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Sri Lanka: Ukraine war muddies economic recovery

Sri Lanka Map Courtesy OCHA - Relief Web

The announcement of the Ceylon Electricity Board that daily a three -hour power cut will be imposed from March 1 is symbolic of the failure of the government to finance its fuel imports which has crippled daily life. The power cut only formalises the erratic power shut downs Sri Lankans had been facing during the month. To meet Sri Lanka’s energy crisis, India delivered 40,000 tons of diesel and petrol during the month. Earlier in the month, India had agreed to extend a line of credit for $500 million to Sri Lanka to meet its urgent energy requirements as part of the economic package discussed in January. Sri Lanka’s inflation in Colombo climbed to 15.1 percent in February 2022, up from the 13-year high of 14.2 percent in December 2021. It is not only fuel, but essential food items and medicines also were in short supply.

The commerce ministry has signed an agreement with Myanmar for import of rice to replenish dwindling food stocks. According to the agreement, Myanmar is expected to supply up to 100,000 tonnes of white rice and 50000 tonnes of parboiled rice. China is said to be committed to donate one million tonnes of rice; it is expected to arrive by March 2022. Trade minister Bandula Jayawardene during his visit to Pakistan is said to have requested for a credit line of $200 million for imports from Pakistan. The Rajapaksa government continued grope in the dark to find a solution to the forex crisis, that has become an existential threat. According to Sri Lanka media, even after two cabinet meetings discussed the subject, no road map to recovery seems to be in the horizon.

Already President Rajapaksa has disowned the responsibility for the economic crisis, but attributed it to Covid pandemic and the inherited issues of economic mismanagement. But his government has to own up responsibility for the policy confusion in the handling of the economic recovery. The rationing of food was announced, only to be cancelled due to public protest. Same was the case when the use pesticide was banned, only to be lifted when farmers loudly protested. Another example quoted in the media is the government plan to withdraw the Special Goods and Services Tax (GST) bill aimed at simplifying the present tax structure by consolidating several taxes as a single tax following the Supreme Court’s directive that it requires a two-thirds majority in parliament and a referendum to enact it as a law.

There was also lack of discipline in handling imports. According to Minister Mahinda Amaraweera even in the midst of financial crunch, around $600 billion was spent in 2021 on importing non-essential commodities. Majority of the products imported were items that could be produced in Sri Lanka. These included vegetables, fruits, honey etc. Mobile phone imports totalled $386.73 million. He said the primary challenge facing the country was the dollar crisis. “When we earn $100, we must pay off $115 in debt,” he explained.

The twin foreign exchange earners – foreign remittances and tourism – are facing their own uncertainties. Expatriate workers remittances took a steep fall, touching a 13-year low of $ 259 million in January 2022, adding to the Central Bank’s challenges. This indicates the failure of Central Bank’s incentive measures to lure the Sri Lankan diaspora to use official banking channels for remittances, after it pegged an unrealistic exchange rate cap of SL Rs 203 per dollar. Evidently, expatriate workers are now using unofficial channels to realise actual street value of the dollar, in the black market.

The government eased the Covid restrictions on tourist arrivals and vigorously promoted tourism. It patted itself, when tourist arrivals hit the all-time high of 93,582 tourists in February, pushing the cumulative figure to 175,909 in 2022. However, the war in Ukraine has come as a rude shock, because Russia had topped the tourist arrivals with 28,932 tourists so far. It was followed by India (24,141), UK (17,749), Ukraine (13,039) and Germany (12,779). In February, a total of 14,914 Russian tourists and 5267 Ukrainian travellers arrived. With the war on, Ukrainians are unlikely to travel; in fact, around 4000 Ukrainian tourists are stranded in the island, after the eruption of war.

Stringent economic sanctions slapped on Russia is likely to affect Russian tourist arrivals. Moreover, the value of rouble is rapidly going down. The closing of airspaces of many EU countries to Russian planes could also affect tourism. Media reports quoting a Colombo-based think tank said Sri Lanka imports 45 percent of wheat, more than half of soyabeans, sunflower oil, peas and asbestos from Russia and Ukraine. Already, the war in Ukraine has resulted in steep increase international oil prices as Russia is major source of oil and natural gas. Both Russia and Ukraine are also major importers of Sri Lanka tea. Sri Lanka will be facing multiple challenges in handling its economy, in the uncertain days to follow during the Ukraine war.

The economic crisis has brought to the fore the rumblings within the ruling Sri Lanka Podujana Party (SLPP)-led coalition with President Rajapaksa’s style of governance. Sri Lanka Freedom Party (SLFP) General Secretary Dayasiri Jayasekara said the some of the members of the ruling coalition would be making a set of alternative proposals on March 2. He said “We really didn’t have any other option as the SLPP doesn’t believe in consultations among the partners.” According to him, of the 145 parliament members of the coalition, 30 members including 14 from SLFP. SLFP leader Maithripala Sirisena, would attend the launch of the alternative proposals on March 2, symbolising the SLFP’s reassertion of its national identity, which had been subsumed in the SLPP coalition.

In the midst of all this, the 49th session of the UN Human Rights Commission will be discussing Human Rights Commissioner Michele Bachelet report on Sri Lanka and Sri Lanka’s replies thereof on March 3. Commissioner Bachelet’s report has strongly criticised the amendments proposed to Sri Lanka’s Prevention of Terrorism Act (PTA). She has also called upon the attorney general to function independently and wants action on 2019 Easter Sunday massacres, a festering issue among Christian community in Sri Lanka.

Both Foreign Minister GL Peiris and Justice Minister Ali Sabry are taking part in the event. They will have to tread carefully as it could impact the future of EU of the GSP Plus preferential tariff scheme. EU-Sri Lanka Joint Commission meeting held on February 8, had noted that important elements of the PTA had not been included in the Amended Bill gazette. Overall, the Rajapaksa government is heading for turbulent times, as its economic troubles are getting critically interwoven with the spill over of the international crisis in Ukraine, in the Indo-Pacific theatre.


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