Dissecting Sri Lanka’s self-induced crisis

The resignation of the entire Sri Lankan Cupboard of ministers, as very well as the governor of its central lender, is not likely to assuage public anger from the Rajapaksa government, as the catastrophic economic crisis gripping the nation, and the resultant hardships for the people, is not likely to be mitigated whenever before long.

Sri Lanka’s Lemony Snicket-esque collection of regrettable occasions which brought on the downslide ended up existing in lots of other countries as nicely, including those which are very similar to Sri Lanka in the dimensions and form of their economies. But Sri Lanka’s responses to these situations — or in some cases the absence of it — has precipitated the current acute crisis that the island nation is encountering. These keep valuable lessons, not only for those people who have to steer Sri Lanka out of its present-day problems, but for chief executives and small business leaders everywhere you go.

Recap of the difficulties

Initial, a recap of the difficulties. Sri Lanka’s recent disaster arguably had its roots in the 2019 Easter terror bombings of church buildings and luxury accommodations in Sri Lanka, which started the disastrous downfall in tourism, Sri Lanka’s major supply of foreign exchange earnings. This was followed by the Covid pandemic which strike other foreign exchange earning sectors like apparel and tea exports as worldwide progress and trade faltered.

The international financial slowdown also strike Sri Lanka’s second biggest trade earner — remittances from abroad Lankans — as hundreds of overseas Sri Lankan staff shed work. And all this was built even worse by Sri Lanka’s credit card debt-fueled infrastructure spree about the past decade or so, which experienced saddled it with crushing domestic and overseas debt at a time when its foreign exchange reserves had been dwindling and the present-day account deficit widening.

The issue is that all these have been professional by other nations as effectively. Bali bounced back from the 2002 terror bombings which ruined its tourism-dependent overall economy, as have world towns like New York, Paris and London. Countries like the Philippines, Bangladesh and Myanmar much too have been impacted by the Covid impression on apparel exports or even abroad employee remittances. And Sri Lanka’s estimated $11 billion credit card debt publicity to China (which include personal sector financial loans) is actually smaller than that of Laos and is comparable to that of Bangladesh or Malaysia.

But none of these nations are in rather the type of hole that Sri Lanka is in at the minute. Sri Lanka’s complications are uniquely Lankan because of the series of policy miss-techniques and blunders, especially by the Gotabaya Rajapaksa federal government just after its return to energy in 2019.

In retrospect, these now amount of money to virtually a textbook situation of what not to do. On the other hand, it is not just policymakers and administrators who can find out from the Sri Lankan practical experience. There are essentially sign lessons that CEOs — whether or not in the authorities or the private sector — can find out from the Lankan muddle.

Tax reforms

The to start with Lankan lesson is this: what was a excellent plan in the previous want not necessarily be a fantastic thought now. The Rajapaksa federal government undertook some sweeping tax reforms right after it returned to ability in 2019. This was a poll assure of Rajapaksa’s bash the Srilanka Podujana Peramuna.

The tax variations drastically altered the framework of both equally oblique and immediate taxes. Though the Value Extra Tax amount was nearly halved from 15 for every cent to 8 per cent in most situations, the VAT registration floor was lifted to LKR 300 million for every 12 months. The VAT on expert services delivered by inns, eating places and these like who were being registered with Sri Lanka’s tourism growth authority was cut to zero delivered they procured 60 for every cent of their materials locally.

On the money tax entrance, the exemption restrict was elevated to LKR 3 million for each annum, and the progressive tax price slashed to a utmost of 18 for every cent for people today and corporate profits tax minimized to 14 per cent for several sectors. All revenue from agriculture, livestock, fisheries, as properly as IT solutions and provision of companies abroad was built exempt from revenue tax.

All of these blended to induce a disastrous fall in the government’s revenues, derailing its credit card debt-reimbursement programme and precipitating the present foreign trade disaster which has led to acute shortages of imported gas, food items goods and energy. So why did they do it? That was since back in 2009, the Mahinda Rajapaksa federal government had made use of sweeping tax reforms to kickstart use immediately after the close of the decades extensive civil war, and the present-day dispensation experienced promised a return to that golden period by doing the identical thing.

Having said that, 2019 was extremely various from 2009. The unanticipated terror strikes, followed by the Covid pandemic, correctly derailed the revival. At a time when the government necessary resources the most, it was still left battling for revenues. So that is CEO lesson quantity a single: just simply because a little something has labored in the previous doesn’t suggest it will operate once again in the long run.

Natural farming

The 2nd lesson lies in the disastrous determination to change right away to natural and organic farming. The whole ban on the use of chemical fertilisers and pesticides wreaked havoc with the country’s crucial plantation sector and practically halved the output of the vital rice crop. Despite the fact that the conclusion has been primarily rolled again now, the impression will just take a great deal for a longer time to repair.

And therefore hangs CEO lesson selection two: listen to the specialists, really do not be blinded by an notion since it is yours. What you may possibly feel is a fantastic notion may possibly not really be so. The Rajapaksa government’s choice went towards scientific guidance from its possess professionals. And the nation and its farmers compensated the price.

Infrastructure tasks

The third CEO lesson is this: do not enable vainness or personal ambition determine how you expend your resources. Nothing illustrates this improved than Sri Lanka’s white elephant infrastructure assignments — the scarcely utilised Hambantota port, the spanking new Mattala Rajapaksa Global Airport now currently being made use of to retail outlet paddy and the Colombo Port City reclamation undertaking, all funded by costly Chinese debt which the nation is now not able to repay.

These have been self-importance tasks of the Mahinda Rajapaksa governing administration, pushed by the elder Rajapaksa’s wish to be seen as the builder of a modern Sri Lanka. Sadly, self-importance mixed with lack of eyesight and economic feeling is a hazardous mix. This is as essential for corporate CEOs to remember as it is for presidents and prime ministers.

The writer is a senior journalist

Published on


April 06, 2022