The economic crisis in Sri Lanka has been a hot topic this year for a variety of reasons. The biggest and most important reason is that it has impacted the majority of the country’s population in a manner not seen in the past century. The reasons for the crisis attributed by some have at best been controversial. Few have attempted to examine the real reasons and China has often been described as the villain. What is the truth?
Sri Lankans have been handed a double whammy, or as the local idiom goes, it is like ‘the man who fell from the tree being gored by a bull’. An investor presentation by the Central Bank of Sri Lanka and the Ministry of Finance states that, ‘Some past policy mistakes, the global COVID-19 pandemic and the resulting global crisis have stunted Sri Lanka’s growth projections, leaving the country exposed to the consequences of the energy and food crisis. The COVID-19 pandemic jeopardized the key engines of the country’s economic growth, including domestic demand and the tourism sector, the awaited rebound was further halted by the subsequent energy and food crisis.’
The presentation was made by the Governor of the Central Bank of Sri Lanka and the Secretary to the Treasury and Ministry of Finance. Both assumed office after the crisis situation began shaking the foundations of the government earlier this year.
Since May this year, due to the debt crisis, Sri Lanka’s political and economic situation has gradually fallen into turmoil. In July, the President and Prime Minister announced their resignation amidst a rare show of public dissension and violence against the government and some Members of Parliament. Protestors raided the Presidential Secretariat and the President’s Office as well as the Prime Minister’s Office and residence showcasing a major threat to law and order in the country. One Parliamentarian was killed. Some western diplomats however, protested when the government decided to crack down on the violence unleased by the protesters, labelling it a violation of human rights.
In the meantime, relevant data shows that Sri Lanka’s total foreign debt has reached 51 billion US dollars, and the country has been unable to buy fuel and other necessities. Ninety percent of domestic households are facing food shortages.
Tourism is an important pillar of Sri Lanka’s economy, but due to the Covid-19 pandemic, the country’s tourism industry was hit hard; Sri Lanka’s ability to earn foreign exchange was weakened; and with the US Federal Reserve raising interest rates and the consequent appreciation of the US dollar, Sri Lanka’s debt pressure increased further. At the same time, after the outbreak of the Russian-Ukrainian conflict, Sri Lanka’s food and oil costs have soared, and its trade deficit has grown.
What developing countries need is real money, not just dead paper. Some of the US and Western media accuse China of promoting a so-called “debt trap” diplomacy, trying to blame China for the situation in Sri Lanka, claiming that China’s large loans to Sri Lanka have dragged the country into a “debt-trap”. In fact, China is only Sri Lanka’s fourth largest creditor (about 10%), behind international capital markets (47%), multilateral development bank(s) (22%) and Japan (10%). Sri Lanka needs major countries to abandon their prejudices and cooperate with each other to provide some real help.
The United States and the western countries say that the global economic crisis is caused by the conflict between Russia and Ukraine. However, one cannot ignore the role that the US Treasury’s interest rate hikes have played in the overall deterioration. The Federal Reserve has raised interest rates and international capital has poured into the United States, which has caused the majority of small and medium-sized developing countries to face a very severe capital shortage. The same is true for Pakistan, because Pakistan is now second only to Sri Lanka in the severity of its foreign debt in South Asia, and countries such as Turkey, Egypt, and Argentina are all facing similar situations. For developing countries, the international economic background, especially the US dollar interest rate hike and the conflict between Russia and Ukraine, maybe the decisive factor. For these countries, if they want to achieve development, they must find their own development paths and advantageous industries according to their own needs.
China is not a major player in Sri Lanka’s debt restructuring, according to an August 2022 article by Talal Rafi and Srimal Abeyratne in The Diplomat. ‘Sri Lanka has to improve its forex earning capacity in order to achieve debt sustainability as well as to move beyond and above recovery,’ as ‘Fiscal consolidation is needed as a medium-term measure, but the reforms should be extended to eliminate the country’s anti-export and anti-FDI biases. A crisis is an unprecedented opportunity to carry out the necessary reforms – one that should not be missed.’
China – Sri Lanka relations are recorded as far back as the fifth century, when the traveler Fa Hsien spent two years in the island, and carefully recorded his observations. In modern times, Sri Lanka and China established full diplomatic relations in 1957. However, the Rubber-Rice pact between Sri Lanka and China was signed in 1952. The Bandaranaike Memorial International Conference Hall was a gift from China and hosted the Fifth Non-aligned Conference in 1976. The two countries have maintained close and friendly relations throughout. China has responded very favourably to Sri Lanka’s call for foreign investment. The port in Hambantota, the Port City, Colombo, the Lotus Tower and several other investments have further cemented ties between the two countries.
The solution to Sri Lanka’s economic crisis lies not in acrimony and grandstanding by the super-powers. It is also not in baiting China as the villain. The answer lies in cooperation between the countries of the world to ensure a stable economy for a country that provides safe passage through its waters, for three-quarters of the world’s trade. Sri Lanka’s aim to remain non-aligned should be respected by all.