Transcription
Dealing with fallout from political, economic, and environmental disaster, can Sri Lanka continue its recovery? A 5-year financial crisis culminated in a political revolution? But in the midst of an upswing, economists warn debt restructuring is needed now to avoid another fall. So, can repayments be suspended? And is more debt relief what the country really needs? I'm Andrea Seni and today's newsmaker is Sri Lanka.
Well, less than a month ago, Sri Lanka was ravaged by what its president called the most challenging natural disaster in its history. And it came just a year after Sri Lanka's crushing $9 billion national debt was painfully restructured. Even before cyclone DBA, many complained the burden on taxpayers was unsustainable. But now, top economists are warning if repayments are not put on hold, the economy could collapse again. So, even with a remarkable growth rate of more than 5% and further growth expected, is Sri Lanka still in danger? Here's a look.
>> Sri Lanka is a country buffeted by headwinds and catastrophes, both literal and financial. Cyclone dittoir flattened homes, leveled infrastructure, and brought deadly deluges when it struck in November.
>> My wife, son-in-law, daughter, mother-in-law, two grandsons are all dead. I don't have any protection here. They were all that I had. We have lost our land, house, everything.
It was the deadliest natural disaster to hit Sri Lanka since the 2004 Indian Ocean earthquake and tsunami. The storm left over 600 people dead, nearly 200 more missing. Amid the damage, a country in financial dire straits remains.
>> Well, Sri Lanka has always been identified as one of the most climate vulnerable countries in the world. But we have never seen anything like this. We have never seen 25 districts all affected at the same time. And the level of devastation we are seeing across the country, we have never seen anything like this before.
When families and communities lose assets very quickly as well as the case with the economic crisis and with this natural disaster, it's very difficult for them to come out of the cycle of vulnerability and poverty. Sri Lanka's recovery efforts were boosted by an emergency $200 million IMF aid and disaster relief fund. But the country had already been declared bankrupt in 2022 when it defaulted on its debt obligations. That ushered in a $3 billion bailout back then when the country had been facing economic challenges on multiple fronts which exacerbated food, electricity and fuel shortages and political instability.
>> The country's weak and shaky economic situation was however showing signs of a turnaround, a slow incremental recovery when the cyclone hit. Our task is to do the right thing at this moment. Bring more and more investment. So maintain this economic trajectory. So as I just highlighted the 5% growth and will gradually increase by aiming uh uh medium-term growth more than 7%. So this is the target line.
But Sri Lanka sits in the top 10 list of countries which are most at risk of extreme weather events in the global climate risk index. Ditto obliterated the progress Sri Lanka was making economically on the original 2022 IMF bankruptcy bailout. Before the storm, Sri Lankan annual repayments were sitting at around 25% of all government revenues, which many economists said was harsh on Sri Lankan taxpayers. Economists have called for debt restructuring and a grace period to pause repayments to allow for relief efforts.
In countries like Sri Lanka. So disasters don't break the system. So what disasters do is they expose the already broken systems. Sri Lanka now faces a choice. Return to the path of economic growth or overhaul the country to face the climate crisis and rebuild with resilience. The road ahead is a paradox. Sri Lanka cannot easily afford to do both, but neither can it afford not to.
>> Well, joining me now to discuss the prospects and choices ahead for Sri Lanka are from Vancouver, Sri Lankan lawyer Shihar Hassan. From Indianapolis, associate professor of economics at Indiana University, Indianapolis, Vidora Tenkun. And from Oxford, lecturer at the University of Oxford, Tyruni Kleama. Thank you all so much for being with me. Let's uh first get a general perspective and shihar I'll start with you. How are you feeling about Sri Lanka right now? Should we be celebrating a comeback uh or really preparing for something more ominous?
>> One thing to remember about Sri Lanka is that Sri Lanka has had a history of recovery within 6 to 12 months post uh crisis. Every crisis we are a very resilient people. Um but also this current crisis is different because uh the catastrophe that we had after cyclone ditch is post crisis of the 2022 economic uh meltdown and then the cyclone and the transition that happened to elect president. So um I would say we have to be optimistic at this point but the the outlook seems positive.
>> Okay, let me ask Vidora if you agree. I mean the cyclones timing I think it's not arguable. It almost couldn't have been worse. But still is Sri Lanka in a strong enough position to to bounce back from that as well given that economists like Joseph Stiglets have called for you know the suspension of external debt repayments uh because he they're so concerned with recovery from just the cyclone.
Yeah, I do think uh we can uh say rec I mean the Sri Lanka can recover within like within one year like 6 to 9 months because because of the nature of this type of disasters usually the the recovery short term of course the Sri Lanka has been recovering from a bigger bigger economic shock since uh 2002 and uh uh this happened before that recovery was complete. Uh so effectively what will happen is that that bigger recovery will uh say take a little bit longer.
>> Okay. But do you think economists I mean leading economist Joseph Stiglets had said uh that this needs to be done now. These these debt repayments need to be put on hold. Do you think they should be listened to? Are they correct?
>> Uh I don't think that's necessarily be the case. I mean based on the preliminary assessments,
>> I'm I'm curious why do you think they're concerned and and you're you're not as convinced?
>> Uh I did not go through uh his uh statement or the rational behind that but I just went through the uh detailed report prepared by uh IMF pre after the crisis. It has just been published. So going through that uh I think uh the the the country can uh recover uh in its own with the support of the fiscal package and the support from other international uh organizations.
>> Let me ask Tyruni. I think we lost your connection for a minute but hopefully you heard the other panelist comments. I'd like to get your opinion on the current position of of the country as well as the president's uh Anora Kumar Danoyak. How is he holding up in the face of this? I mean, he was noted for being a Marxist and for having very left-wing non-austerity style economic policy, but but has he essentially been what the country needs?
>> Thank you, Andre. I was kicked off so I unfortunately didn't hear what was said, but let me answer your question because that's a great one. So when president this um he basically entered office with a powerful mandate that was really rooted in I think public exhaustion with elite impunity and crisis management right his early months really delivered very symbolic and substantive shifts like anti-corruption investigations prosecutions of previously untouchable figures like the former president and like a very clear rhetorical break from the political order that precided over the 2022 collapse and that generated real political ical goodwill. But what has happened with dwa is it has moved that lens from that reformist intent into the governing capacity right natural disasters what they do is I think it tests test the state operationally and not just ideologically and what the government has done is it's mobilized emergency services unau authorized unprecedented supplementary spending as of like yesterday day before yesterday which has mattered but there are great concerns which have emerged so the decision to rely on emergency regulations rather than disaster legislation. This raised great questions about um institutional learning. There were failures in Tamil warning, Tamil language warnings in very heavily affected plantation and rural areas and this showed that there were communication gaps that transformed vulnerability into an avoidable risk. And then there's also the rebuilding Sri Lanka fund which is substantial in scale guaranteed but it has drawn a lot of criticism for a management structure that's dominated by male elites and corporate actors right heightening concerns about elite capture conflicts of interests and the marginalization of women and local communities so I think this challenge is not just political legitimacy but really administrative credibility and how and dwar is not a formative moment It's yes, let's see what happens.
>> You know what we we spoke to in our report, one of the experts had said in countries like Sri Lanka, disasters don't break the system, they expose an already broken system.
>> Uh it sounds like like you agree with that. Let me ask Shihar though. I mean having said all that how much then does that leave Sri Lanka going forward at the mercy of climate change and knowing that Sri Lanka is one of the most vulnerable countries now when it comes to to climate disasters.
I would say uh with the the current uh climate situation around the world and especially South Asia becoming more and more vulnerable to the climate disaster that that we are seeing around the world. Sri Lanka is susceptible for such climate uh disasters more often than not. But what I see is that the preparedness um uh that a country like Sri Lanka sees uh what I have seen so far around the world is that being poor is expensive when it comes to climate disasters. And what I have seen in cyclone VWA is clearly that uh the warning systems were a failure. The the uh hierarchies the government hierarchies were not working properly. the the message was not passed clearly through the system and there were conflicts uh in terms of how the disaster and post disaster has to be managed. So uh with all this taken into account the what I would say is that it's more important for to be prepared for the upcoming disasters than just talking about climate change and disasters in itself.
When we look at kind of the the more historic economic trajectory of Sri Lanka, would you say Sri Lanka is simply maintaining the same boom and bust cycle of the past? I mean it was able to bounce back from bankruptcy but then another bust could be around the corner or or do you have more confidence this time?
>> Uh not just myself.
>> Sorry. Go ahead.
>> Yes. Yes. I do think uh say the economy can come back. Uh so basically so based on the uh projections of IMF, IM has IMF has lowered the growth projections for next year from the the previous 3.5% to 2.9%. But uh when it comes to the long-term trae uh trajectory, so it was like 3.1% which remains as is. uh so uh their uh estimate is that there will be an uh short-term impact which I do agree because the the effect on economy was mostly on agriculture and uh tourism which has a short-term effect and uh that effect last uh not for not more than 6 to9 months. Of course uh there was damage to infrastructure which can have uh consequences in the long term uh and which needs some funding and governments has uh say uh uh say gone to gone for a say strong uh fiscal stimulus which was supported by some uh funding from international aent agencies including uh an emergency from IMF for uh say uh support to balance the external sector. So with that uh say I think there say the the country has the ability to uh say come back to the the the original long-term tra trajectory uh say to recover uh which was the case after the the uh economic crisis in 2022.
>> Okay. I'll I'll ask a a are you that optimistic?
>> Um that's a good question. Well, in terms of optimism, I think it kind of goes back to what you really asked, right? Because what we have is Sri Lanka stabilization. For me, it does not really represent a decisive break from this boom bust, which I think was your first question. The country has exited formal bankruptcy, restored some measure of macroeconomic order, but in a way, what you have poverty that has more or less doubled. You have an underlying source of fragility which is really still intact. an external debt service still absorbs like an exceptionally high share of government revenue. So really I think what has changed is it's really the nature of shocks that um Sri Lanka faces and that basically is where climate disasters are no longer rare but they are a recurring macroeconomic event that more or less needs to be taken into consideration. So maybe I'm a bit more cautious about saying maybe just a little bit more cautious about seeing it as recovery but actually seeing how debt structuring will go on at this point really.
And Tony, when you speak of the nature of those shocks, we have to remember the cyclone came after a massive chemical spill in 2021 whereby Sri Lanka is still, as far as I know, still trying to to seek some compensation because those the plastic microplastics are still contaminating the fishing industry, some of the beaches. Uh what effect does that collectively have on, you know, the most important industries including tourism? um and fishing.
>> Yes. Well, I think again it's kind of looking back at Sri Lanka's growth narrative, right? It can be read against, it must be, I think, read against a really a backdrop of a cumulative series of shocks rather than events. And you just mentioned the chemical spill which really inflicted lasting damage on coastal ecosystems and with and the compensation and remediation is still more or less unresolved, right? And then you have tourism which has slightly more or less partially recovered and remains and remains a major foreign exchange earner but it's not really stable still and not nor sufficient um and it's neither stable or nor sufficient growth anchor. So what you really have is a sector that's really sensitive to environmental degradation climate events and even infrastructure dis uh disruption. And what happens here is with that was damage you really need to see how we can how this will play out and then you really have the reliance on tourism as a co-economic pillar as you just mentioned and that carries structure I think goes back to the question of recovery and how recovery will work and how reconstruction will actually work and what it'll prioritize under the president.
>> Okay Tony I I'm I am losing a bit of your audio. I think it's better for our listeners but I only missed a little bit of what you said but let me move to Shihara then because another issue here uh it's not just the shocks there's an inflation worldwide that is really hurting uh shihar it's really hurting consumers and in Sri Lanka in particular household debt is considered crippling so in spite of overall the overall growth number it's still hurting consumers ers what do you fear as far as household debt is concerned and what Sri Lankans in spite of whatever the growth of the economy says what Sri Lankans themselves can truly afford in order to live you know dignified lives that won't lead to more political upheaval
>> yes I I am as much concerned as you are because what I see is 25% of the Sri Lankan population uh going to poverty right after the 2022 crisis. But with Cyclone Ditto on the way, I I fear that there's more to come. There's more inflation. There's more people who would fall below the poverty lines. And that means more stress, more tension uh within the macro and microeconomic sectors. But what we should also remember the the cyclone affected 2.3 million people of Sri Lanka which is close to 11% of the Sri Lankan population and almost 20% of the country's land mass has been affected by uh by the the the floods. Um so what I would say while we are optimistic the the economic growth is not stalled it's uneven. It's fragile but more more so than the 2022 crisis now people are going to face the brunt of it far more uh for recovery than before.
Okay, Vidura, your thoughts again. And also, I'm I'm curious as to what you think. We, you know, we used to hear so much as well about the Chinese debt trap, especially for a country like Sri Lanka. Is that now seen in your opinion as kind of beneficial foreign investment that the country can actually use right now and benefit from or is there still an issue there behind behind the surface?
>> There there are investments. Uh so with the effectiveness of those uh investments is something to be judged on uh case by case basis that is uh uh something a little bit more complex uh but when it comes to say investments overall uh investments uh do help overall um and uh okay so that's about the investments so if you want to say something about uh inflation which was the discussion say I can I can.
>> Yeah, please comment. I I had asked earlier about the the household debt which many many Sri Lankan citizens will say is absolutely crippling and that's what's holding the economy back.
Yeah.
>> Right. Of course. Of course. Do because that is where I have some expertise. So I like to talk based on the numbers actual numbers. So most of the panelists I mean both of the panelists highlight highlighted some of the structural issues the country has had which is true. I agree with that. uh but they were always there and those those uh structural issues haven't changed but if I focus on the on the effect of uh deta and what what happened after the recent economic crisis of course many people were below the poverty line and uh the uh the the people were in debt the people who were in debt were increased after the economic crisis uh and the inflation was high but during the recovery uh most of these uh say effects reverse to a great extent and uh there were there was a long period of deflation. the prices were dropping. But with DIPA at least in the short run like in the next 6 to 9 months prices will increase because particularly the there will be a shortage of some of the agricultural products produced dome domestically and in the short run inflation will increase but given we are starting with a very low baseline level particularly so it will not be a say huge issue so inflation will increase to probably to five or 6%. Yeah.
>> Let me ask Tun if she's on the same page there because if it's just a matter of time before it stabilizes as we were just hearing, do you think the public can hold out for as long as need be? Or will we see them again on the verge of some sort of political upheaval because life will just become too expensive for for too many people that are already really mired in poverty?
>> I mean, I think despite the stabilization we have, household economic conditions are deeply strained, right? You have years of inflation, you have wage erosion, subsidy cuts and they have left many families with really minimal savings and high levels of informal and unsecured debt. So household debt is really a binding constraint on recovery. So and this is this is extremely serious and this is what Dwire has done. It's compounded these pressures. You have crop losses, you have transport disruptions, supply chain damage and while incre reconstru and while reconstruct and basically the supply chain damage will push up food prices, right? while reconstruction also increases food demand. So really this the question here is how how do you the challenge is whether not adjustment is really necessary but then looking at how basically the population that's most exposed to this and how they can move and this is where this is a real problem. It's the social strain will be incredibly high. there's austerity, there's rising living costs and household debt will actually be uh a huge problem and without targeted relief then these dynamics risk entrenching poverty and undermining social cohesion as well at this point.
So tuni quickly I mean do you foresee more kind of political upheaval in the years to come or do you feel the crisis of a few years past and everything that Sri Lanka went through means people won't want to return to what I guess we can consider the bad old days.
>> You mean as in whether there could be another crisis in the future. Is that what you mean? Yeah. sense
>> because the cost of living we've heard a number of Sri Lankan households testify to just how expensive life is even while the country is recording tremendous polit uh economic growth. So do you think something might give out or do you have more again more confidence than that in in the Sri Lankan people who wouldn't want to return to the upheaval we saw in 2021?
Yes, because I think then it's the question of could it cause similar disruptions, right? And I would actually kind of maybe be a bit more cautious about drawing a very direct parallel because in a way if you look at the crisis of 2022, there were very different mechanisms that was driven by a collapse in foreign exchange and paralyzed imports of food f and medicine. But whereas here what you have is a very a domestic production and an infrastructure shock that happened right and that's I think that's a huge distinction that needs to be kind of put on board but the risks cannot be un understated you have like a large amount of you know what you really have is there's a the flooding and landslides have damaged agricultural land irrigation systems and then you really again going back to the whole debt and the household debt you have um shop food prices very increasing very likely in the coming months particularly affecting lowincome households but does that mean whether we'll have a crisis that's a different kind of thing because in a way we are looking at reconstruction and watching how reconstruction will play out there is and and then the question is whether Sri Lanka faces a real risk of inflationary stress and um selective scarcities so avoiding that outcome will basically require a lot of um reconstruction and also kind of planning ahead really in And that's that's what we are going to be seeing how this will play out really.
>> Okay, Tyrone, that will have to be the final word for this edition of the newsmakers. Unfortunately, we're completely out of time. So, I'd like to thank all three of you so much for being with me, our viewers for joining us as well. Remember, you can follow us on social media and do be sure to subscribe to our YouTube channel. I'm Andrea Sanki. We'll see you next time.