By Raj Gonsalkorale

There is a time to play politics, a time to destabilize governments for political gain and a time to hide the truth from the people, again, for political gain. This is not that time as the consequences arising from the war in the Middle East is far too devastating for the global economy and therefore for Sri Lanka. The current behavior of the Opposition, and some trade unions is like the behavior of Ostriches with their heads in the sand. The under-performance of some Ministers makes matters worse for the country. It is time to take stock of the performance of some Ministers and make necessary changes so that the country could weather the impending storm with the least discomfort for the people. It is time to take stock of the country’s economic situation before the storm is upon us and take measures to avoid a social upheaval that might become inevitable if action is not taken now.

The article titled Strait of Hormuz closed by Iran: An economic Tsunami in the making for Sri Lanka?” (https://www.ft.lk/opinion/Strait-of-Hormuz-closure-An-economic-Tsunami-in-the-making-for-Sri-Lanka/14-789226) laid out the scenario facing Sri Lanka should the war in the Middle East were to continue for a prolonged period. Presently, it does not appear that the conflict will end soon, and all indications are that it will continue and it will cause irreparable damage to the global economy. Sri Lanka is not on a sound economic footing to weather the economic Tsunami although it was showing very positive signs of economic recovery in recent times. The economic fundamentals are flawed in Sri Lanka and successive governments that ruled the country since independence have not had a strategic economic vision for the country although various development projects were done. A strategic vison entails a sound economic footing where, the country borrows for investments that will yield good financial returns, and not for consumption, manages its service projects with its own funds, builds a net debt free economy with high foreign reserves, achieves a GDP growth and a high per capita income to retain its talent within the country and prepares the economic platform of the country to facilitate ongoing foreign and domestic investments. The bankruptcy in 2022 showed that Sri Lanka never had an economic vision to avoid that debacle. In order to achieve such a vision over time, a National Economic Governance Framework was suggested in the above article and it is reiterated in this one.

Sri Lanka as well as many other countries will face the negative consequences arising from the current war in the Middle East.  These will require immediate measures as well as long-term measures

1. SUPPLY AND COST OF ENERGY (OIL, GAS, CRUDE OIL)

The closure of the Strait of Hormuz, and the impact on movement of supplies, impact on production of oil and gas itself in the mid-eastern countries that produce them, will result in shortages and major price hikes. This will have a cascading effect on the economies of many countries. Unless this conflict ends soon, and a solution found to whatever issue that precipitated this conflict, a new world order of shortages, inflation, price rises, increase in poverty, and food insecurity, and general civil unrest could eventuate.  Sri Lanka will undergo this downward transformation from a country just raising its head from bankruptcy to a lesser and greater degree depending on how the country prepares for these possible eventualities.

• FOOD INSECURITY

Sri Lanka spends a considerable amount of money for food imports. These will get affected due to production slowing down in exporting countries, transportation challenges arising from fuel shortages and high prices of fuel, and the shortages of inorganic fertilizers both in the producing countries and even in Sri Lanka for what is grown locally. While assessing what is produced locally and its sufficiency, Sri Lanka will have to explore food imports from countries which are relatively less impacted by the Middle East Crisis. This will have to be done as a top priority activity

• MEDICINE SHORTAGES

If the war in the Middle East continues and the global economic impact spreads, production of drugs by the pharmaceutical industry will get impacted. A significant number of pharmaceuticals are petroleum-based or utilize petrochemical derivatives as raw materials in their manufacturing process. Many common drugs, including aspirin, paracetamol (acetaminophen), and various antibiotics, are synthesized from petrochemicals like benzene and toluene. Transportation challenges will exacerbate the problem. Sri Lanka will have to take immediate measures to assess the availability and duration of what is available of at the least essential items and take steps to bring in additional stocks keeping in mind the expiry dates of the items.

• IMPACT ON FOREIGN RESERVES, DEBT (BOTH FOREIGN AND LOCAL, REPAYMENTS OF DEBT EXPECTED TO COMMENCE IN 2028), REVENUE (EXPORTS, OVERSEAS REMITTANCES, AND LOCALLY GENERATED), CURRENCY EXCHANGE RATE (DEVALUATION MIGHT BECOME INEVITABLE)

These economic fundamentals could be seriously affected. Foreign reserves (currently USD 7.2 Billion), which is sufficient for about 3.5 months of imports, could dwindle if export income and overseas remittances decline, as they surely will, and this results in the country resorting to spending its reserves to fund imports. Considering an inevitable rise in inflation, and pressure on supply unless demand is arrested, economic impact on other countries, the Sri Lanka Rupee may have to be devalued to contain foreign exchange outflows and keep internal revenue at a level it can fund essential services without resorting to major borrowings.

• IMMEDIATE AND SHORT-TERM MEASURES THAT MAY BE NEEDED TO SURVIVE THE ECONOMIC ONSLAUGHT

Inevitable measures that will be unpopular will have to be taken. Politically, the government will have a daunting task ahead to prepare for a likely situation they had no part in it. This is not how the Sri Lankan Opposition will see it and make use of it to do their best to destabilize the country, hoping to topple the government. The following broad suggestions are made

1. The government will have to minimize the impact of the crisis on the most vulnerable.
2. Expenditure on energy (oil and gas) will have to be reduced. Planned power cuts and fuel rationing for private motor vehicles may become necessary. Schooling days may need to be reduced to say 3 or 4 days a week, and office working days (physical presence) will need a similar reduction. This will result in a reduction in transport costs.
3. A food security assessment will have to be carried out as a matter of urgency and necessary measures taken based on findings.
4. Health service will have to be declared an essential service, and work to rule, work stoppages, and strikes, officially banned under emergency rule with harsh penalties imposed on those breaking rules.
5. Exporters and foreign remittances given an incentive payment of 10-15 percent over the official exchange rate.
6. All infrastructure projects to be temporarily halted, with intended expenditure transferred to an essential service reserve fund.
7. LONG TERM SYSTEM CHANGES 

The fundamental premise here will be the need to strengthen the country’s economy and drive it towards greater self-reliance.

Essential components of this strengthening will be

1. Increasing its net foreign reserves and foreign assets wealth up to or beyond its foreign debt.
2. Increasing export revenue in sufficient amounts to meet the foreign reserves target mentioned at (a) above .
3. Introducing mechanisms to increase its foreign assets wealth via mechanisms similar to the Singapore model, TEMASEK HOLDINGS (https://www.temasek.com.sg/en/index), and the GIC (Government of Singapore Investment Corporation) – https://www.gic.com.sg/
4. Increasing its manufacturing base to supply local demand as well as for exports.
5. Increasing emphasis on preventive healthcare using nontraditional (non-Western) approaches like Ayurvedic and indigenous medical methodologies, and other practices like Yoga and similar practices that are focused on preventive health, rather than curative health which incurs a huge component of the national budget.
6. Increasing food security with a combination of measures.
7. Ensuring local recurrent expenditure is met with local revenue, with no borrowings, and project expenditure is also met as far as possible with local revenue and in partnership with long term debt (where necessary).
8. All infrastructure projects to be assessed independently for their costs and benefits, prior to commencement.
9. Energy self-sufficiency – Sri Lanka should work towards this and increase solar power, wind power and hydro power including mechanisms for reusing reservoir contained water as in the Snowy Mountains in Australia (see https://www.webuild-group.com.au/en/what-we-do/projects/snowy-mountains-hydro-electric-scheme/)

A NATIONAL ECONOMIC GOVERNNACE FRAMEWORK TO ADVANCE LONG TERM SYSTEM CHANGE

It is strongly recommended that long-term systems change measures noted above and other relevant ones, are included in a national economic governance framework supported by all political parties and approved by the national parliament as an abiding act of parliament that should be reviewed every five years with the participation of all political parties

While a National Economic Governance Framework is suggested as a long-term measure to mitigate similar issues arising in the future to a better degree, a challenge is thrown to the broad political establishment (the government and the Opposition)  to place the country before themselves, and organize themselves as a National Governance Committee to discuss, debate and collectively agree on urgent measures that are essential to minimize the impact of the current crisis on the general populace. In order to avoid any side taking political advantage of the dire global economic situation unfolding before everyone’s eyes, and its impact on Sri Lanka, one of the primary tasks of the committee would be to brief the community with one voice about the global situation, its impact on the country and why some essential measures are being taken. This is not the time to play politics.