The South Asian country Sri Lanka is now facing the most economic crisis in its 74-years history. But some days ago, Sri Lanka was the most advanced economy in South Asia, with a per capita GDP of over 4 thousand USD. 95% of Sri Lankans are educated, their education system is the most effective of all South Asian countries. Their healthcare system is also the best in South Asia, after Kerala, India. Sri Lanka was also a major tourist destination in South Asia. But over the years, Sri Lanka’s economy has been in deep crisis. The growing shortage of imported goods in the country is ruining the lives of the people. The country has been going through a terrible food crisis for several months. With foreign exchange reserves at an all-time low, it is safe to say that they cannot meet the crisis by importing food from abroad. The growing shortage of essential commodities has brought about an unprecedented catastrophe in public life. The foreign exchange rate of the Sri Lankan rupee was 190 rupees to the dollar a few days ago, but in the last two months, it has risen to more than 300 rupees. At present, the country’s foreign exchange reserves are fluctuating between 1 billion to 2 billion, while Sri Lanka will have to repay 7.3 billion in interest within the next year. This means that Sri Lanka is on the verge of becoming ‘financially bankrupt’. The Sri Lankan government has recently declared a state of emergency in the country, as the country faces a mass uprising to oust the Rajapaksa family. As many may not know, the current Sri Lankan government has five members from the Rajapaksa family the president, the prime minister, and three other ministers. The Rajapaksa family controls about 75 per cent of Sri Lanka’s government budget.
Why is Sri Lanka in a deep crisis?
Frist: The worst mistake that could have been made was to get a few political family members to come back to power. Those who have shown responsibility towards the people of the country. These families brought democracy down to a point where, despite timely elections, there was no significant change or reform. No government has taken the initiative to institutionalize democracy, fundamental economic and social reforms or strengthen such institutions by ensuring accountability. Perhaps the grossest and unique example of a family occupying a country is the return of the Rajapaksa family to power. President Gotabaya Rajapaksa (who is also the defence minister), the prime minister and the newly ex-finance minister are three brothers. Relatives hold various ministries and important government posts in the country. During Mahinda Rajapaksa’s second term as president, he had 40 members of his family in key government positions from 2010 to 2015, in addition to the cabinet. The formation of a family government and integrity is a major cause of the current crisis in Sri Lanka.
Second: In the last 15 years, Sri Lanka has undertaken several costly and ambitious projects, most of which are unnecessary and economically unprofitable. In 2009, Mahinda Rajapaksa, the then President and current Prime Minister of Sri Lanka, began to distance himself from India and lean toward China because of India’s role in the Sri Lankan civil war. Considering the importance of Sri Lanka’s geopolitical location, the construction of a deep seaport at Hambantota under the Belt and Road Initiative (BRI), and the construction of a Chinese city near the seaport in Colombo, and the construction of an airport in a forested area named Rajapaksa. Later, when the construction of the Hambantota deep-sea port was completed, it was found that there was not enough demand for port use. Sri Lanka was finally forced to lease the port to China for 99 years after failing miserably to increase its port revenue. Colombo’s Chinese city and airport project are in a similar predicament. At the same time, Sri Lanka raised a large amount of foreign debt through international sovereign bonds to accelerate the country’s GDP growth, the maturity of which will begin in 2022. But now Sri Lanka cannot afford to repay the bond. Therefore, by declaring itself incapable of repaying its debts like Pakistan, Sri Lanka may have no way out of the ongoing crisis without reaching out to the IMF and the World Bank for a ‘rescue package or bailout package’.
Third: Unplanned project acceptance and indifference to important projects. For example, the demand for electricity in Sri Lanka is increasing at a rate of 8 per cent per year. But since 2014, the country has not taken any initiative for a new power plant. The power crisis has now become so low. The unplanned mega project has become a burden for Sri Lanka’s development.
Fourth: in 2019, President Gotabaya Rajapaksa decided to reduce VAT and taxes. He reduced the rate of value-added tax (VAT) from 15 per cent to 8 per cent. He also abolished the 2% Nation Development Tax and the Pay as You Earn system. As a result, the government’s revenue fell by 25 per cent, it’s forcing Sri Lanka to take more foreign borrow.
Fifth: Tourism is a major source of foreign exchange in Sri Lanka. The contribution of this sector to the GDP is about 10 per cent. Another major source of foreign exchange for the country is remittances. Before the COVID-19 pandemic, Sri Lanka earned about 12 billion USD from tourism and remittances. As the pandemic harms the tourism sector, Similarly, the amount of remittance also decreases significantly.
Sixth: The hasty decision to introduce overnight organic farming in the agricultural sector is largely responsible for today’s situation. The decision was taken by President Gotabaya Rajapaksa without consulting the agriculturists and scientists. To reduce the pressure on foreign exchange reserves, the import of chemical fertilizers was banned and the use of chemical fertilizers and pesticides in agriculture was banned. As a result, food production in Sri Lanka has declined by about one-third. Food prices rise. In addition, the country must spend more on the foreign exchange than before to meet the growing demand for food.
Economic comparison of Bangladesh and Sri Lanka:
To the discussion, it is necessary to have a clear idea about the comparative situation of the economies of Bangladesh and Sri Lanka. Sri Lanka’s total foreign debt is 33 billion US dollar. With a total population of 22 million, Sri Lanka has 1650 USD per capita debt. On the other hand, the total debt of Bangladesh is 49.45 billion dollars. Since the total population of Bangladesh is 169 million, the per capita debt is 292.11 USD. Sri Lankan remittances have reached the bottom due to the Corona virus pandemic. The country’s remittances were 8.5 billion in the 2020-21 fiscal year. Bangladesh’s remittances in that fiscal year were 24.78 billion, which is almost three times more than Sri Lanka’s. But Bangladesh in population about 6 times more than Sri Lanka. So, a large amount of foreign debt cannot be covered by showing the per capita debt calculation.
Experts cited declining export earnings as one of the reasons for Sri Lanka’s current crisis. At present, Sri Lanka’s export earnings are 8.5 billion. Bangladesh’s export income is 38.75 billion USD. In other words, the export income of Bangladesh is almost five times more than that of Sri Lanka. However, Bangladesh is 8 times more populous than Sri Lanka.
What can Bangladesh learn from Sri Lanka?
Bangladesh’s economy is largely dependent on two basic sources of income, readymade garment exports and remittances. Naturally, the country’s economy is largely dependent on global market fluctuations. The importance on the readymade garment exports dependence should not be underestimated. At the global level, any significant fluctuations in demand and prices could lead to misery and crisis in Bangladesh’s economy.
Remittances are another source of foreign exchange, which continued even during the epidemic and kept our economy stable. But it is also dependent on a handful of markets, especially the Middle East. Bangladesh needs to reduce this dependency and increase the efficiency of its staff. So that they can earn more. This issue needs to be addressed urgently.
Megaprojects have caused an economic decline in many countries. There is a general tendency in developing countries to rush into large-scale infrastructure projects overnight to change the destiny of the people.
In Bangladesh, large investments have been made in megaprojects. If we add the cost of the 10 biggest running projects in Bangladesh, then the total amount stands at more than 2817060 million USD, this is a huge amount of money. But the key question is how Bangladesh raise funds and how rationally the country uses them.
In this case, the amount of money borrowed is not the problem, but the utility and timely implementation of the projects, it is more important. In that case, Bangladesh can reduce the debt burden by increasing the capacity and making the projects more efficient. But in this case, the country’s biggest weakness comes to the fore. Most of the megaprojects including small and medium are not implemented on time. The duration and cost of the project have been increased one to four times. As a result, the overall cost of the project increases a lot. In addition, delays in implementation reduce potential income opportunities and put pressure on the economy. If Bangladesh considers corruption and waste, these costs increase even more. The sad reality here is, why this increase in terms and expenditure, the concerned officials do not have to be held accountable. Then comes the most important thing, coordination. A project, especially a large project, has many branches. If there is no coordination in all aspects of the project. As a result, costs rise further and put additional pressure on the economy.
Bangladesh may not face the same situation like Sri Lanka in the near future, but Bangladesh still has considerable weaknesses in its economy and good governance process. Which needs special attention.