Dilrook Kannangara 

The five-year debt moratorium comes to an end later next year. Fears of the national economy going bust are creeping back in. But will that happen? If the 2022 economic collapse was the result of corruption and if corruption, at least large-scale corruption, is under check, how can the country go bankrupt yet again? NPP regime just like all its predecessors are oblivious to the real reasons of Sri Lanka’s economic woes. Instead of thinking in terms of economics, most Sri Lankan leaders since 1948 looked at matters from a grievance point of view and the nation paid a very heavy price. Sadly, this structural deficiency is not over yet. The NPP regime can throw in jail anyone and everyone it levels corruptions allegations against (no disputing that the law must run its course) but that cannot save itself from impending bankruptcy. Let’s look at real reasons for 2022 national economic collapse and why the root causes remain same today.

That Kind-Hearted Woman

Sri Lankan economy did very well during the time of the war. It was not just resilient it actually grew the fastest it had ever grown for decades. Sri Lanka became self sufficient in many grains during the war. It became a middle income country during the war; won various sporting contests, withstood so many world wars, regional, Asian and global financial crises, overcame many natural disasters.

The year after winning the war was a good one with promising economic growth. However, since then economic growth gradually slowed until it went negative in 2020 and remained negative for 4 years. By 2022 Sri Lanka was dropped from the list of middle income countries. That means in real terms, the Sri Lankan economy went back to 2000 level when it overcame its long held poor nation status. Politicians’ corruption did NOT ruin the economy. If so, Sri Lanka should have suffered economic collapse during the war. The government borrowing money and investing (or wasting) them in areas of no exports and no income tax collection bankrupted the nation. Over 85% of all borrowed funds from 2009 to 2013 was invested in the north which sealed Sri Lanka’s fate. With no exports and no meaningful income tax collection from the north, loans taken to develop it could not be repaid. Fortunately, the war prevented this type of reckless spending but unfortunately, peace allowed it. Interestingly Sri Lanka’s economy was equally hopeless from 1960 to 1977 prior to the war when there was ethnic harmony.

New Borrowers Since 2008 GFC

Despite howling about human rights and the war, western countries did not help Sri Lanka rebuild the north and east. Instead, Sri Lanka had to borrow from western commercial lenders at rates that can only be described as exploitative. The 2008 Global Financial Crisis was caused by excessive lending and thereafter lenders found they had limited lending opportunities in their own countries. Sri Lanka, Pakistan, various African and Latin American countries came along to grab those debts. There is no harm in debt, if invested in export income earning, import substitution and/or income tax producing ventures. The north and east have none of these.

When these loans had to be repaid around 2014 to 2018 there was no funds to repay them, so Sri Lanka borrowed again – this time the old loans and their interest too. In another 5 years (by 2022) they fell due and no lender was willing to lend to Sri Lanka. It had hit rock bottom. Similarly, a number of other debt-ridden nations including Pakistan fell into similar difficulties due to other reasons.

The Lose or Lose Solution

In late 2022 the debt moratorium was discussed from a position of weakness. It’s a ridiculously disastrous deal for Sri Lanka. According to it, Sri Lanka will have 5 years without having to repay commercial loans and their interest (bilateral loans had to be repaid). If the Sri Lankan economic growth was healthy in 5 years, Sri Lanka will have to repay all loans and unpaid interest. No discount. If the economic growth rate was poor, then there will be a 35% reduced loan and interest repayment. If the economic growth rate was healthy (as now) Sri Lanka will again hit rock bottom after repaying all loans and their accumulated interest on interest. Whatever Sri Lanka saved since 2023 will be given away. Either way the island nation is damned by this deal.

What must be understood is International Sovereign Bond businessmen and the IMF are in the business of lending money and earning a profitable return via interest. They are never going to suffer losses just to help a poor nation! The IMF is not called the economic hitman for nothing. Greeks came bearing gifts and Sri Lanka accepted them.

Hell’s Intermission

JVP’s idealogue Tilvin Silva equated the debt moratorium period to an intermission in hell – torture of souls to recommence after it. He was right. However, since winning power in 2024, he stopped referring it as such! Just like its predecessors, the NPP regime did nothing to face the impending challenge in 2027. The economy is still the same – same poor exports, very high imports, low-income tax collection, low foreign investments (actual dollar inflows, not locally borrowed investments by foreigners and not poor currencies like the Indian rupee) and wasteful welfare practices. As astute economists have pointed out, massively increasing the salary of tea plantation workers when Sri Lanka’s largest tea buyers (Iran, Turkey, Russia, Syria, Libya, UAE) are in economic turmoil is beyond insane. Generous handouts for natural disaster affected people is seen as kindness but its economic cost is bankrupting. The government seems to be maintaining high oil prices despite price reduction in global markets to collect these wasted funds. However, high oil prices hurt the entire economy. Endless stream of donations to the north and east for education, healthcare, cultural benefit and other economically useless projects are the only mentionable stuff this regime has to its credit.

2027 is approaching fast. Get ready for another 2022. Look for a scapegoat – natural disasters, global wars, past mistakes, corruption, etc. All these were there during the 3 decades of war but Sri Lanka never struggled to repay debt or provide basic necessities to the people. Peace destroyed the resilient economy built by Sinhalas during the war.