Author: TELO Admin

Sri Lanka is now in an unfortunate plight in which the failure of the state has entered the phase of its completion both internally and externally. The rule of the country is eclipsed by dark shadows of disintegration and anarchy. The state and the political system are also in a state of disarray and virtual collapse. The economy is on the brinks of virtual bankruptcy. In the sense of geo-politics, the country is largely under siege.

Anarchy

The anarchic situation and bankruptcy the country is facing have become an oppressive and tangible reality which the people could feel. Gotabaya Rajapaksa can be considered as a President elected solely by the Sinhala Buddhist votes. His Government was able to secure a two-thirds majority in the Parliament. However, it is clear that the recognition maintained so far, by both the President and the Government has now eroded.

Another significant characteristic of this trend is that no opposition party movement has been able to enhance their public acceptance in proportion to the extent of decline in the governing party. This clearly explains that the crisis of Sri Lanka is more a crisis of the system itself which has rendered all traditional leaders and traditional political parties failures than a crisis of the leader, the head of state or the government.

Despite the fact that the President has adopted a policy with more weight being placed on a military approach which undermines the civilian rule, obviously he has not been able to achieve any of the intended objectives. A significant number of not only civilians, but also army officers who have been appointed to key positions have abandoned them. It can also be considered as an important trend.

In this crisis, the functioning of the judiciary also can be said to have shrunk and degenerated to a greater extent. It can be said that the Sri Lankan judiciary has reached a level where it finds itself incapable of meting out justice fairly, and providing protection not only to the general public but also to the socio-political system. The pathetic plight faced by Shani Abeysekara is a good example revealing this situation. All investigations carried out by him were pursued with necessary guidance from the Attorney General’s Department and the judiciary. Yet, both these institutions have failed in providing him with necessary protection.

Almost everything in the country is being conducted in an informal and absurd manner. It is only in three areas where active and effective performance could be seen viz in acquitting the leaders of the present Government who were prosecuted during the previous regime, prosecuting the opponents of the Government and looting public property in various fields.

Bankruptcy

The bankruptcy of the economy which is visible and tangible has become a major factor that oppresses the people. It is unavoidable that this situation will soon develop into an unbearable scale. The exchange rate of the US dollar has already crossed the limit of Rs. 200 and according to the Minister Finance himself, it might reach Rs. 350. Under the circumstances, a bag full of money will be required to buy a bag of goods in the future. The imported goods could be purchased only as long as they are available in the market. Already there are signs of a shortage of tires in the market, and a situation might arise where the motor transportation might collapse at any moment.

A large number of people have already lost their jobs and the number of those whose income has declined though they have been able to preserve their jobs is even greater. There are already signs of mass protests and demonstrations, and probably a situation might arise that such protests will develop drastically in the future.

The lack of having a practical vision needed to overcome the crisis Sri Lanka is facing can be considered as a common feature inherent not only in the Government but also in the Opposition as well. The failure to build the nation and the plundering of public property associated with the ruling power can be considered as the two main factors that have contributed to the current deplorable state of Sri Lanka. The nation must be rebuilt and the State and the political system which have crumbled must be restructured.

In doing so, it is imperative that there must be a large-scale inquiry into human rights abuses while the opportunity gained by the rulers to exploit public property which has become a permanent feature of state administration, is completely abolished. Neither the ruling party nor the opposition parties have apparently felt any disenchantment about the great catastrophe that has befallen the country due to their misdeeds. Both parties have not shunned their greediness for plundering of public property. Both parties are in a state of extreme bankruptcy, devoid of honesty and creative thinking. All opposition parties seem to be thinking that the solution to the crisis in Sri Lanka lies in their seizing the ruling power in the next general election.

Ignoring the geopolitical reality

The extreme pro-China policy followed by Sri Lanka in the field of geopolitics is likely to push the crisis in Sri Lanka to an explosive level. The country is already trapped in a crushing debt burden with China which is not easy to escape from. Sri Lanka is an island located in a strategically important location from which the Indian Ocean could be controlled. India can be considered as the closest neighbour of Sri Lanka. It can also be considered as the major power of the region as well as the one that aspires to become the dominant or the super power in the region.

The location of Sri Lanka cannot be changed. Geographically it lies at the mouth of India and not that of China. Under the circumstances, a pro-Chinese policy that ignores expectations of India can cause great anger in India. If India pushes itself for a policy that interferes with Sri Lanka, certainly the latter will not have a real chance of resisting it.

The recent resolution passed by the UN Human Rights Council on Sri Lanka will inevitably act as a significant element having a major impact on Sri Lanka which is already merged in a deep crisis. If Sri Lanka continues to act arbitrarily, it might lead to a situation in which sanctions could be imposed on Sri Lanka. A major outcome of this resolution would be the establishment of a 12-member UN human rights office on Ceylon in the High Commissioner’s Office to streamline the investigations into alleged human rights abuses in Sri Lanka which are said to have occurred in the past and occurring at present. A sum of $ 2.8 million has been set aside for the office for a period of 22 months.

UN human rights office on Ceylon

This office will undoubtedly be a crucial turning point on alleged human rights violations and have a greater impact on the internal affairs of Sri Lanka in many ways, not just one. It will act as an important institution for the protection of Tamil and Muslim people who have been significantly deprived of their human rights and also the rights of the Sinhalese people who have been and continued to be deprived of human rights. It will also act as an important centre for those who have been affected in various ways during the two insurrections of Sinhala people who have not been able to receive justice for their grievances, and the victims of human rights violations during the Tamil uprising in the north and the Muslims who have been subjected to human rights abuses subsequently. All affected parties would be able to present their grievances to this office and seek redress.

All the victims involved in the cases such as the disappearance of 11 youths arrested for extorting ransom, murder of MP Ravi Raj, abduction and disappearance of Prageeth Ekneligoda, abduction of journalists to undermine investigations into horrific incidents of assault can also seek assistance of this office and urge for justice. In particular, people like Hijaz Hezbollah, Attorney-at-law and Shani Abeysekera can seek assistance from this office for their defence and protection.

Also, all political leaders who are threatened with deprivation of civic rights by a system of Commissions which are contrary to the law could also seek assistance from this office to resolve their issues. Similarly, people like me, Tony Emmanuel Fernando and Palitha Bandaranaike who had sought redress for serious human rights violations from Geneva Human Rights Commission under the International Covenant on Civil and Political Rights, and being adjudged that their rights have been violated and the respective government ordered to pay compensation for the victims, but so far the orders issued by the Commission have not been honoured by the Government, can also appeal to the Bureau to do justice on them.

Apart from that, those who are interested in overcoming the degenerated state of Sri Lanka and keen in having structural reforms adopted for that, and also those who are interested in making a participatory People’s Constitution to effect a real transformation of the system, could also seek necessary guidance and technical assistance from this office.

The challenge on the judiciary

The biggest challenge of this resolution will be in the judiciary. Internationally the judiciary of Sri Lanka does not entertain a good reputation. The new changes that may arise in the judiciary of Sri Lanka in the wake of this resolution is likely to create an alternative mechanism for victims to go before a court of a foreign country and seek justice in the event they fail to get justice administered by the highest court in Sri Lanka. It will inevitably become an uncontrollable stream if the doors of the courts of India are opened for this purpose in addition to the courts in European countries. How will the judiciary in Sri Lanka take up this signal?

Sri Lanka’s government debt as a share of gross domestic product is expected to rise to 115 percent in 2021 and poverty to 10.9 percent, the World Bank said in the wake of several years of mostly monetary ‘stimulus’ followed by the inevitable stabilization policies.

Import controls would reduce growth, while high debt and reduced access to markets were threatening debt sustainability, the agency said in a report on South Asia.

Sri Lanka’s economy is expected to recover to 3.6 percent in 2021, from a 3.6 percent contraction in 2020 amid a Coronavirus shock.

Sri Lanka public and publicly guaranteed debt is estimated to have risen to 109.7 percent of GDP in 2020 from 94.3 percent in 2019 and is expected to rise to 115.0 percent in 2021 and 117.7 percent in 2021.

Lower-middle-income-poverty defined as 3.2 dollars in 2011 PPP dollars had jumped to 11.7 percent in 2020 from 9.2 percent and will moderate to 10.9 percent in 2021 as growth recovers.

Fiscal Hit

In 2020 Sri Lanka’s budget deficit is expected to have worsened to 12.6 percent of GDP from 6.8 percent of GDP in 2019 due to the combined effect of a Coronavirus pandemic and tax cuts for a ‘fiscal stimulus’.

“The fiscal deficit is expected to be high in the forecast period, despite tightly controlled expenditures, as revenue collection is expected to remain weak,” the World Bank said.

“The combination of a stimulus package in 2019 (pre-pandemic) and low revenues in the aftermath of the COVID-19 shock resulted in a steep deterioration in fiscal balances.

“The deficit is believed to have increased to 12.6 percent of GDP in 2020 and public and publicly guaranteed debt to have increased to 109.7 percent of GDP.

“In turn, public and publicly guaranteed debt is expected to reach 115.0 percent of GDP in 2021 and to rise further between 2022-2023. High gross financing requirements will exert pressure on the domestic financial market”

In 2020 Sri Lanka’s central bank has bought large volumes of debt, injecting liquidity and triggering forex reserve losses, which has mopped up most of the liquidity, though private credit has been weak.

The World Bank is expecting inflation to rise to 5.2 percent in 2021 from 4.6 percent in 2020.

“Inflation is projected to increase gradually, as domestic banking institutions, including the central bank, are contributing to finance the government deficit,” the World Bank said.

Sri Lanka’s central bank has been printing unprecedented volumes of money in 2020 and in the first two months of 2021, ratcheting up liquidity injections that brought currency crises in 2012, 2015 and 2018 to new levels under so-called ‘Modern Monetary Theory’ despite running a pegged exchange rate regime.

The rupee has collapsed from 113 to 200 to the US dollar from 2011 under monetary ‘stimulus’.

Return of John Law

Monetary stimulus, broadly dating back to Scottish Mercantilist John Law, gained sudden respectability among policymakers after the ‘Great Recession’ as reserve currency central banks injected large volumes of money into damaged credit systems, seemingly without driving up inflation.

Such policies also known as ‘Go’ policies whether accompanied with deficit spending or not, has historically triggered balance of payments troubles in pegged regimes and asset price bubbles and commodity price booms in floating reserve currency areas followed by low growth critics say.

Sri Lanka’s growth has also fallen as monetary stability worsened and policy makers directed most of their efforts to firefighting the effects of ‘stimulus’ including rate hikes, import controls (Nixon shock) and exchange controls.

Since around 2016 Sri Lanka was also hit by ‘revenue based fiscal consolidation’ a peculiarly leftist or statist framework advocated by the International Monetary Fund that sought to put more money into the hands of politicians and bureaucrats with tax hikes while downplaying the need to cut spending.

No emphasis was placed on monetary stability or restraining the central bank either.

Instead the central bank was encouraged to follow un-anchored monetary policy in the form of a ‘flexible’ exchange rate (no credible external anchor) and ‘flexible’ inflation targeting (no credible domestic anchor) with predictable results.

The central bank was also taught to calculate an ‘output gap’ inciting an agency which had already deprecated the currency from 4.70 to 113 since its inception in the worst performance in South Asia, to follow ‘Go’ policies and trigger external imbalances.

However the agency has no growth mandated in its constitution.

Sri Lanka’s central bank is a top IMF customer due to past anchor conflicts and keeping down interest rates as a final target, critics have said.

In 2018 Sri Lanka cut rates and injected money through a variety of tools, including outright purchases of bonds, term reverse repo injections and overnight injections and dollar rupee swaps (buy/sells) amid tax hikes to reduce the deficit.

The injections pushed the rupee down from 153 to 182 before rates were raised at liquidity tightened in ‘Stop’ policies, leading to a growth shock.

Sri Lanka’s began another round of ‘Go’ policies from August 2019, and in December 2019 value added taxes were slashed worsening budgets again. Rates were cut in 2020 and injections worsened from around March 2020.

Debt Sustaintability

Sri Lanka is still the ‘Go’ mode. Gross official reserves which were at 8.5 billion US dollars when ‘Go’ policies and output gap targeting started have fallen to 4.5 billion US dollars by February 2021.

With liquidity injections and prospects of a private credit recovery, analysts had warned that Sri Lanka would find it difficult to repay foreign debt, which requires a government to have solvency in domestic debt auctions and there was a danger of a Weimar Republic phenomenon.

Meanwhile the World Bank said annual debt payments were around 4 billion US dollars and access to foreign markets have been limited amid downgrades.

“External buffers are expected to weaken relative to external liabilities as reserves may need to be used to service the external debt,” the World Bank said.

“A longer downturn could push many small and medium enterprises from illiquidity to insolvency, further holding back the recovery process and the return to a path of poverty reduction.

“Lower growth would also put additional strain on public finances and increase
risks to macroeconomic stability.

“Depleted fiscal buffers, high indebtedness, and constrained market access will continue to pose risks to debt sustainability.”