Sri Lankan High Commissioner Milinda Moragoda talks about how the island nation’s economy crumbled, integrating growth hubs with India and working within a system. The session was moderated by Shubhajit Roy, Deputy Chief of National Bureau.
Shubhajit Roy: What does the IMF’s $2.9 billion bailout mean for Sri Lanka?
This is a realistic and pragmatic first step. We have to now initiate structural reforms and take many measures on the revenue side. This is going to be a tough ask because this is a staff-level agreement and has to be cleared by the IMF board. In between, we have to take a series of steps, especially in the context of debt-restructuring. We have brought in an investment bank, Lazard, to do this and they have worked out the contours of a restructuring programme, which includes looking at our commercial, bilateral, multilateral and domestic debts and balancing them. First, we have to take some measures upfront, then move to the programme and do the restructuring.
This $2.9 billion package over three years is not huge for the amount of money we need but it gives confidence to investors to come in. Remittances, which have dropped by half, could increase. And it also gives confidence for our bilateral partners like Japan. India helped us right through this year without any idea of where this was going to end. That’s why we are so grateful to India because it encouraged us to go to the IMF. Your Finance Minister Nirmala Sitharaman played a role in that. But I think the real confidence will come once the IMF board approves this agreement and actualises the programme for implementation.
Shubhajit Roy: The Sri Lankan economy has been a consumption-driven one for decades and a deficit economy for four decades. How did it reach this precipice where suddenly there was a forex crisis, commodities couldn’t be bought and the political system collapsed?
After the British left, our economy was doing very well. We were producing rubber and graphite and we started investing heavily in social programmes, which have paid dividends. Our quality of life indices are very impressive by any standard. So, it would be wrong to write that off. But the fact is, we didn’t look after our economy as we spent money without investing in growth. For a long time, our economy was closed. Yours was too but you had your own market. And when you opened up, it was a different journey. Our economy was opened in 1977 but our mindset, unfortunately, was very statist. Eighty per cent of our total revenue goes to pay salaries of public servants. So basically, you start the year with only 20 per cent in your hand. The 80 per cent goes to 1.5 million government servants and 500,000 pensioners. Our population size is 22 million. So, you can imagine the proportion, it’s one of the highest ratios around. Our pension is unfunded and paid straight out of budget as well.
Our economy was opened in 1977 but our mindset, unfortunately, was very statist. Eighty per cent of our revenue goes to pay salaries of public servants. So basically, you start the year with only 20 per cent in your hand
The university system is geared to government jobs because the private sector is not developed to absorb the young. That leaves us with no option but to borrow. During the civil war period between 1983 and 2009, people didn’t lend us much. After 2009, we had commercial borrowing possibilities. Since then, we have borrowed $12.5 billion from international markets. That’s about 40 per cent of our debt. So, while 80 per cent of our revenue is going as salaries and pensions to government staff, we have to pay another 70 per cent as the interest on the debt. We ended up borrowing more. In 2020, my own foundation had suggested that we begin to clear the debt by going to the IMF. Unfortunately, our nationalists did not support this idea. So when COVID struck, followed by the Ukrainian crisis, Sri Lanka just tipped over.
Then we have structural issues. In India, you’ve got the private sector in electricity generation and distribution with the government as a regulator. In our case, the power sector is a state monopoly and is losing huge amounts of money. Trade unions won’t allow privatisation.
We have managed to deregulate telecom, petroleum and the financial services sectors but more sectors need to be opened up. Now our banking system is stressed because the electricity board, the petroleum corporation and national airline borrow heavily from state banks. There has to be a massive recapitalisation of the banking system. This will have huge consequences as we will have to relook at our social welfare net.
The IMF projects our economy will contract by 8.4 per cent. We will probably see growth from the following year from a much-reduced base. Part of the reason is that our taxation is being increased. A part of the IMF agreement is to increase our VAT from 12 per cent to 15 per cent. I think former Prime Minister of Singapore Lee Kuan Yew summed it up best: “Sri Lankan democracy is a periodic auction of non-existent resources.” Politicians have been outbidding each other.
We get around 300 ships from around the world every year and these are approved very routinely. We need to develop a framework in this new context and have a dialogue with India because it’s the anchor for regional security
Shubhajit Roy: Mahinda Rajapaksa was a skillful politician for four decades and initially, there was investment and a positive outlook. What happened when his brother Gotabaya took over?
One can argue and point fingers but this crisis was waiting to happen because we didn’t restructure the economy. We don’t have the demographic dividend, ours is an ageing society and we don’t have high population growth. The demographic peak for our youth was basically in the 80s when we were fighting a civil war. We lost the ability to propel growth at the right time. I was the Economic Reform Minister in 2001 but I was demonised for suggesting privatisation. But the fact is that we should have done a lot of reforms after the war ended.
Gotabaya Rajapaksa was not a politician but he was very well-intentioned and wanted to make a difference. But then COVID happened and the economy suffered. Our politics is untidy. We can talk about the Rajapaksas, Chandrika Kumaratunga, J Jayewardene but nobody looked at economic management. Over the next 18 months, we need at least $3 billion of our own money in this game. Where do we find that? By selling some public assets. But if you say our airports and power plants are national relics, then there’s no turning around.
Fortunately, people are open to the airline sale but nobody wants to buy it because the debt is huge. You have to sell assets that can get some money. If you keep increasing VAT, it’s a poor person who is going to pay in the end. Our foreign exchange from remittances, garment, IT and tea sectors has been static for nearly 40 years.
Shubhajit Roy: When India reached out to you, what were your conversations? How did the $ 4 billion LOC happen?
We had discussions with Mrs Sitharaman. Your External Affairs Minister S Jaishankar took a personal interest in this as did National Security Adviser Ajit Doval. Our then Finance Minister Basil Rajapaksa had discussions with Dr Jaishankar and Mrs Sitharaman. We looked at three aspects: Emergency assistance, petroleum and balance of payment support. We had a credit line of $1 billion for food and supplies. Then we had a separate line of credit for petroleum and the swaps with the central bank, with support from RBI, for payments to the Asian Clearing Union.
The other part of the discussion was to develop a longer-term growth strategy. For example, Indian Oil is a distributor in Sri Lanka and runs the tank jointly with us in Trincomalee. How could we make Trincomalee into an energy hub that would be a win-win for all? We are looking at integration with India in the tourism, power and wind energy sectors. Our whole national energy capacity is 4,200 megawatts, so we could create an energy grid with India and get investment. Eighty per cent of the business in Colombo port is transshipment. We have three terminals, one is government owned, the other is privately controlled, the third is a Chinese CICT and now Adani is coming with the fourth. There’s scope for two more terminals. Most of this will go to service India, which needs to trust us as a partner in its shipping network. As of now, we have the comparative advantages vis-a-vis India for deep water terminals. Similarly, given your petroleum requirements, if you set up a refinery in Trincomalee and use it to store a part of your strategic reserves, it will be a win-win for both. This requires trust. It’s a step-by-step process. It cannot be done overnight.
Our politics is untidy. We can talk about the Rajapaksas, Chandrika Kumaratunga, J Jayewardene but nobody looked at economic management. They were all disengaged from the system
Shubhajit Roy: Did China’s debt trap diplomacy exacerbate matters?
No. China accounts for just 10 per cent of our overall debt. That’s not small but a lot of that money has gone into infrastructure. Japan also accounts for around the same but its terms are much better. Japan has been a development partner since the 1970s. But I think in the current strategic context, there is a debate about China’s role in this region and that’s something we can talk about.
Shubhajit Roy: There was a flip-flop by the Sri Lankan government on the arrival of a Chinese ship. There is a contestation between Beijing and New Delhi over Colombo. How do you see yourself caught in this interplay?
Our history with India goes back 7,000 years, with China, it goes back 1,000 years. We were colonised three times by the Portuguese, Dutch and the British. And all of it had to do with our geographic location. We get around 300 ships from around the world every year and these are approved very routinely, without political or a bureaucratic intervention. We had a similar situation with a Chinese submarine in 2014. We now need to develop some kind of framework in this new context and have a dialogue with India because it is clearly the anchor for security in this region. We cannot afford to become a flashpoint. There has to be communication at the highest level.
Unni Rajen Shankar: If 80 per cent of your revenue is going into paying government staff, isn’t the size of your government too big for a country of your size? Also, how important a factor was organic farming in your economic collapse?
I call myself a compassionate libertarian because I think Sri Lanka needs a smaller government to do its job. The government runs everything from fast food businesses, to hotels, airports and infrastructure. We’ve got to grow the private sector so that it can generate alternative jobs for the skilled youth. We need to drive up exports, foreign investment and get into global supply chains. And yes, the organic fertiliser decision did impact us. It had to be a phased-out programme and that’s a lesson learnt.
Amrith Lal: Have you managed to integrate the estranged Tamils?
The war cost us young talent. Nearly one million people of Tamil origin are abroad and another million are working in West Asia and elsewhere. Out of a population of 22 million, two million are abroad. That’s the talent that should have been back home. In addition, I think we lost our sense of humanity in some ways. I’m 58 now, so I grew up through that period. I joined politics as an advisor to Ranasinghe Premadasa. I lost a large number of colleagues and friends to the LTTE and Janatha Vimukthi Peramuna (JVP). It will take us maybe another 20 years to come out of it (effects of the war).
We have to re-examine the reconciliation processes because of the highly polarised nature of our politics. There are many fault lines beyond the ethnic, that of caste, class, religion and language. The Rajapaksas represent the Sinhala-speaking rural population. The English-speaking elite is in cities like Colombo with a disproportionate influence on power play. To some extent, the Rajapaksa period could have corrected this whole imbalance but that’s another fault line. We have religious fault lines. We have had insurrections in the south in the 1970s and 1980s. In the north and east, we had the LTTE issue. Recently, we had the Easter bombings. That’s a lot to take and we need to understand that complexity. As far as the Tamil community is concerned, the current President is reaching out to the diaspora, which has a strong influence. We should also look at how we can create a Sri Lankan identity at the national level. While we have to tackle the economic crisis, we cannot forget this.
I was involved with the peace process in 2001 in London and Oslo. But I can see the frustration with politicians across the board. We have to re-examine the situation and come up with a new dialogue, a new conversation more in keeping with the times. We are still talking the language that was used in the 1980s and the 1990s.
Amrith Lal: Is there any kind of mechanism to release fishermen who are arrested by the Sri Lankan Navy?
In Sri Lanka, the courts release them in three weeks. On the Indian side, we get consular access now. Tamil Nadu Chief Minister MK Stalin has just set up a focal point to deal with our issues, fishermen being one of them. There are three issues. Fishing in our water is non-negotiable. The second is the ecological aspect of fishing beds getting denuded. If we lose fish, it’s not good for either side. Then there is the livelihoods issue because you have commercial trawlers from the Tamil Nadu side and mainly artisanal fishermen, that too Tamils, on our side. Mr Jaishankar has taken an interest and MK Stalin has a very balanced approach.
Raj Kamal Jha: Were you surprised when people came out on the streets and entered the presidential palace, something that is likely to be seen in non-democratic countries? What do you make of that?
Ours is a divided, polarised and extremely volatile society. We have this veneer of tranquility but when it goes off, it explodes. In 1971, we had one of the most brutal insurrections in the south by the JVP. In the 1980s it was the same, triggered by the Indian presence as part of the Indian peace accord. That volatile element continues in this current movement, especially with the Inter University Students’ Federation and with far-nationalist parties like the FSB. The backlash was immediate and it was targetted at politicians’ houses. The protesters said they didn’t recognise any institution and wanted people’s councils instead as a parallel structure. In Sri Lanka, it’s very easy for this undercurrent to become a tide.
This time the protest is a middle-class movement as there was no gas, fuel or electricity. The political vacuum happened because the main parties were not in a position to engage with the people. Gotabaya Rajapaksa himself was not a politician. Once he was elected President, his party functioned on its own while he was focussed on managing the Covid situation or getting fertilisers. So, politicians were disengaged from the system altogether and the economy was crumbling. My concern is that we should not get carried away by protests because in the end, we have to work within systems. Fortunately, we went back to our Constitution. You may not like it, you may want to change it but you’ve got to work within its framework.
Although Gotabaya came from a political family, he wanted to do things his way. Interestingly, he did not want to use violence to crush the protesters and I hope history will remember him well for that. He also got in the private sector. My concern is the marriage between Pol Potist elements and young romantics, who think that they can be the Google or Uber of politics, disrupt the whole system and see virtue in this. We need a lot of change in Sri Lanka, we need a revolution but not total disruption.
Raj Kamal Jha: Were you in touch with Gotabaya Rajapaksa those days and does he have a place in Sri Lanka now?
Yes…But I don’t think he has a place in politics. Frankly, I feel we have too many politicians in Sri Lanka. Former presidents can be icons. For example, Jimmy Carter.
Liz Mathew: Which is more dangerous, the economic crisis in a democracy or the divisions in society?
Both are in tandem. We have not been able to get our economy right because our society is divided. If our economy doesn’t move, we will be in a chicken and egg situation. Sometimes our intelligentsia is too focussed on new constitutions and governance rather than the economy. The rural Sri Lankan has still not fully understood the need for an efficient productive economy.
Raj Kamal Jha: What are some of the low-hanging fruits for structural reforms?
I would use the connectivity grid with India to deregulate the sector and bring in private investment into electricity generation, which could mean new power plants, renewable energy plants or buying existing plants. I would liberalise distribution. I would use the grid with India to create capacity, export and import if needed. The other would be oil and India needs to take a call on Trincomalee as an energy hub given that by 2030, it will apparently need 50 per cent more oil than now. We need to privatise Sri Lanka Insurance Corporation and telecom. The problem is corporates are so huge and our market is so small that to get India started here is not easy. That’s why when people like Gautam Adani come in, it means something. ITC has invested too.
WHY MILINDA MORAGODA
Sri Lankan High Commissioner Milinda Moragoda has had a distinguished political career, having worked with current Sri Lankan President Ranil Wickremesinghe and former President Mahinda Rajapaksa. Having held many portfolios as a Cabinet Minister, he knows the political and economic ecosystem inside out. As leader of the Pathfinder Foundation, he is best placed to analyse what went wrong in the island nation.
Drawing on his vast experience, he advocates the need for structural reforms, the kind that will steer the economy out of its rut, spur growth and build synergies with India.