people and giving rise to support industries. But this has never happened (I recall Turkey’s Koc Group enquiring about the possibility of investing) because one family will not permit this as it competes with their Indian import concession. It has been going on for years.

The Tuk-Tuk analogy is just one example of literally hundreds where vested interests have stifled Sri Lanka’s economy and stunted its manufacturing industries. I could also mention Sri Lanka’s enviable position as a Pearl in the Indian Ocean – yet there are practically zero marina facilities. That means limited opportunities to develop a maritime support services industry, although people are trying. Opening up the sector to commercial sailing vessels – a look at Thailand and the Maldives to the East and West would suffice – would explore the possibilities of manufacturing – chandlers, sails, rigging, and all the services and products an ocean-going yacht requires. Sri Lanka is a beautiful island with a 1,340km coastline. Is there a decent marina? No.

Protected by family members in Government, and rules and regulations drafted specifically to assist, Sri Lanka has been operated purely as a means to squeeze the domestic economy and to extract as much income from domestic purchases and supply chains as is possible. The problem for those in power is that the Sri Lankan economy has reached the limits of over-exploitation. 2017 was probably the peak summit, when national GDP reached US$87.42 billion, and per capita income was US$4,067. Today, Sri Lanka’s GDP has declined to US$81 billion, while per capita income has also declined and is currently US$3,800. Inflation is now running at 29.8% as at April 2022 and will bring these figures down considerably more by the year end.

This over-reliance on squeezing the domestic consumer market has come at the expense of Sri Lanka’s exports. Sri Lanka’s total exports in 2008 were worth US$10.11 billion, and in 2020, total exports were US$11.30 billion, illustrating that over the past decade plus, Sri Lanka’s export manufacturing sector has undergone significant decline. This is a direct result of the deliberate inhibiting of Sri Lankan industrial development – the government has focused on imports only – precisely because both it (and corrupt Ministers) can levy duties on products and have the domestic market, being the average Sri Lankan individual, pay for them.

Very little Government or private investment has gone into developing Sri Lanka’s exports, with key industries, such as rice, rubber, tea declining or remaining static. A ban on imported fertilizers imposed at the end of last year (because of dwindling foreign exchange reserves) has proved disastrous for the 2022 crop, which is significantly reduced and is leading Sri Lanka (in what should be a rice-sufficient nation) to have to import over 600,000 tonnes this year to meet demand. With no cash left to pay for it, the Government is having to beg for supplies – the Chinese sent 5,000 tonnes of rice to Sri Lanka in food aid last month.

China has refused to lend Sri Lanka any more money related to stalled Belt & Road Initiative projects, while the country is currently in discussions with the IMF. But even IMF loans will have to be repaid.

A solution is on hand, and interestingly it is the Chinese who are trying to force Sri Lanka’s hand to open up their markets and engage in free trade. A China-Sri Lanka Free Trade Agreement has been under discussion since 2015, with very little progress made. Studies have however shown that Sri Lanka produces 566 products with Asian regional price advantages, of which, 243 items were or could be exported to China. There were an additional 299 products with trading potential with China, and especially in vegetable products, rubber, and plastics.

A Free Trade Agreement with China would actually turn out to be beneficial to the country – but this doesn’t fit in with the Rajapaksa’s view of commerce. It would mean losing their domestic supply chain insertions, access to the duties and levies imposed on imports, and the increased competition with China that would mean actually investing into Sri Lanka by Sri Lankan domestic industries would be required. Quality would need to be improved, money spent on upgrades. Neither the Rajapaksa’s, nor particularly the Wickremesinghe’s want to engage with such expenditure. The preference is for Sri Lankan money to flow into Sri Lankan pockets, with those of the elite at the very top.

China’s Free Trade Agreements – and it has many, including with Sri Lanka’s ASEAN neighbors, have resulted in significant trade boosts for the participating countries.

The China-ASEAN Free Trade Agreement, which impacted small countries such as Cambodia, and Laos, as well as larger economies such as Indonesia, Malaysia, Thailand, and Vietnam came into effect in 2009. At the time, unprepared businesses struggled in their own domestic markets with more affordable, and often superior Chinese products – but were able to adapt by either re-investing in their own businesses, joining together with Chinese partners, and by looking more closely at the China market. Their China results have been significant (figures in US$ billions):

Country 2008 China Exports 2020 China Exports
Cambodia 0.841 1.46
Indonesia 11.63 32.6
Laos 0.47 1.68
Malaysia 19.01 38.7
Thailand 15.9 30.2
Vietnam 4.8 49.4

Sri Lanka could do the same. It would revolutionize industry, encourage much-needed investment into the country, lead to better employment potential, and bring in much needed foreign currency. It would also spread the risk away from Sri Lanka’s economy being purely dependent upon the Sri Lankan family fiefdoms that have run it. For sure, they would lose their concessions, the ability to mark up import duties and to impose themselves into skimming money from the national supply chains, but then again after 20 years one would have thought they have made enough money by now. Sri Lanka needs to be freed. And that means a new, forward-thinking Government, prepared to sweep away the past parasitical behaviour and engage in that freedom. And that means Free Trade, and certain people ‘Going Home’.

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About Us

Chris Devonshire-Ellis is the Chairman of Dezan Shira & Associates. The firm assists British and Foreign Investment into Asia and has 28 offices throughout China, India, the ASEAN nations and Russia. For strategic and business intelligence concerning China’s Belt & Road Initiative please email silkroad@dezshira.com or visit us at www.dezshira.com

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