Sri Lanka has seen a wave of speculative investment in real estate from the late 2000s onward (Reuters)
Given that Sri Lanka is facing a massive economic crisis, it is extremely urgent that Budget 2021 reflects the changes that must be made to get the economy onto a sustainable track. The crisis, rather than simply a temporary, one-off effect of the COVID-19 pandemic expose long-standing trends both in the global economy and Sri Lanka’s economy. The question is whether the upcoming budget will adequately respond to this reality. To make sense of the budget, we must grasp Sri Lanka’s longer economic trajectory and how it fits into the global context.
Sri Lanka’s economic model since 1977 has promoted the country’s integration into the global economy. J.R. Jayewardene advocated the open economy over Sri Lanka’s previous import substitution regime.
The regime led by Sirimavo Bandaranaike was unable to break Sri Lanka out of its dependency, which it inherited from Colonialism. By the 1970s, during a similar global economic downturn to the one we are facing now, the Bandaranaike government was forced to commit to austerity and rationing.
Jayewardene’s Neo-Liberal policy appeared to offer relief from these restrictions. He promised people the horizon of untapped global markets. Now, more than forty years later, however, the reality has settled in.
It is becoming clear that the open economy policy worked primarily for the richest Sri Lankans. Even then it could only function in a relatively prosperous global environment. In light of the COVID-19 pandemic and its economic fallout, it appears that global moment is closing fast.
Although COVID-19 triggered the latest crisis, we must return to the era of “hyper-globalisation” to understand why the structural trends eventually led to the current breakdown. During the 1990s, after the The Soviet Union was defeated and the US appeared triumphant after the Cold War, a lot of rhetoric emerged about fast-moving changes in the global economy. IT, the shipping container revolution, and more were celebrated as achievements of irreversible global integration. These changes were reflected in the fact that while global GDP increased by approximately 3% annually, global trade growth tripled in some years, growing by approximately 6.5% annually in the 1990s (World Trade Organisation). The global economy in this period was built on three main pillars: free trade, financialisation, and privatisation.
In terms of trade, the global economy was far less stable than it appeared. For one thing, it relied on growing exports from places such as China to sustain US debt-driven consumption. US consumers took on massive amounts of debt, even as real wages stagnated. The period looked relatively bright for export-producing countries such as Sri Lanka. They repressed workers’ wages while looking for Western markets that could consume the goods they were producing because workers in those countries themselves could not afford them. In 2008, the first bubble popped, and it became clear that US consumer debt was unsustainable. The housing market collapsed. Americans faced the biggest economic crisis at the time since the Great Depression of the 1930s.
"The citizenry should be vigilant about the country’s economic survival and the long-term rebuilding of society. They should demand that the budget reflects the scale of the crisis, and at the very least addresses working people’s welfare as the primary way of getting Sri Lanka’s domestic economy back on track"
The next pillar of the global economy, financialisation, exacerbated the collapse. Although globalisation advocates promised a wave of foreign direct investment for poorer countries such as Sri Lanka, the reality is much of it remained concentrated among Western countries and a select few Asian countries such as China. Instead, because of deregulation and the emphasis on promoting capital markets, financial speculators brought money in and quickly took money out of countries.
Much of the speculative investment was in real estate and other areas of the economy that failed to create sustainable foundations. “Hot money” triggered explosive shocks such as the Mexican debt crisis of 1982, the Asian Financial Crisis of 1997, the Argentinian crisis of 2000, and now the most recent crisis triggered by the COVID-19 pandemic. Sri Lanka similarly saw a wave of financial speculation from the late 2000s onward. This has contributed to the sovereign debt bubble that looks set to burst.
This trend relates to the third pillar of the global economy, privatising public assets as a proposed solution to recurring crises.
Because of unsustainable debt in both Western countries and “emerging economies,” powerful global institutions such as the International Monetary Fund (IMF) and the World Bank (WB) initially proposed painful structural adjustment measures. They pushed “austerity” as a way of enabling countries to settle their debts. Social services were slashed, and in places like Greece after the 2008 crash and the resulting Euro crisis, unemployment skyrocketed.
While the IMF and WB have recently begun backing away from their recommendations, realising that the cure is worse than the disease, they are still quietly backing “fiscal consolidation” in countries such as Sri Lanka. By the end of 2019, a total 47% of Sri Lanka’s external debt was raised in financial markets, and mostly large private institutional investors such as hedge funds own this debt (Finance Ministry Annual Report 2019). Thus, Sri Lanka will find it difficult, if not impossible, to negotiate the kinds of settlements it can pursue with bilateral creditors, including countries like China. The question is, what will finance capital do now that global investment is shrinking? How and when will the brute economic factors impact continuing speculation on future profits in stock markets around the world, especially the looming bubble in the US? The IMF projects that the global economy will contract by 4.4% and the World Trade Organisation (WTO) projects global trade to fall by 9.2% in 2020. If global trade grew three times as fast as global GDP during the decade of hyper-globalisation in the 1990s, it is declining more than twice as fast as the shrinking
According to the United Nations Conference on Trade and Development (UNCTAD), global flows for Foreign Direct Investment (FDI) is projected to fall by 40% this year and are not likely to recover until 2022. In other words, the model of export-led growth with FDI support has to be rejected due to the global economic realities.
The COVID-19 pandemic and its economic fallout have accelerated the trends outlined above. The world is descending into another severe economic depression. This is characteristic of a capitalist crisis long in the making and that has been pushed over the cliff by the pandemic.
Consequently, the global order is going through tremendous changes. China is for the moment the exception, having controlled the spread of COVID-19 within its borders. It has been able to continue with positive GDP growth for 2020 on the order of 4%. However, despite its large domestic market along with its major Belt and Road initiative abroad over the recent years, its surplus capital requires investment possibilities around the world, and there are likely to be fewer takers with the depression. As the pent-up demand for its consumer products slows, with the continuing fall in global trade, pressures are likely to mount on China’s economy as well.
The solutions unfortunately so far appear to be further consolidation of competing for regional blocs such as the US and China, and the polarisation of the rest of the world along these lines. The geopolitical question still appears relatively distant though for most people attempting to recover from the immediate economic shock. The question then is, how is the Sri Lankan economy experiencing the ongoing effects of the current depression? And what are the local consequences for both the possibility of a social-democratic solution and the danger of a fascist solution to the crisis?
The challenges for Sri Lanka are extremely urgent. Given that the country is experiencing so much pressure, it is necessary to disaggregate the consequences in terms of two major issues: 1) the external-facing economy and 2) the internal-facing economy.
Sri Lanka is facing an unprecedented debt crisis. In the recent past, Sri Lanka’s total debt as a proportion of GDP was 87% in 2019 (Finance Ministry) and is likely to rise to nearly 100% over the coming year.
As a consequence, Sri Lanka will have to pay approximately 6% to 7% of GDP on interest alone without including the capital repayment, which becomes the lion’s share of the 10% of GDP in expected government revenue in 2020 and 2021. Government revenue was already under pressure before the crisis and that trend looks set to accelerate. The external sector in particular, with approximately 50% of government debt owed to external sources and imports in Sri Lanka, historically twice the value of exports is likely to put tremendous pressure, including fears of default. These dynamics have accelerated with foreign earnings from tourism reduced to zero, and a great fall in foreign remittances, both of which supported the trade imbalance in recent times. These pressures on the external sector have become evident with rating agencies, the voice of global capital, downgrading Sri Lanka’s debt to junk bond status and Sri Lanka having to look to bilateral and multilateral donors for support. Rolling over past debt with new debt has become difficult, if not impossible.
"Jayewardene’s Neo-Liberal policy appeared to offer relief from these restrictions. He promised people the horizon of untapped global markets. Now, more than forty years later, however, the reality has settled in"
In the meantime, Sri Lanka’s economy is likely to contract by between 5-10%. Earlier estimates in the year were ignored or downplayed by the government. The Central Bank claimed that exports have rebounded to 947 million dollars in August 2020, just 9% below August 2019, but this was most likely due to excess inventory and pent-up demand due to logistical disruptions during the previous months. Since then, the awareness of the larger crisis is becoming clearer to policymakers. Sri Lanka gets around 80% of its revenue from indirect taxes such as the consumption-based VAT tax, which means that as the economy declines and people spend less, government revenue will also decline. Moreover, import duties which are a significant chunk of revenue are under pressure due to import restrictions to try and contain the external shock to the foreign reserves that are needed for debt repayment.
Without more investment, the negative effects will accumulate, further slowing down future growth despite rosier estimates for next year. In India, for example, between April and June 2020, investment declined by 53% compared to the previous year (The Wire). The Census and Statistics Department of Sri Lanka has yet to release data for the 2nd Quarter, having delayed it to December 15th, but it is clear that investment has most likely experienced a similar shock in Sri Lanka. This combined with declining consumer demand due to job layoffs is likely to create a vicious cycle for the domestic economy. With private actors unlikely to invest during a depression, the only way out is government spending combined with renewed efforts to reallocate capital among vital sectors of the economy, especially for greater investment in agriculture, which currently contributes to only 7% of GDP. Such investment in agriculture is also critical for food security, with food systems disrupted by the pandemic and the depression.
One solution to the revenue question is wealth and property taxes. The government will have to find revenue from other sources, and given the significant popular pressure, it is likely to experience if it attempts to raid working people’s assets, such as distributing 20% of the EPF funds, it will most likely have to look elsewhere.
Austerity is no solution to the current crisis, especially when the very real possibility of famine among vulnerable groups exist. At the same time, the government is afraid of alienating its elite business constituencies. But the reality is that when capitalism experiences this level of crisis, the only solution is to dramatically reorganise production, to prevent capitalists from cannibalising each other’s market shares and further depressing the economy. That will require an incredible level of state intervention to promote investment and subsidise
The question is whether this intervention will involve and expand popular support, along the lines of a social-democratic solution, or whether it will become a fascist solution designed to crush dissent while dispossessing marginalised groups, such as minorities. The danger is clear. It is only a matter of time before the ruling class is forced to choose. The upcoming budget will have massive implications for Sri Lanka’s near to long-term trajectory and time are ticking.
The government has a choice: Either 1) it pursues dramatic measures, including wealth taxes and unprecedented deficit spending to increase investment with a new set of priorities focusing on people’s real needs and to get the economy going again or 2) it provokes an even worse fall by wasting precious time and pursuing dilettantish proposals for foreign investment and export-led growth, which will supposedly appear out of thin air.
The citizenry should be vigilant about the country’s economic survival and thethe long-term rebuilding of society. They should demand that the budget reflectsthe scale of the crisis, and at the very least addresses working people’swelfare as the primary way of getting Sri Lanka’s domestic economy back ontrack.
That is the first step to meeting the unanticipated external challenges that will involve further global manoeuvring; both among the existing hegemonic powers and the Southern countries, which may yet be able to demand a just and fair alternative to the collapsing neoliberal order.