4 lessons to be learnt from Sri Lanka

When there is an economic crisis, the powers that be must address it in earnest rather than find scapegoats to heap blame on. The Rajapaksas instead blamed everyone - from hoarders to the media - for the problems they themselves had created. After declaring a state of emergency, their administration used strong-arm methods like deployment of armed forces to discipline traders suspected of hoarding and profiteering

With the anger of anti-government protesters forcing the once all-powerful Rajapaksa family members to hide in or flee from Sri Lanka, the situation is getting from bad to worse in the island nation. Developing countries all over the world can draw four main lessons from the developments in Sri Lanka.

First, public finance is something that can never be taken lightly. If a nation doesn't manage its deficits, it will suffer the consequences sooner or later. "During the first three decades after independence [1948], development policy focused on two themes, equity through social welfare and substitution of imports with local products," says Encyclopedia Britannica.

In other words, it was similar to the policies India adopted. Food subsidies, statutory price controls on consumer goods, import substitution, etc., were main elements of economic policy. But while Indian policy and decision makers, despite all their failings, never lost sight of the realities of public finance, it was not so in the island nation.

This brings us to the second point: the government should not only never ignore the deficits, fiscal as well as current account, but also be rational in policy making. Economic policy must be formulated in accordance with facts and reason, not on a whim or following a fad.

Even before the Covid pandemic, the Sri Lankan economy was crumbling, with a declining growth rate. The pandemic exacerbated the situation. President Gotabaya Rajapaksa and his brother, Prime Minister Mahinda Rajapaksa, failed miserably in managing the economy. The crisis became a catastrophe when the Rajapaksa brothers imposed organic farming and banned chemical fertilizers on April 29, 2021.

The decision made green activists happy - but few others. The Indian environmentalist Vandana Shiva said in June last year at a virtual summit, "This decision will definitely help farmers become more prosperous. Use of organic fertilizer will help provide agri products rich with nutrients while retaining the fertility of the land."

With improvement in biodiversity, the harvest will also improve and crops will become resistant to weeds and various diseases, she added.

But this is not what happened; there was a sharp fall in farm yields. The ban on chemical fertilizers was withdrawn eventually after extensive protests, but the damage could not be undone. Paddy produce fell by 30-40 per cent; tea production, another major crop, was hit even more.

Problems multiplied: foreign exchange reserves began depleting; there were severe food shortages; there were widespread protests, resulting in violence and finally the fall of the Rajapaksas.

It needs to be mentioned here that organic farming is not without its merits. But, like everything else in the economy, it must be allowed to grow… well, organically. It cannot be and should not be imposed by executive fiats and capricious pieces of legislation.

The third lesson to learn is: When there is an economic crisis, the powers that be must address it in earnest rather than find scapegoats to heap blame on. The Rajapaksas instead blamed everyone - from hoarders to the media - for the problems they themselves had created. After declaring a state of emergency, their administration used strong-arm methods like deployment of armed forces to discipline traders suspected of hoarding and profiteering.

And last, but not the least, all countries in the world must beware of China. Friendship with the dragon is no less lethal than enmity with it. China deployed the Belt and Road Initiative to ensnare Sri Lanka into a debt trap. About a tenth of the island nation's total foreign debt is in the form of concessionary loans. This does not include the commercial loans through Chinese state banks. As a result, Sri Lanka had to hand over the Hambantota port to China for 99 years (Compare this with India's magnanimity: Acting like a friend in need, India extended a $1-billion line of credit).

The situation has been grim for quite some time. "Sri Lanka is a classic twin deficits economy," an Asian Development Bank working paper said in 2019. "Twin deficits signal that a country's national expenditure exceeds its national income, and that its production of tradable goods and services is inadequate."

Other countries, including India, must learn a few lessons from the ongoing economic and political crisis in Sri Lanka.