Prime Minister Announces Resignation Where does Sri Lanka go in the triple crisis?

He Liuying, a reporter at the 21st Century Business Herald, reported that this "pearl in the Indian Ocean" has dimmed a few points.

On May 9, local time, Sri Lankan Prime Minister Mahinda Rajapaksa announced through social media that he had submitted his resignation to President Gotabaya Rajapaksa due to clashes between his supporters and anti-government protesters in the capital that day.

On the same day, Mahinda's supporters clashed with anti-government protesters in front of the Prime Minister's Office and in Galle Face Square, the main venue of the anti-government protests. In order to prevent the spread of the conflict, the Sri Lanka police announced the imposition of curfews in various parts of the capital, and subsequently announced that the curfew would be extended to the whole country.

Following Mahinda's resignation, Sri Lankan President Gotabaya Rajapaksa has reportedly invited all political parties to form a government of national unity to address current socio-economic and political issues. News from 10 May revealed that Sagit Premadasa, the leader of Sri Lanka's main opposition, the United National Forces, has made it clear that he is reluctant to form a government in alliance with the current ruling Popular Front Party (SLPP).

Previously, the Sri Lankan government blamed the country's plight on the epidemic and external geopolitical impacts, but in the eyes of most people, the failure of the Sri Lankan government is to blame. In the view of Long Xingchun, executive director of the Chengdu World Communications Research Institute, the rise of the opposition party to power does not play a big role in solving domestic problems, "I think a change of government can not solve the problem."

Chinese Foreign Ministry spokesman Zhao Lijian said on May 11 that China is highly concerned about the development of the current situation in Sri Lanka and sincerely hopes that all sectors in Sri Lanka will proceed from the fundamental interests of the country and the people, maintain unity, maintain stability, overcome difficulties together, and restore Sri Lanka's political and economic stability at an early date.

Sri Lanka, which means "land of light and abundance" in Sinhala, is an island nation of 22 million inhabitants that is now facing its worst economic crisis since 1948.

Long Xingchun told the 21st Century Business Herald that the root cause of the conflict lies in the economic crisis in Sri Lanka, triggered by international and domestic factors. First of all, due to the impact of the epidemic, Sri Lanka's pillar industry tourism has been fatally hit; secondly, an important source of Sri Lanka's foreign exchange income, remittances, have also decreased due to the epidemic, and the number of Sri Lankans working abroad has dropped sharply; in addition, on the basis of the reduction in foreign exchange, the domestic import demand is still very large but difficult to meet, coupled with the rise in energy prices caused by the Russian-Ukrainian conflict, which has triggered an economic crisis and a crisis in people's livelihood.

Triple people's livelihood crisis: power outages, lack of oil, lack of food

On the afternoon of May 9, local time, the Sri Lankan police announced that due to the escalating conflict between Sri Lankan protesters and government supporters, Sri Lanka began to implement a curfew nationwide from the afternoon of the 9th. On May 10, Sri Lankan police extended the curfew imposed throughout the country to 7 a.m. on May 12.

The protest stemmed from the country's growing economic and livelihood situation. Under the soaring price of commodities, this highly import-dependent South Asian island country has suffered from a serious shortage of fuel, coal, milk powder and other daily necessities due to insufficient foreign exchange reserves.

In addition, due to fuel shortages, power outages are also prolonging. Since March, Sri Lanka has implemented a 7-hour daily power outage, and at the end of March, the Sri Lankan authorities announced a 13-hour power outage every day from March 31, which has greatly affected people's lives.

At the same time, food shortages are emerging. According to the data, Sri Lanka has 4 million hectares of arable land, accounting for 61% of the country's land area, with large tea plantations, rubber plantations and coconut plantations, mainly cash crops. In terms of food crops, Sri Lanka's food production has declined in recent years due to extreme weather such as drought and heavy rain.

Liu Xiaoxue, an associate researcher at the Institute of Asia-Pacific and Global Strategy of the Chinese Academy of Social Sciences, said in an interview with the 21st Century Business Herald: "Sri Lanka's agriculture mainly relies on the plantation economy, and grain used to be self-sufficient, but Britain's colonization in the local area has promoted the division of labor in the industry, which has caused the fragility of agricultural supply and made grain need to be imported from India."

What is most criticized is Sri Lanka's overly rapid agricultural transformation. In May 2021, President Gotabaya appointed the "Presidential Working Group on Building a Green Sri Lanka and Providing Sustainable Solutions for Climate Change", which aims to promote the transformation of sri lanka's economy to a green economy, and has developed a roadmap for the transition from chemical agriculture to organic agriculture.

As of 26 April 2021, Sri Lanka has banned the import of fertilizers, pesticides, herbicides and fungicides in order to become the first country in the world to fully realize organic agriculture. But instead of keeping up with this sudden shift in organic production, farmer farming has been followed by a decline in agricultural production and higher prices. In November of that year, the Srilaka government officially lifted the import ban on agrochemicals such as fertilizers in consideration of farmers' demands, but the relevant import subsidies were not restored, and the import price remained high.

Under the price pressure of food and energy, Sri Lanka's inflation problem has become very serious. The data showed that the consumer price index (CCPI) in Colombo soared to 29.8% in April this year, and the food and non-food inflation rates rose to 46.6% and 22% respectively.

Previously, in response to inflation, the Central Bank of Sri Lanka has tightened monetary policy twice. On March 3, Sri Lanka's Central Bank held a meeting of its Monetary Committee to raise the policy rate by 100 basis points, raising the deposit rate and lending rate to 6.5% and 7.5% respectively, while the statutory reserve ratio remained unchanged. This is the second consecutive rate hike this year after a 50 basis point rate hike in January. But with global energy and food prices soaring, Sri Lanka's inflation problem may remain elusive in the short term.

The outlook for economic growth is worrying

A number of interviewed experts told reporters that the conflict also exposed Sri Lanka's long-standing economic structural problems.

Sri Lanka's economic growth has suffered one setback after another in recent years. The pandemic is a big blow. Sri Lanka Bureau of Statistics data show that in 2020, Sri Lanka's gross domestic product (GDP) was Rs 9.53 trillion (in constant prices), down 3.6% year-on-year. Among them, agriculture, industry and service industries all showed negative growth for the first time in history, down 2.4%, 6.9% and 1.5% respectively year-on-year.

Affected by the epidemic, Sri Lanka's main source of income, tourism and transport services, has shrunk significantly. According to the data, the number of tourists in Sri Lanka in 2020 was only 508,000, down 73.5% year-on-year, and the tourism revenue was about 682 million yuan, down 81.1% year-on-year. This directly reduced the country's trade in services surplus from US$2.849 billion to US$819 million that year.

In addition, Sri Lanka has been chronically weak in international trade. Sri Lanka's trade deficit widened from $655 million a year ago to $859 million in January 2022, according to Trading Economics. Judging from its data for nearly 10 years, the country's trade deficit has been difficult to solve.

Liu Xiaoxue pointed out: "In addition to the need to import food, Sri Lanka's industrial manufacturing is also relatively backward, and at present, the country's daily consumer goods and energy products also need to be imported." Overall, Sri Lanka's import elasticity is relatively small, which has also created a trade deficit for many years. ”

She believes that Sri Lanka still needs to solve the problem of structural transformation of its economy and needs to find new economic growth points in addition to tourism. Tourism alone is fragile. "For example, the terrorist attacks in 2019 and the current epidemic will cause a big blow."

Debt crisis

The national sovereign debt crisis is another speck. On April 12, local time, Sri Lanka's Ministry of Finance issued a statement saying that the government decided to temporarily suspend the repayment of all foreign debt before completing the debt restructuring. Sri Lanka's foreign exchange reserves had fallen to $1.93 billion as of March, according to central bank data. Sri Lanka's total external debt reportedly needs to be repaid this year in the billions of dollars.

Why is Sri Lanka in debt? Liu Xiaoxue pointed out: "After the 2008 financial crisis, when the world was overly mobile in order to stimulate the economy, Sri Lanka borrowed a lot of money at that time. However, the country's economic development has always lacked growth points, especially the epidemic, which has led to a more intensive debt repayment cycle in Sri Lanka and greater difficulty in repaying debts. Sri Lanka has entered a vicious circle, and its own economic restructuring takes time, but the epidemic has made it impossible to transform, which has led to a serious debt problem. ”

Under pressure, Sri Lanka sought financial assistance from international organizations such as the International Monetary Fund (IMF) and the World Bank. The World Bank said the Bank's contingency package includes an immediate provision of $10 million for essential medicines. Sri Lanka's debt needs to be put on a sustainable trajectory before new loans can be made available.

"If you want to seek help from international organizations such as the International Monetary Fund, you must accept the supervision of the organization, and there will be stricter constraints on the finances of the country of recourse." The release of bailout funds by international organizations ultimately depends on whether Sri Lanka has agreed to their terms, which is debatable in today's political chaos. Liu Xiaoxue said.

Constrained by all parties, Sri Lanka's economic growth prospects in 2022 are worrying. The Asian Development Bank's latest Asian Development Outlook 2022 report shows that as Sri Lanka grapples with the challenges of high debt, low foreign exchange reserves and high inflationary pressures, Sri Lanka's economic growth rate is expected to slow to 2.4% in 2022 and improve slightly to 2.5% in 2023.

Liu Xiaoxue believes that in order to promote economic growth, it is still necessary to improve the economic structure. In terms of manufacturing, Sri Lanka's labor costs are relatively high, and it is currently difficult to compete with countries such as India. "Maybe Sri Lanka could consider developing into a shipping or financial center in South Asia, but this is not something that can be achieved in the short term."

Long Xingchun suggested: "In terms of the shortage of foreign exchange, it is still recommended to further expand opening up, attract external investment, including industrial transfer, take advantage of Sri Lanka's good position in the Indian Ocean, and give full play to the role of foreign capital." Sri Lanka's current opening up to the outside world needs to be further improved, including the relaxation of restrictions on some investment projects. ”

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