During the time Sri Lanka gained independence in 1948, its economy was ranked as one of the wealthiest in the region. The economy of the then Sri Lanka was second only to that of Japan. The main source of income to the country at that time was generated through the plantation industries; i.e. tea, rubber, and coconut. The necessary infrastructure to facilitate the plantation industry, such as railways, roads, ports was well established at that time. Parallel to this economic prosperity, there was a significant development in sectors such as education and health. The D.S. Senanayake regime that came in to power prioritized building up the status of the agriculture sector of the country. The government prioritized the agriculture sector, especially that of the dry zone, through repairing the irrigation systems.
In order to find a solution to the Balance of Payment difficulties at that time, the regime that came in to power in 1956 concentrated on promoting local industries, through the participation of the public sector. It was an altered approach compared to the policy decisions of the previous government at the time of independence.
Hence the state shoulders prominent responsibilities in the economy. During the time, new state enterprises were initiated. Later during the Sirima Bandaranaike regime in 1960 – 65, the same economic strategy continued following the policies of the previous regime. Instead of an open economy, a closed economy could be seen in operation during this time. It could be observed the implementation of an economic system with alternatives to imports. It was vivid that the system grew up from the 1950s state attempts to overcome the Balance of Payment issues the country was facing. Following this era emerged the 1965 – 70 Dudley Senanayake regime in which a novel export-based economy was implemented. Parallel to this, upgrading the local agriculture was a priority too. The Sirima Bandaranaike reemerged in the 1970 – 77 period and concentrated their focus on imports substitution industrialization. There were numerous attempts to control importation. The controlling started from non-essential items and later moved into controlling essential commodities. This eventually led to queuing up Consumers Island wide outside stalls and promoted actions of the black market pushing the economy to the verge of destruction.
However, after 1977 the Sri Lankan economy leaped in several folds. Following a special policy by the J.R. Jayawardane regime followed a path centered on the open economy towards an export oriented economy along with a massive contribution from the private sector of the country. There was a great attempt to attract foreign investments in to the country. It was during this regime time that the country opened to gaining bulky loan and aid packages in to the country in order to improve development projects and infrastructure facilities, agriculture and the industrial sector. During its inception of this process, country received ‘aid’ that need not be settled in return. As time passed by, the loan component in foreign aid gradually increased. This was the initial steps of the country getting in to the accumulation of foreign debts. Parallel to this, it was well observed the interest rates of the loans issued gradually increased.
Next, the succeeding government was of the Ranasinghe Premadasa regime, where the attention was to expand the export sector and social welfare. Within this time period there was a significant flow of foreign investment into the country. The establishment of Free Trade Zones and 200 Garment Factories project promoted the inflow of foreign investments.
In 1994, the significance of Chandrika Kumaratunga as the President in power was that she maintained the economic strategy followed sine 1977 only with minor changes. It was a notable point in history, as the practice of earlier regimes was to turn and change the previous regime’s economic policy in to a total 180 degrees. The Governments succeeded by the United National Party followed the open economy policy while the succeeded by the Sri Lanka Freedom Party followed the closed economy. Yet, in 1994 such economic change did not take place. Since then, continuously the economic policies of successive governments followed the open economy strategy with a heavy involvement of the private sector establishing an export-based economy. During the Chandrika Kumaratunga’s regime it could be observed that the economy suffered unexpected shocks due to the war in the North-East areas of the country. By 2001, the economy was severely affected due to the terrorist attacks that targeted national fuel storage and economically vital points such as the airport. This situation worked in favor of the Ranil Wickramasinghe’s regime to come in to power. The government that succeeded in 2001 led by Ranil Wickramasinghe, followed an economic policy that included identifying flaws of the economic systems including spotting public sector institutes that were running at a loss and thus implementing the programme ‘Regaining Sri Lanka’. Yet, the programme operated only for two years.
However, the next succeeding government led by Mahinda Rajapaksa continued with the same open economy based economic strategy. After achieving middle income status, Sri Lanka became unqualified for most generous finances offered by donor agencies/countries. Sri Lanka started borrowing on commercial terms both from international financial market and the newly emerged donors such as India and China. For instance, in 2007, this regime started borrowing the international monetary market. The first five years of the regime operated with a heavy focus on eliminating LTTE terrorism. Following the triumphant end of the war, Mahinda Rajapaksa regime took steps to obtain foreign loans at a higher interest rate and, borrowed money wage largely channeled into the construction sector. The growth of the GDP of Sri Lanka was a main reason behind. Thus, the government decided to move in to sovereign bonds and development bonds through which targeted fulfilling the foreign aid need of the country. The turning point this regime took was diverting from the usual donors towards a different set of donors that included countries such as China and India who were the new donors in the trade. In the new trend Sri Lanka tend to obtain large sums of loans from Sri Lanka. Sri Lanka moved towards China at the initial stages of the Belt and Road Initiative programme of China which led to an increase in the loans from them. One reason for the government to opt obtaining loans from China at a higher interest rate was due to the limitations imposed on obtaining soft loans from traditional donors.
Flexible conditions imposed during obtaining loans were another reason for Sri Lanka to move towards donors like China. China would grant loans without evaluating the ability of the country to effective use on projects. Parallel to this, the public sector expanded with more spaces opening up for graduates. Which means there was an increase in public sector recruitment? And the government continued to operate public sector institutes that were running at a loss as they were.
At the same time, after 2000 the lack of attention towards the export economy was significant too. The main reason was to financial liquidation that existed in the global market at that time. In other words it means availability of money in abundance in the global market. Loans were obtained with this abundant money in the global market in order to bring a temporary solution to the repayment issues the country was encountering.
The good governance regime (Yahapalana regime) that succeeded the Mahinda Rajapaksa regime attempted to lease assets of the country – which was a prominent characteristic of the government. The Hambantota port was leased out as a result of this attempt. Parallel to these steps there was an increase in the taxes imposed and when monetary reserves were low the government opted to obtain loans from the international monetary market. Even though the economy was weak, there was an attempt to push the economy forward supported by temporary solutions on the way. Considering the pattern in issuing sovereign bonds it can be observed that there is a yearly increase in it. In fact, it actually worsened the balance repayment crisis. In 2019 alone sovereign bonds worth 04 billion dollars were issued. This was in addition to the other loans obtained. On the other hand, during this time the economic policies were updated and investors were encouraged. Yet with the Central bank bond scam and the conflicts between the parties to the regime, the economy moved towards a notable collapse. And later, following the Easter Sunday attack diverted the government’s attention towards national security and the interest on developing the economy got lost.
The Gotabhaya Rajapaksa regime succeeded later with the slogan emphasizing the need to strengthen national security. The structural issue the economy was facing was intense. The main problem was budget deficit. The income to government through taxes was at a very low level and the state expenses were extremely high. To fill the budget deficit, huge loans were obtained through local and foreign sources. This budget deficit was largely caused by state enterprises. A significant number of institutes were running at a loss. On the other hand, obtaining foreign exchange to repay irregularly obtained high interest loans was a crisis the Gotabhaya Rajapaksa regime encountered. The crisis becomes obvious when analyzing the amount of sovereign bonds issuing patterns in the recent years compare to that of the previous year. Despite the fact that the Gotabhaya Rajapaksa regime should have realized that Sri Lanka was not in a position to sustainably settle the loans obtained, it was never understood. The export economy and tourism industry were collapsed and these structural issues were not properly identified.
The Gotabhaya Rajapaksa regime took decisions on the Sri Lankan economy without considering any of these main issues. The first decision was tax relieves. The second was ending all development projects. Over 300 national development projects forcefully ended during this time. If there was a clear understanding about the debt balance crisis, the government would not have put an end to the inflow of foreign exchange through there development projects. Another decision was abandoning the MCC agreement with United States. In order to promote the export sector and attract investors to the country, the government should have paid more attention to gain to international support. Without a mere consideration of these facts the government dismissed the MCC agreement. The other main issue that intensified the economic crisis during the Gotabhaya Rajapaksa regime was the COVID19 global pandemic. This patient that was suffering from a hidden disease was struck with the COVID19. The impact spread from tourism to exports to foreign exchange transferred to the country from foreign employment. Eventually the economy collapsed with the deadly blow to these main sources of income to the country. The Gotabhaya Rajapaksa regime ruined bilateral ties with United States through dismissing the MCC agreement, and that with Japan through ending the agreement on the light train project and shuddered the relationships with the Middle Eastern countries by cremating dead bodies of patients who died due to COVID19. These decisions had severe consequences bringing negative impacts on the economy. Eventually the country is now dragged in to a collapsed economy. In it the lack of foreign exchange, inability to repay loans, high inflation, and severe collapse of the economy has happened. And the main cause was the narrowed decision-making structure in which the economic decisions are taken by selected few without the opportunity for an all-inclusive approach at economic, political and institutional levels – that never existed under any regime. Despite the fact that the state was created with the participation of public representation through a democratic selection process where the general public are involved, the economy was always controlled and regulated with the same group of decision makers solely to fulfill their needs. The economic crisis can be eliminated only through the establishment of correct structural changes at economic, political and institutional levels.
by Doctor Priyanga Dunusinghe
(Doctor Priyanga Dunusinghe is a senior lecturer in the Department of Economics of the University of Colombo. Dr. Dunusinghe completed his masters and doctoral studies at the Kiyushu University in Japan and currently academically involved in dispersing knowledge on Applied Economics, Labour Economics, Development Economics, international Economic studies, Economic research, international trade, labour market and inequalities and poverty. He is intensely involved in increasing the public awareness on the current economic crisis.)
