Connect with us

Economy

Elucidating the Sri Lankan Economic Crisis

Avatar photo

Published

on

Asia has turned out to be a hotspot for the pandemic to regroup. Unfortunately, the frontier economies have faced the repercussions of disruption: a tad bit more than their emerging counterparts. In recent months, the badly battered economy of Sri Lanka has emerged as a prime example of how the pandemic has crippled the economic mechanism to the extent of paralysis. And while endemic inflation and external imbalances are a commonality in the developing economies today, Sri Lanka is facing a fatal blend of fiscal mismanagement, economic incompetency alongside excruciating debt obligations; all that is leading the country on the precipice of bankruptcy.

The South Asian island nation is currently under an extended lockdown due to mounting hospitalizations and deaths related to the recent outbreak of the delta variant. Amid a health crisis, Sri Lanka is beleaguered by the economic downturn which is tightening the noose around the country’s fragile monetary mechanism. Sri Lanka’s forex reserves have dwindled significantly in the past few months. As of July, the foreign exchange reserves have dropped down from the highs of around $7.5 billion (back in 2019) to a dismal level of $2.8 billion. The drying reserves could be fundamentally attributed to the debt repayment schedule. Colombo recently registered an outflow of $1 billion on account of the international debt payment. The remaining reserves barely provide an import cover of 1.8 months: massively falling short of the minimum desired three-month mark. Thus, Sri Lanka’s credit default premium has climbed through the roof as the country wades through a blinding shortage of foreign currency to meet even basic requirements.

“The economic turmoil has been further compounded by the colossal drop in revenue and remittances,” said Finance Minister Basil Rajapaksa. The issue at the forefront is the worsening health crisis and the subsequent restrictions that have all but wrecked the key industries of Sri Lanka: Travel and Tourism. Tourism contributes roughly 12% of the Sri Lankan GDP and congregates an approximate share of 5% of the $81 billion economy. The sector stands as the most lucrative industry in Sri Lanka. However, the tide has been harsh against recovery. Over the past few months, the revenue from tourism has fallen, from more than $450 million a month two years ago, down to $2 million a month, according to the data from Trading Economics. Such a steep downfall has resulted in further deterioration of the forex reserves that are already at their lowest level since 2009.

Despite receiving concessionary funds from both the World Bank and the Asian Development Bank, the Sri Lankan economy seems to be spiraling towards an impending downfall. The apparent reason is the extreme inflationary pressure which is weighing heavily: especially on food essentials. According to data acquired from leading economists, the Colombo Consumer Price Inflation has bloated at 5.7% year-on-year. As a result, the Sri Lankan rupee has increasingly depreciated by more than 8% this year. A combination of high inflation and massive devaluation has all but punctured the balance of payment. As Sri Lanka imports the majority of its food supplies, it is only straightforward to connect the dots: the more the inflation prevails, the faster the rupee would depreciate, and thus, the more expensive the food items would turn out to be.

To make matters worse, the Sri Lankan government has facilitated a food crisis by barring the use of chemical fertilizers to achieve 100% organic agricultural production. With expensive imports and throttling domestic regulations, the Rajapaksa regime has created a deliberate shortage of even the most basic food items like sugar. Instead of acknowledging the faulty policy, the Sri Lankan government has ventured through to declare an economic emergency: passing the baton to the army to ensure adequate supply at a fair price. Moreover, price caps have further pushed against the supply chain since traders are engaging in black markets instead of selling at a loss. The Rajapaksa regime has been befuddled by the fissures in the economy and has since started playing the Blame game.

While refusing to end its aggressive policy of organic farming, the government has blamed speculators and hoarders for the surging food inflation. Naturally, the supposed corrective policies did nothing to resolve the underlying problem. The Central Bank of Sri Lanka (CBSL) recently implemented restrictions in the forex market to disarm the alleged speculators from further plunging the rupee. The CBSL limited spot trading of rupee to a maximum of 200 rupees to a US dollar. Furthermore, CBSL also banned traders from entering forward contracts in the currency market to control the volatility of the rupee. However, the strategy has so far backfired. The inability of traders to get more US dollars has resulted in a fall of imports of even the basic food essentials and necessities. Moreover, the ban on forward contracts in the forex market has made it difficult for traders to mitigate the risk of currency volatility. As a result, foreign trade has ceased to exist in some industries while a growing demand is all but exacerbating inflationary pressure in the domestic economy.

To dampen the demand pressure, Sri Lanka adopted a hawkish shift in a desperate attempt to reach equilibrium and harness inflation. Recently, Sri Lanka became the first Asian country to raise its policy rates since the pandemic. The CBSL hiked the interest rates by 50 basis points while also increasing the Statutory Reserve Ratio by 200 basis points. The CBSL officials claimed that the rate hike was scheduled to “mitigate pressure on the currency and preempt the buildup of excessive inflationary pressures.” However, the reasoning was based on a faulty groundwork assuming that the dwindling forex reserves are due to excessive borrowing and import of exotic goods: which is simply ludicrous. As already discussed, high imports are basically comprised of food essentials which are turning more and more expensive due to excessively devalued rupee along with extreme food inflation in the domestic market. The real causes of depletion are the crippling debt obligations, mounting inflationary pressures, massive devaluation of the rupee, and inane agricultural policies. Therefore, the hike in interest rates is only making it harder for domestic traders to meet their margins while the shortage is only expanding with time as the supply struggles to keep up.

Sri Lanka stands at a high risk of bankruptcy, especially since the S&P Global Ratings has recently slashed the country’s credit outlook to negative. The change in ratings along with significantly low forex reserves and a nosediving rupee, all have jointly contributed to the doubts prevailing regarding Sri Lanka’s ability to service its $1.5 billion debt that matures in 2022. To make matters worse, the CBSL Governor Weligamage Don Lakshman recently announced his abrupt resignation from the office. Amid such uncertainty and economic disparity, the Rajapaksa regime is still dabbling in options instead of resolving the problems head-on. The president himself asserted that the country’s policy is to “borrow without any conditions harming the country’s independence and sovereignty.” However, ironically his aspirations are at a dead end as Sri Lanka is rapidly falling short of survival. In the end, the only option left would be to turn to the IMF for aid: where the regime would be forced to choose between survival or independence – reforms or bankruptcy in simpler terms.

The author is a political and economic analyst. He focuses on geopolitical policymaking and international affairs. Syed has written extensively on fintech economy, foreign policy, and economic decision making of the Indo-Pacific and Asian region.

Economy

Explainer: African Leaders Should Accelerate Industrialization Without Short-Haircut Processes

Avatar photo

Published

on

At the end of their four-day deliberations, African leaders and participants have issued a joint statement relating to the future of economic diversification and industrialization in Africa. The summit provided the opportunity to take stock of the progress made during the year on the drive towards industrialization, it also provided a policy dialogue platform to firmly recommit to accelerating structural transformation. 

Convening in Niamey, Niger, the Extraordinary Summit on Economic Diversification and Industrialization, the ministers and participants collectively, in a the report, suggested that the key policies and regional integration issues should be drastically addressed to support industrialization in Africa, reminding further that Africa is widely seen as a future investment and development frontier given its extraordinary economic potential in Africa.

It was, however, acknowledged that it was held at the backdrop of a completely uncertain global landscape owing to the prolonged effects of the coronavirus pandemic, the pressing challenges posed by climate change and the Russia-Ukraine conflict that have disrupted the global supply chains with huge consequences globally and more fundamentally on African economies.

According to the summit reports these circumstances have revealed the extreme fragility of African economies against external shocks and reinforced the need for structural changes necessary for the acceleration of productive transformation through a determined shift towards sustainable and resilient industrialization in the years and decades ahead, the statement says.

The summit highlighted the role governments and other non-government actors play in addressing the constraints to industrial development, strategies for countries to re-invigorate the role of development finance institutions to promote industrial financing while drawing lessons from existing challenges, strategies for the countries to deal with global issues such as climate change in their efforts to industrialize, and reflected on the experience on industrial policy, design, implementation and monitoring its new industrial strategies. 

Ms. Aissata Tall Sall, Minister of Foreign Affairs and Senegalese Abroad and the current Chairperson the Executive Council, underscored the critical role of the private sector in supporting innovation in high-potential areas such as agriculture, agro-industry, health, education, infrastructure, and especially energy, which remains a crucial issue in advancing industrialization. 

She observed that “this decision has a high strategic significance because the aim of the industrialization and productive transformation process in our countries is to improve their capacity to take advantage of the many human and natural resources that the continent has to offer. Indeed, the industrialization of Africa can unlock the continent’s potential for inclusive growth by expanding access to the economic opportunities thus created to all segments of the population, especially women and youth. In addition to these challenges, all of which are important, there is the issue of mobilizing domestic resources to finance our economies, as well as the fight against illicit financial flows that encourage tax evasion and corruption.”

Massoudou Hassoumi, Niger’s Minister of Foreign Affairs and Cooperation emphasized on the urgency for inclusive industrialization that harness the demographic divide of the youth, which he noted would also sustainably address issues of irregular migration, manipulation and recruitment into outlawed groups.

He added that “industrialization and economic diversification are therefore a lasting economic legacy that we must leave to the younger generation, because it is a solution to the challenges of the moment, especially those related to insecurity. In this regard, it is important to reiterate the African position for a fair and equitable transition to defend the right of our countries to exploit their available resources such as gas, alongside their efforts to develop the energy mix.” 

To accelerate the progress made in operationalizing the African Continental Free Trade Area, Moussa Faki Mahamat, Chairperson of the African Union Commission restated the need to conclusively address the structural challenges that hinder the optimal functioning of the common market. 

“The major challenge here is to be able to strengthen trade between African countries that are more open to the outside world through agreements that have already been signed and that manage the bulk of their trade. It is therefore a matter of developing the capacity to successfully transform our productive structures with a view to increasing the complementarity of intra-African trade. It would also be necessary to ensure convergence by reducing the major gaps between Member States and between the Regional Economic Communities in terms of development and level of integration. The AU Commission’s State of Integration in Africa 2022 report has highlighted the reality of such gaps,” according to Moussa Faki Mahamat.

Africa possesses 60% solar irradiation in the world, 70% of cobalt global production and significant reserves of other battery minerals, world class carbon sink assets in our forests and peatlands, huge green hydrogen potential, which Antonio Pedro, UNECA Acting Executive Secretary noted can position the continent to become a powerhouse and a globally competitive investment destination for multi-sectoral investments combining climate action, job creation and industrialization. 

“As we drive industrialization, we also need to realize that industrialization is not an event, but it is a process, and a long one at that. And, of course, we should be mindful that industrialization is not the business of Ministries of Industry alone. Instead, the implementation of true industrial policy requires a whole of government and beyond approach and action. It requires aligning industrial, trade and other sectoral policies and putting science technology and innovation at the centre to ensure that we remain globally competitive beyond our initial endowments and comparative advantages,” noted Antonio Pedro.

To rally the support of the private sector, Dr. Amany Asfour, started the commitment by the AfroChampions Initiative to mobilize the private sector to enhance the public-private partnership as the continent moves from commitment to action on industrialization and trade. Empowering the private sector through market-based solutions and resolving finance barriers remains critical.

Among the recommendations of the minsters of the appointment of the African Union Champion for Sustainable Industrialization and Productive Transformation to provide political leadership, awareness and ensure effective implementation of Africa’s industrial development. And further considering endemic factors that have stifled the Africa’s economic transformation, it is important to reassess the continent’s capabilities in the face of external shocks. 

In this regard, it is important for the African Union members to set up innovative and inclusive institutions capable of designing and implementing effective industrial policies and processes that will advance socio-economic transformation, as stipulated in global and continental frameworks such as the African Union Agenda 2063, the United Nations Sustainable Development Goals and the Third Industrial Development Decade for Africa.

Continue Reading

Economy

Bregret Reigns Britain: Blaming Brexit over Economic Exigency?

Avatar photo

Published

on

Sometimes I blunder that the UK is still a part of the European Union (EU). Whether when discussing a unified policy stance on sanctions targeting Russia or a common polity on sustainable energy strategies for a resilient future of Europe. Brexit may be a figment of the recent past, but its tremors are certainly not bygone. And the European cohesion, which should’ve been envied at a time when Russia is wreaking havoc on its energy security, seems ephemeral as Britain’s vexed relationship with the EU refuses to recede. However, amid the boiling economic crisis in Britain and the rest of Europe, public sentiments betray an inherent admission: Britain’s exit from the Union might have been a mistake. But the connotation of this public rhetoric is just as awry as the Brexit chatter leading up to the 2016 referendum.

The opinion of Britons has been notoriously fickle throughout history. But the outcome of the Brexit referendum was razor-thin at inception. Now, a stagnant economy; a revolving-door political leadership; and decades-high inflation are turning the tide against the championed narrative of the Conservatives. According to a recent opinion poll by YouGov – a leading market research and data analytics firm headquartered in Britain – 56% of the Britons surveyed concurred that leaving the EU had been a mistake. Only 32% believed that Brexit was a good idea. However, while many Brexit critics would jump onto this opportunity to bash the Tories, this perception is misguided, a product of frustration of an irate populace looking to blame something for their woes. And Brexit has been a notable feature of the ruling government.

Britain installed its fourth prime minister since 2016 last month. But the damage was already done a few months back. Britons were already reeling from soaring energy prices and acute food shortages. The economic slowdown was heralding an unfamiliar era of high-interest rates and unemployment. Then entered Liz Truss, the former prime minister who eschewed economic orthodoxy with her trickle-down tax-cut plans. Her disastrous stint in office – that barely lasted 50 days – tipped the pound into a free fall, sparked a liquidity crisis for pension funds, and sent government borrowing costs spiraling to harrowing levels. While the incumbent Prime Minister Rishi Sunak has managed to calm the turbulent economy, the wreckage is still visible in the mortgage market.

Earlier this year, mortgage rates in Britain typically remained below 2.5%. Since October, however, the average two-year fixed rate mortgage is hovering around 6.25% – slightly down from the peak of 6.65% on Oct. 20. The lowest two and three-year fixed rates are still above the 5% mark, according to Moneyfacts Group, a financial information company. Unlike the United States, British mortgages run for shorter terms. For instance, about 2 million mortgages in Britain would reach the end of their fixed terms by the end of next year, pushing many Britons to refinance at rates more than double their initial settlements. An estimated 1.6 million borrowers in Britain have variable mortgages, which track the central bank’s policy rate. Thus, as inflation keeps running ablaze, no respite seems on the cards. 

The annual rate of inflation in Britain has reached a multi-decade high of 11.1%. And at its last policy meeting, the Bank of England (BoE) – the central bank of Great Britain – hiked its interest rates by 75 basis points, taking the policy rate to 3% – the highest level since the financial crisis of 2008. Andrew Bailey – governor of the Bank of England – doubled down on his commitment to raising interest rates higher to deter double-digit inflation fuelled by pandemic-induced supply chain logjams and the mercurial energy prices triggered by the Russian retaliation against Western sanctions. While the logistics backlogs seem to be improving, the Russian dilemma shows no sign of resolution. And as the Western coalition prepares to implement a price cap on Russian energy supplies, economic difficulties would only worsen for the British citizenry.

According to the Office for Budget Responsibility (OBR), a fiscal watchdog group in Britain, inflation-adjusted disposable income is projected to slump by circa 7% over the next two years under the government’s new budget plan. Introduced as the “autumn statement,” the 55 billion pound ($65.4 billion) budget virtually reversed every plan by Ms. Truss. Mr. Jeremy Hunt – the new chancellor of the Exchequer – has frozen the annual taxable income threshold until April 2028 rather than having those bands adjust to the inflation rate. Consequently, the top tax rate of 45% would now be applicable on earnings starting from £125,140 instead of the current level of £150,000. The government has also raised the windfall tax rate on energy firms from 25% to 35% until March 2028. Hence, economists believe that aggressive rate hikes coupled with such steep tax increments could trigger a brutal recession – perhaps the most debilitating since the 1930s.

So blaming Brexit for the economic turmoil battering Britain is not an accurate depiction of the public sentiment regarding Brexit. And it is chiefly because the throes of the British economy are tricky to quantify under a defining rubric. 

True, the UK is struggling with labor shortages. But this issue is not entirely driven by Britain’s inability to replace workers from Europe, who left after Brexit. A substantial portion of workers are Britons, who left during the pandemic and never returned to the labor force. Many started their own businesses; some settled into the groove of remote work. 

Admittedly, Britain’s sluggish growth further worsened when investments diverted to other epicenters of commerce in Europe after Brexit. Britain is the only member of the Group of Seven (G-7) advanced economies with an economy smaller than its pre-pandemic level. Recently, India replaced Britain as the world’s fifth-largest economy; Paris supplanted London as Europe’s highest-valued stock market, according to data published by Bloomberg. But Britain’s productivity has been in decline since 2009; public funding has been in the dumps ever since austerity policies were implemented in the aftermath of the 2007 financial collapse. High-interest rates are visibly hurting the domestic outlook of the British economy. But it is mainly because people were so conditioned to the ultra-low interest rates over the past decade that their perspective is dovishly askew.

Nonetheless, the British government has the incentive to structure a trade mechanism with the EU. While the hardliner Conservative MPs who voted Sunak into the office would definitely resent (and veto) an intimate relationship – like that enjoyed by Switzerland and Norway – with the single market, a settlement of disputes revolving around the hybrid trade status of Northern Ireland is imperative to Britain’s economic revival. Yet, if the Labour Party manages to topple the Tories in the next general elections, a closer alignment with Brussels should be in the vanguard. Because while Britain’s economic debacle might not be entirely Brexit’s unraveling, the UK cannot resurface without improving relations with Europe in an openly hostile neighborhood with a bleak future.

Continue Reading

Economy

Global Recovery: Mobilize SME, Digitize Economies and Commercialize Exportability

Avatar photo

Published

on

Like an open book, all such deployment ideas are already available for last many years to allow immediate mobilization of any national small medium business economy. On the world stage, as a recovery, nations can digitize on fast tracks any selected sectors of economies and get ready to dance on global digital platforms. Nations can become examples on creating superior exportable goods and services while commercializing innovative ideas on the global stage. There are no secrets on how to achieve all this, but there are huge secrets why it is still not being done despite all the economical struggles?

How to capture opportunity losses; the biggest tragedy of any disconnected economic progress is watching the world ‘continuously’ advancing, consuming and growing, while nations ‘persistently’ despite extraordinary resources abandoned, talented citizenry only herded and left as spectators, trade associations, chambers and government agencies remain disconnected. Therefore, needed are precise world-class goals, as national symbols of unity, diversity and tolerance. So, what are the top missing rules to mobilize a nation on economic development fronts and what is stopping?

How to grow economic development? The fastest way is via right meaningful collaborations, alliances and brokering of deals, the fears of communications must be eliminated, the trepidations of opening global markets is just a mindset issue but not having bold open dialogue on fast track vibrant programs is a killer. Establish, define and articulate a long term agenda and drive like a formula car.

National mobilization of SME entrepreneurialism is a step by step methodology, if there is still no progress after a decade, which only raises serious questions about available skills to lead such a charge. Similarly, 50% mobilization of the qualified SME if allowed to dance on global digital platforms creates productivity, performance and profitability and therefore brings foreign exchange to improve national grassroots prosperity. If local economic development teams do not openly engage, adapt and utilize available blueprints and related mobilization expertise little or nothing will happen.

This is not about good or bad management; this is about core competency to move national economies towards pragmatic progress, particularly, when national mobilization of entrepreneurialism is already an entrepreneurial movement. This is far apart from the traditional bureaucratic procedural paperwork and especially in most cases not necessarily new funding dependent rather execution hungry and deployment starved. In most cases, the lack of knowledge on the global age demands and transformation of digital platforms, that leaves the SME behind. Study more why will population-rich-nations lead knowledge-rich-nations?

Matter of choice: Unless immediately exercised the required departmental tests and measure capabilities matching right mindset and speedy execution requirements, just piling up degree-holders and highly preferred staffing without precision is in reality what is destroying economic development.  So, choose economic progress or choose bad HR, the economic recovery has no time to waste. Explore new options on how to acquire mastery on such affairs. What level of efficiency is required to become a productive nation to cope with the consumption hungry world?

Furthermore, to play in global commerce, the global age speed of communication acts as a power of progress rate. There is no room for departmental responses to take days, weeks and months, but must face global age demands as a thriving 24x7x365 living world waiting for immediate response. What will it take to create a LIVE economic development recovery program of highly integrated departments? What levels of expertise are required to start deployments of such thinking? Better understand how other nations are doing, study a new world of G20 and national mobilization of small medium business economies

Capitalism is not failing; it is economic development. Unless mandated differently, the circus will go on. The skills gaps are not about lack of degrees; rather, global age experiences to understand how the pyramid of global consumption works, how to open new markets and how to produce real value to stand up to the global age of competitiveness. Skills are not about degrees, but now translated into global age skills as art of communication, presentation and global age level understanding of diversity, tolerance and entrepreneurial mindsets.

Why blind leading blinds; why high priced and fancy studies on SME always select ‘access to finance’ as the mother lode problem but they critically lack centricity of entrepreneurialism as such studies are academic driven. Hence the biggest disconnect, SME founders are not interested in loans but sales. Sales are more about value creation and globally accepted production standards to cope with global age competitiveness, where they do not require consultants rather developed skills to become better executives and better producers. They need help but not the loans, they need skills and knowledge and not the procedural and conflict resolution compliances. They know too well what to do but need to know how to do it better. Cookie cutter complex forms and rubber stamping will never do the trick, they need entrepreneurial dialogue, but not from academia but real entrepreneurs. They strive for meritocracy and not bureaucracies.

No, this is not an academic study but an entrepreneurial response to grand economic failures by the majority of nations on up-skilling SME and re-skilling manufacturers at national digitized levels. Furthermore, failing to understand the difference between the job seeker and job creator mindsets is the first step to get eliminated from any serious dialogue on the subject of SME economic recovery. Failing to articulate on the national mobilization of entrepreneurialism is the second step to get eliminated from any economic development activity as a whole. Study more on Google.

Proof is mandatory; when it takes 10 days to debate, strategies and finalize a national mobilization programs, and when it takes 100 days or organize digital platforms to deploy 10% to 50% selected SME on digital platforms and 1000 days to turn around small medium business economies so why still there is no show after last 5 or 10 years. If there is nothing wrong, why are the restless citizens marching in protest? Why are economies openly collapsing and what is stopping them to correct the course and how much it has to do with core competencies at the source of economic development? Is it possibly now a time for the first industrial revolution of the mind

Next key steps: What can current teams learn and what can they deploy within 90 days in any sector or any national economic realignment. How can they be framed as a customized national mobilization of entrepreneurialism model? How can they select and identify 5K to 50K SME and get them ready for a digital platform? How can they start intense programs to up skill and re-skill all layers of the economic departments to become a global age expert and start thinking of future applications and methodologies of economic growth? What does it take to acquire mastery on national mobilization of entrepreneurialism within a specific SME sector or across the nation? The rest is easy.  

Continue Reading

Publications

Latest

East Asia3 hours ago

Deciphering North Korea’s Nuclear ‘Obsession’

In the past few decades, nuclear weapons have come to be synonymous with North Korea. The country’s growing nuclear proliferation...

Africa5 hours ago

Ramaphosa Faces Possible Impeachment for Corruption

South African President Cyril Ramaphosa has fallen into turbulent waves and struggling to save his position and reputation. It has...

Africa8 hours ago

Russia-Africa Summit: Sergey Lavrov Embarks on Courtship and Assessment Tour

Behind lofty summit declarations, several bilateral agreements and thousands of decade-old undelivered pledges, Russia has been at the crossroad due...

Americas10 hours ago

The Indignant Politics of America’s Mass Shootings

Why do mass shootings garner the lead stories in the news cycle? Could it be the sudden cluster of deaths...

Eastern Europe12 hours ago

It Is Possible To Live Peacefully In The Caucasus

The Caucasus is a geographical area inhabited by a number of peoples. This region with its beautiful nature has experienced...

Reports15 hours ago

Small Business, Big Problem: New Report Says 67% of SMEs Worldwide Are Fighting for Survival

Small- and medium-sized enterprises (SMEs) and mid-sized companies are the backbone of the global economy. They create close to 70%...

Defense17 hours ago

Ukraine Crisis: International Security and Foreign Policy Option for Pakistan

Impact on International Security: When Russia invaded Ukraine on 24 February 2022, Russia presented it as a matter of its...

Trending