One of the biggest lessons Malaysia can learn from Sri Lanka’s crisis is that it did not happen overnight, or in the last two years.
The island nation has severe structural problems but these were not effectively addressed by successive governments largely for fear of losing public support. Malaysia too has structural issues and it needs to rectify these if it does not want to go the way of Sri Lanka.
Rather than implementing sometimes painful but beneficial long-term policies, successive Sri Lankan leaderships went for populist, election-in-mind policies. That should sound familiar to most Malaysians.
The ruling Gotabaya Rajapaksa family and their cohorts, for instance, pandered too much to their own Sinhala race to the detriment of the nation.
Sri Lanka’s governments also took the easier short-cuts, such as issuing sovereign bonds without provisioning for repayment, and the island nation is paying the price today.
Sri Lanka’s environment minister Mahinda Amaraweera told the media in February: “The primary challenge our country faces today is the US dollar crisis. When we earn US$100, we must pay off US$115 in debt. The funds obtained by the country are insufficient to pay off the country’s debts.”
In 2017, the government spent 83% of its revenue on debt repayment, according to one report.
There’s no doubt that the debt burden has dragged down the Sri Lankan economy. The International Monetary Fund (IMF) noted in early March that Sri Lanka’s projected government debt had risen from 94% of its gross domestic product (GDP) in 2019 to 119% of the GDP in 2021,
Understandably, international ratings agencies have downgraded Sri Lanka’s credit ratings
Successive governments borrowed money despite persistent fiscal and current account deficits, causing public debt to grow to such an extent that it has become unmanageable. The country faces a dilemma: Should it repay its debts or spend the money helping its suffering people? No wonder it is seeking a bailout package from the IMF.
The problem with Sri Lanka is that it has been living beyond its means for years and years.
And I’m afraid if we in Malaysia don’t manage our debts well, we may be headed in the direction of Sri Lanka.
The Dewan Negara was told in March that government debt stood at RM979.8 billion at the end of December 2021. This amounts to 63.4% of GDP.
Last October, finance minister Tengku Zafrul Aziz told Parliament the debt service charges for 2021 would hit RM39 billion and would go up to RM43.1 billion in 2022.
In October 2020, the Dewan Rakyat passed a bill to increase the statutory debt limit to 65% of GDP from 60% under the Temporary Measures for Reducing the Impact of Coronavirus Disease 2019 (Covid-19) Act 2020 (Amended 2021). Earlier still, the limit stood at 55%. Should we keep increasing the limit each time there’s a crisis?
Certainly, it’s not as high as Sri Lanka’s government debt which rose to 119% of the county’s GDP in 2021, and both Putrajaya and Bank Negara Malaysia seem to have control over it. But that doesn’t mean they can’t learn from Sri Lanka’s experience and be more prudent.
Importantly, Putrajaya must only go for debt that is productive, not use borrowings to construct something that becomes underutilised or is only for show, and certainly not for operating expenditure.
And let’s not forget that household debt stood at RM1.17 trillion, higher than the federal government debt, in 2021. Some economists warn that high household debt, apart from deleveraging economic activity, would make recessions more severe.
When things go wrong, who do you blame? Your predecessor, of course. Sri Lanka’s president Gotabaya Rajapaksa recently said the economic crisis was caused by previous governments.
Remember how Pakatan Harapan blamed our own woes on Barisan Nasional, and how the subsequent Perikatan Nasional and Barisan Nasional-led governments blamed PH?
Until the 2020 general election which saw the current government securing a two-thirds majority, Sri Lanka was awash in political turmoil. In 2018, for instance, major disagreements among leaders of the ruling coalition resulted in instability. In October that year, then president Maithripala Sirisena sacked his prime minister Ranil Wickremesinghe, plunging Sri Lanka into a constitutional crisis.
Claiming his sacking was illegal, Wickremesinghe refused to step down. But that didn’t stop Sirisena from appointing Mahinda Rajapaksa, brother of Gotabaya, as prime minister. To cut a long story short, after the Supreme Court declared that the dissolution of Parliament by Sirisena was “illegal”, Mahinda resigned and Sirisena reappointed Wickremesinghe as prime minister.
But the political manoeuvring continued, with MPs jumping from one party to another if the offer was good, and everyone was left guessing what would happen next. Sound familiar?
Sri Lanka’s politicians are still so engrossed in fighting for power that they have been unable to arrive at a consensus on the way forward for the drowning nation.
In this sense, I think Malaysian politicians can’t be that bad as they have been able to come together on some issues, despite fundamental ideological differences, to ensure political stability ahead of the next general election.
But it appears that the current dire situation, especially increasing public anger and protests despite an emergency and a curfew, is spurring Sri Lankan politicians into action. On April 3, Sri Lanka’s Cabinet, except for president Gotabaya Rajapaksa and his brother prime minister Mahinda Rajapaksa, resigned. There’s talk of an interim government comprising all parties, including the opposition, being formed.
One important lesson Malaysians should learn from Sri Lanka is not to tolerate nepotism and cronyism.
When Gotabaya became president, he appointed his brother Mahinda prime minister. Mahinda had, in fact, served as president from 2005 to 2015. Gotabaya and Mahinda were heroes to the Sinhala-Buddhist majority for crushing the separatist LTTE rebels in May 2009.
Until their resignations on Sunday, Gotabaya’s younger brother Basil was finance minister, another sibling, Chamal, was agriculture minister, Chamal’s son Shasheendra was a state minister while Namal, the elder son of Mahinda, was sports minister.
When family members and cronies control the government, any nation will be in trouble sooner or later, as Sri Lanka so clearly shows.
One of the major accusations against the Gotabaya government has been that it has abused its two-thirds majority to enrich its cronies and silence dissent. Sound familiar?
Another reason given for the crisis is Sri Lanka’s dalliance with big-ticket projects that did not produce enough value. Some critics say the country accrued more debts when, in the 2000s, it began undertaking massive infrastructure projects – but with low-returns. Many of these projects were undertaken by firms from China or backed by loans from China.
By promising to finance and construct mega projects, China, critics say, managed to get a strong foothold in Sri Lanka, right at the southern doorstep of its rival India.
One of these mega projects is the Hambantota port built by China-based companies. The government has leased a 70% stake in the port to China Merchants Port Holdings Company Limited for 99 years in return for US$1.12 billion to help manage its massive debt and financial problems.
Malaysian leaders, who have a tendency to go for multimillion and multibillion ringgit projects, should keep this in mind. They should also keep in mind that the public is aware that mega projects open up avenues for huge kickbacks.
Sri Lanka’s food sector has been mauled by the crisis, the main reason being its over-dependence on food imports. Ceylon Today reported environment minister Mahinda Amaraweera as saying in February: “Despite the fact that the country has facilities for growing vegetables, US$384.27 million was spent on vegetable imports. This represents a US$31.41 million increase over 2020. US$58.14 million was spent in 2020 to purchase fruits such grapes, oranges, and pears.”
Malaysia must learn from this and shore up its food security by implementing policies that encourage local food production, and also open up more land for farming.
Another lesson is the need for greater export diversification. Sri Lanka depends too much on tourism and exports of tea and garments, which have been adversely affected by the Covid-19 pandemic and now the war in Ukraine.
Malaysia cannot control external events – such as a pandemic or war, and the subsequent supply-chain disruptions – but it can implement measures to be more self-sufficient and resilient in the face of these and other threats.
The above are the more noticeable problems that have contributed to the current crisis in Sri Lanka and which have parallels to our politico-economic situation. But these are not all; there are some non-economic foundational issues too, which I’ll talk about tomorrow.
Tomorrow: Five foundational flaws
The views expressed are those of the writer and do not necessarily reflect those of FMT.
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