11 August, 2022

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Is Catastrophic Collapse Imminent?

By Kumar David

Prof. Kumar David

An optimist would venture to say that an economic catastrophe is not imminent, using the adjective imminent literally. He would be emboldened to make this remark because a restructuring deal, maybe a tough one, seems likely to come out of the negotiations with the IMF. Since all other lenders take their cue from the IMF thanks to its expertise and experience, Sri Lanka is likely to clinch agreements of different forms with China, India and Japan; life will go on. The country seems important enough for international actors such as India, China, America, Britain, Japan and the QUAD to be concerned about; in the case of India strategic concern is natural. America threatened war if Cuba stationed Soviet nuclear missiles, and now Russia is apoplectic at the thought of NATO getting its fingers around its neck via Ukraine, Finland and Sweden. No great or regional power will allow foreign bases near its land borders or its littoral waters. India’s anxiety is no surprise but such concerns should not passage to America and Europe. Actually, Lanka has little relevance to the Quad strategy of encircling China and is irrelevant to NATO’s scheme to suffocate Russia. The so-called Indian Ocean strategic zone too is a myth.

Therefore, my view is that the ongoing foreign flurry is not primarily strategic or about world-power relations; the spurt of international interest is political and psychological. The psychological facet is that though we know we are a bunch of s.o.bs, foreigners, poor suckers, have affection for this island, and believe it or not its undeserving people. Let’s not spoil this advantage; let’s keep the charm of genuine non-alignment alive. Competition for mating-rights gets us, petrol, cooking-gas, milk-powder, pharmaceuticals and dhal. It would have been helpful if we had slaughtered fewer Tamils and now refrain from harassing Muslims on trumped-up charges. Lanka is no dream democracy; it is the site of militant and state-terrorism and crass military-police human rights abuse at the instigation of the JR, Premadasa Snr. and Mahinda regimes. It has been a locale of brazen plunder by political leaders, and not only in the Paksa era. Racism is widespread among the people, but then ethnic intolerance is a global pandemic.

This is all true but there is another crucial aspect. Lanka is one of few post-colonial outposts where constitutional governance, admittedly imperfect, survives. Our giant neighbour India is another. This is different from Burma, Pakistan, Cambodia, Thailand (never colonised) and 50+ countries across Africa, Central Asia and Latin America. Hence my thesis is: India and the West, though they will be tough on economic reforms (IMF, West) and political changes (India), will not allow Lanka to collapse into anarchy and chaos. The uncles and aunties crowding over our crib will throw a lifeline before we asphyxiate. Can you imagine India, the West or China standing by and doing nothing if Lanka sinks into bedlam? We do not deserve a reprieve, but international political and psychological concerns will play out to our profit to prevent catastrophic meltdown. This is my hypothesis; let’s see if events prove the hunch correct.

However, this hypothesis does not allow conclusions to be drawn about the traumatic fuel crisis of this (late June) moment. Fuel is the litmus test that will decide whether RW’s administration dies; so far it has been paralysed and failed to inspire confidence. It must stop deceiving the public about the state of the fuel supply-chain. It will have to find an immediate fuel fix if mounting violence outside petrol stations is to be contained and eventually the government driven out of power. Fuel availability determines what happens to the entire economy; production, public transport, food in shops.

Of course, our congenital problems will persist but sudden death will likely be averted for now, that this till the IMF negotiations are finalised and implemented. Three IMF teams visited the country, one examining fiscal balance and seeking to restore a measure of equality between government expenditure and revenue and a second looking broadly at public finances (money supply, debt, banking, financial stability, social welfare). The third team worked on debt restructuring and interacted with legal advisors cum consultants hired by the government, Lazard and Clifford Chance. Chance is a London based law firm; Lazard engages in asset management, financial services and is also an investment bank with offices in New York, Paris and London. Judged by conventional norms, we have a strong squad on our side.

The wisest stance for Parliament and the opposition (SMB, TNA and JVP-NPF) to adopt at this juncture is to allow these negotiations to proceed and do nothing to disrupt them. Walking out of parliament when critical negotiations about the country’s financial destiny are in full-swing and the Twenty-first Amendment (maybe renamed 22?) is about to be tabled, is both imprudent and irresponsible. The protocols imposed by the IMF could, at worst, be a repletion of its old Structural Adjustment designs: laissez-faire (nearly unchecked free-markets as in JR, Premadasa Snr times), pro-business, privatisation and foreign capital oriented, inimical to state participation in the economy, hostile to state spending on welfare (health and education) and pushing for labour-market reform (easier firing, lowering real wages). To be fair however we have to wait and see, and some changes to Lanka’s economic structures are in any case justified. RW’s natural inclinations would be to go along with right-wing, market-oriented proposals.

21A (22A?) now finalised and about to be tabled in Parliament is defective; too much power retained by the president despite substantial pruning. Instead of debating and discussing these two urgent matters in the House and from there taking them to the public arena, for the Opposition to walk out of Parliament is an unbelievable act of stupidity. I am surprised Anura, Vijitha Herath and Harini fell for this senseless stunt. They must return forthwith and address the tasks that await them; that is, critically examining the protocols agreed with the IMF and proposing amendments to 21 (22) A.

The RW government should be given the space to work through this emergency (EX) period when the country is in intensive care (say a month or two), but this is not what RW seems to have in his mind. He speaks of remaining in office for much longer: “Once we have established a firm economic foundation you (the people) can hand over power to any political party you wish”. This could be one year, or maybe he has it in mind to hang on till the November 2024 (Presidential) and August 2025 (Parliamentary) elections. RW would then be governing without a mandate from the people (reasonable during an existential crisis such as now) for an extended period; this is unreasonable.

Another matter is that the emergency medications that Lanka will be forced to swallow, whether it likes it or not, to secure foreign debt restructuring via IMF and space from foreign creditors, will not be much different whether Ranil Wickremesinghe or Vladimir Lenin is PM. We are in such a mess that we have to grab any rope that is thrown to us. That’s why I say, allow Ranil to steer during the emergency (EX) period – which madman wants to shoot the pilot in mid-air halfway through a flight?

RW has his known proclivities and policy preferences and some will dovetail with anticipated IMF protocols. We can criticise but may have no option but to accept some. But allowing RW to set the economic direction of the country in next medium-term (MT) say three-year period is another matter; his remit has no electoral mandate. He has a right to his preferences and proclivities but no right to impose them on the country without a mandate. I make a basic distinction between the period of negotiations with the IMF (say one- or two-month emergency EX phase) and a three to five-year economic, financial and social programme that requires a mandate. This is the distinction between trauma-therapy urgently administered during EX and longer-term recuperation strategies to rebuild economy and society.

Will a government elected in say one year be any better? Will there be a smaller number of donkeys and crooks? Have people learnt their lesson? There is a convicted felon seated in Cabinet right now – Mr President and Mr Prime Minister please explain. A multi-billion-rupee tax-dodger has been made a Minister. The voters of Ratnapura returned a convicted murderer to parliament. But this is what we call democracy – the right of the people to choose which bunch of vampires will suck their blood next time. Unfortunately, there is no acceptable alternative to democracy; a one-party state will not survive without open revolt because of our post-Donoughmore past and also because our national ethos and psychology will not accept it. The other option, a military regime will be hell on earth, so no more mention of that.

Why has the Lankan economy collapsed? Depending on how far back you go and your preferred ideology the answers are many, and all true. The following are the most frequently adduced.

* National consumption far exceeded production for seventy years and we ate our way into debt.

* Excess consumption was financed in part by foreign borrowing which plunged the country into the black-hole of ‘dollar indebtedness’.

* Export earnings fell far short of import expenditure (chronic balance-of-payments deficit).

* Government finances were out of kilter, with revenue falling way short of expenditure and the indebtedness was paid for by reckless rupee printing (chronic fiscal-deficit).

* Stupid projects by Rajapaksa regimes (Mattala Airport, Hambantota Harbour, Lotus Tower, Hambantota Stadium, show pieces named after Mahinda Rajapaksa) bankrupted the country.

* These projects were financially wasteful and executed either as prestige ventures or to collect commissions from contractors. These are part of staggering corruption activities amounting to billions of dollars perpetrated by the Rajapaksa Clan, re-elected with a massive majority!

* Breakdown of the rule of law and judicial independence.

No country can withstand such an inferno of epidemics, pestilences and plagues. It is all of this that has come together in 2022 to sink the ship. If it survives for the few EX-months, then the next step is elections to empower a government for MT. My preference is social-democracy with a well thought out dirigisme (state directed) component in its economic policy package. If it is necessary to wait till next time round for the electorate to mature and elect this option, let’s wait till vox populi comes around. Most likely a centrist or centre-right alliance will be elected in an election right now (options, Sajith, Ranil-Sajith, Dulles-led SLPP). Their right or centre-right policy spaces will be defined by terms like, market-oriented, business-friendly, private-sector led development, privatisation, restructured labour-market, FDI oriented, and rather harsh on the grassroots regarding welfare and subsidies.

A social-democratic alternative will have to borrow some of this but the difference will be in implementation and orientation. Eran Wickramaratne in “A Just Tax System” Daily Mirror 27 June writes in a vein where social-democrats seeking to direct the economy (dirigisme) into just directions cannot ask for more (Was he ever a Party Member!). In recent decades, lines have blurred everywhere between avant-garde liberalism and 21st-Century social-democracy.

This brings me to a last thought. The LSSP’s Tissa is sharp and intelligent; what on earth is he doing with that spent force Vasu and two jackals Wimal and Udaya? Isn’t it as clear as daylight that the LSSP must move over and align itself with the new left (JVP, FSP etc)? Yes, yes there’s 1971 and 1989 and the 5-lessons, and etc and etc. Who doesn’t know all this? I wrote the first left critique of the JVP (Ajith Samaranayake did a brilliant translation) which the Party published 50 years ago. But it’s not that same world any longer Comrade!

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Latest comments

  • 8
    1

    “Is Catastrophic Collapse Imminent?”

    No. We have already collapsed: cant collapse anymore ……….. already prostrate on the ground …….. nowhere to fall ………

    • 2
      2

      “would be emboldened to make this remark because a restructuring deal, maybe a tough one, seems likely to come out of the negotiations with the IMF”
      True enough. But what can a non-suicidal politician agree to?
      We already have a devalued rupee by default. So, government expenditure on salaries and pensions is cut by half in real terms. There are already grumbling and threats of strikes over inadequacy of incomes. Will the government agree to actually retrench some of the bloat from the state service? That includes the very comfortable armed forces. To complicate matters, the dim-witted Sajit, the only credible Opposition, now swears not to retrench or privatise. He doesn’t spell out how his own recovery plan is supposed to work.
      When there is such lack of consensus in the country, will the IMF or anyone else dump their money here? Will even tourist scome without transport or food?
      “National consumption far exceeded production for seventy years and we ate our way into debt.”
      We were quite proud of our swanky “Middle income ” lifestyle vis a vis neighbours who reputedly have no toilets. Now the same neighbours provide a lifeline. What would the situation be if we were located, say, south of Diego Garcia instead of 30 miles from India? How the mighty have fallen!

  • 2
    3

    The reason why modi gave some assistance to sri lanka is not because of strategic concern mentioned by the author.It was because of his buddy adani who will fill up his election coffers again.

    After the CEB officials damning statement about modi pressurising gota on behalf of adani,assistance from india has stopped.The reasent high level indian delegation here wanted only indian/adani projects to be fast tracked as the cat is now out of the bag and if the projects are gone too far before gota gets kicked out,then they can’t be undone by the next government.

    So you see nobody is concerned about sri lanka ‘s plight.They are all interested like vulture on the pickings of the dead carcass.Is the body a dead carcass now?It is still breathing little bit,butwhther it can continue to breathe in july will be douphtfull.The IMF is only interested in sri lanka quickly coming to a agreement with the creditors.My advice is not to try to make a hard bargain when you are dying,but to agree to anything the IMF wants and get the emergency relief. Whatever we agree to under duress is not the ten commandments set in stone and like the indo lanka accord where we told india it was a parippu drop accord and so go and stuff it up yours,we can one day tell IMF to stuff it up their arses too.
    https://reports.weforum.org/global-competitiveness-report-2019/competitiveness-rankings/?doing_wp_cron=1656817546.6529989242553710937500#series=GCI4

  • 1
    1

    contd

    .In the meantime we have to make sri lanka competive urgently.

    https://reports.weforum.org/global-competitiveness-report-2019/competitiveness-rankings/?doing_wp_cron=1656817546.6529989242553710937500#series=GCI4

    making sri lanka more competitive than india with its 1400 million people next door is the key to slowly getting up and starting to walk and work again.We allowed that giant to get ahead of us.

  • 1
    1

    Essentially Kumar is arguing that RW should be allowed to do his job a few more months at least. This is harrakiri. Where are his ideas for a “System change”? Where are his thoughts about how to coordinate diverse forces lined up against the government, otehr than asking Tissa to join FSP? An intellectual of his calibre should offer the disaffected masses including the youths in Aragalaya some leads from the books he has read and life experience. I am disappointed about this article at a critical time like this. He does not answer the question posed in his title either!

  • 5
    1

    There is a saying in Tamil: Fermenting dough is good for hoppers.
    With Gota at the helm and Ranil as his facilitator, things will go on fermenting with IMF also mixed in the dough.

    Most of parliamentarians and the ministers have no clue as to how to solve the economic mess created over 74 years of pathetic rule of Sri Lanka by its successive rulers. Sri Lankans have acquired an entitlement mentality over these years from independence.

    Various writers suggest this or that as the possible solution. Thinking of the ruling class and the attitude of the society who jointly created this mess has to change if anything positive is to happen.

    What I foresee is Chaos before any solution to the problem of bad governance of independent Sri Lanka. Sri Lanka is not alone with self-created mess: If you look around the world there are many in Sri Lanka’s boat.

  • 6
    0

    An outsider’s perspective
    *
    I see a few of you get it – most (including the author) still don’t understand.
    *
    Catastrophic Collapse has already taken place!
    *
    No fuel/no medicines/food running out/country is bankrupt/the same idiots still in charge – how can you call this anything else?
    *
    It’s only getting worse from here – plan accordingly!

    • 0
      0

      UK Citizen and Nimal are absolutely right. I just returned after a 2 weeks stay in Lanka. Witnessing the situation firsthand, I feel , from now it’s going to be , nothing but a free fall. Chances of any recovery is minimal to none. What concerns me most is the dissociation between reality/ seriousness and public perception. Almost all, who I met during my stay ( labourers, small business owners, established businessmen) believe it’s temporary, whereas a real recovery takes years.

  • 0
    2

    kumar is asking whether catastrophic collapse is imminent when we have aFuel-less, power-less, gas-less, food-less, school-less, work-less, dollar-less and hopeless country.Is it vodka or whiskey kumar?

  • 4
    2

    So far, Sri Lanka has no friends or neighbours who are prepared to trust or believe that their money is worth to invest in Sri Lanka because the people are honest to create an environment or changes towards a stable policy or governments. People are emotional towards their religion, their language, their race than peace, equality or good governance or economy. Within the past 75 years people think they are superior to other human beings which resulted continuous violence, continuous destruction of economy, contiunous murders and build up a society with unlawful, unethical, uncivilised culture and still they want to continue. We can blame that West, East, Neighbours are opportunists and they are trying to use this opportunity to their benefit but we don’t understand that it is our politics and politicians are more opportunistics and they are not interested in people or country.

  • 2
    0

    “The LSSP’s Tissa is sharp and intelligent; what on earth is he doing with that spent force Vasu and two jackals Wimal and Udaya?”
    Whatever the LSSP has been doing since it surrendered to the SLFP under CBK.
    For once Tissa V is making useful comments,
    Wonder why he was silent up to two years ago.
    Will the author like to be reminded of his ‘compliments’ to TV not long ago?

  • 0
    5

    “Why has the Lankan economy collapsed?”

    War is expensive. The biggest war-monger, USA, has around $30 trillion in debt. Sri Lanka’s debt of $50 billion is puny, by comparison. It is less than the net worth of Elon Musk. On the other hand, the 30 year civil war did two things: (1) drain the forex reserves of the country, (2) cause a brain drain. The latter cannot be ignored, as this led to diminished productive capacity. Without the war, Sri Lanka would have received a large amount of FDI, similar to India and China. Sri Lanka was actually ahead of China in terms of human development during the time Deng X opened the Chinese economy.

  • 0
    0

    lester

    war may have contributed a bit but governance and policies are the reason we are in this mess at the moment.I will tell you how

    1.from 1977 onwards successive governments built the country on debt.IMports overwhelmingly exceeded exports. The expenses were far exceeding the income.To cover that deficit we borrowed more and more with high interest.This was a time bomb waiting to explode and now it has,with the country being built and run on borrowings only,not earnings.

    2.then in 2005 when mahinda came to power he borrowed rampantly to pay for the war which ended in 2009 and to build roads,airports,powergrids,stadiums.More than 14 bln USD was borrowed by mahinda.The economy grew a lot but due to debt.PB also resisted import bans after the covid struck and also going to the IMF.He also presented a rosy picture of the finances to gota.

    3.there was large scale corruption ranging from bribery to money laundering.

    4.in 2014 mahinda lost the presidential election.why did he lose if he governed well?

    cont

  • 0
    0

    Some more Perspective
    *
    When your useless Politicians tell you “2 weeks until we get a fuel shipment” – you are being lied to.
    *
    Just ask them:-
    – Where is this fuel coming from?
    – How was it paid for?
    – What is the name of the ship transporting the fuel?
    *
    They will not be able to answer these questions because there is no fuel coming. Here is the truth:-
    *
    No money = No fuel
    No money = No medicines
    No money = No food
    No money = No way out

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