Next domino to fall? Avoiding Sri Lanka like situation developing in Pakistan

There are important lessons that Pakistani elite can learn from crisis in Sri Lanka

 By Muhammad Ragheeb-ud-din

Just as art imitates life, it seems that failed economies run by dynastic family politics and power hungry autocrats and the misfortune they bring onto their constituents also seem to imitate one another.

The crisis engulfing the island nation of Sri Lanka and the current economic and political crisis facing Pakistan though not complete copies of one another share several similarities and hold important lessons for the political elite of Pakistan as to what lies ahead should course correction not happen urgently.

For almost two decades, Sri Lankan political landscape has been dominated by the Rajapaksa brothers and their family with the important political offices of President and Prime Minister alternating between the two.

Rajapaksa brothers were initially hailed as heroes by most of the country due to their role in ending the long running civil war against Tamils as well as for their heavy investments in infrastructure projects like ports, roads and power plants on the back of expensive foreign loans sourced from China and India. In 2019 large tax cuts and subsidies on fuel and energy were also offered in order to further strengthen their political base.

 In order to make up for the large current account and fiscal deficits and depleting foreign exchange reserves these policies induced, Sri Lankan government relied on tourism and remittances to increase inflow of foreign exchange. Several warnings were given that reliance on just these two lifelines whilst maintaining subsidies and large scale borrowing was pushing the country towards default but in order to maintain popularity the government paid no heed to any warnings from foreign institutions like the IMF.

Then in 2020 disaster struck as with the arrival of Covid-19 the tourism industry collapsed due to lockdowns and foreign remittances were hit due to job losses in the gulf and Europe leading to foreign inflows falling rapidly along with the exchange reserves.

All of this eventually lead to the country defaulting on its debt payments and unable to pay for fuel, medicine and food imports leading to shortages across the country. Rapid currency devaluation unleashed a wave of inflation across the country. Hospitals ran out of medicines for patients and hours long queues were established just to get a few liters of petrol to drive to work.

 The economic collapse eventually led to civil unrest which saw MPs’ shot and houses and properties of the ruling party set on fire. Prime Minister Mahindra Rajapaksa, once hailed as the hero of the nation has been forced to resign and go into hiding in a naval base in Colombo. The younger brother Gotabaya Rajapaksa now stands alone amongst the four brothers still holding as President and has now formed a unity government.

However the opposition has refused to negotiate with the government, instead opting for street protests and it seems unlikely that the weakened government whose future is uncertain can take the tough economic decisions that will be a part of any deal with the IMF.

Without blaming anyone party or person it is not difficult to draw comparisons with this situation for the political context in Pakistan since such disastrous economic policies have always been present in one form or another in all of our political setups. The only saving grace Pakistan has in this situation is that unlike Sri Lanka foreign remittances have continued to break records preventing the crisis from spiraling out of control but even this is a short term measure that is bound to lose steam with foreign exchange reserves enough to cover only 2 months of imports.

Urgent, decisive actions are needed if Pakistan wants to avoid Sri Lanka like crisis. On the political front, date of elections needs to be announced to bring some calm to the turbulent political landscape. On the economic front, fuel and energy subsidies must end immediately and IMF program reestablished in order to access aid and loans from multilateral lending institutions and reduce our fiscal and current account deficit.

 In the medium to long run the need to boost our export base and reduce imports through expansion of manufacturing base should also be amongst the main priorities in order to prevent default down the line. Like Sri Lanka’s reliance on tourism we are also too reliant on one or two sectors for export earnings and are in need of diversification to access new markets and boost export earnings while increasing employment in the country.

 With regards to import substitution there is need to incentivize in house production of automobiles, cell phones, heavy machinery and oil processing in order to reduce import bill. Reducing reliance on oil imports by shifting to hydel power is also a need of the hour which will also simultaneously boost our water security and the agriculture sector.

 Furthermore the tax free status of commercial institutions runs by the establishment needs to be abolished and agriculture and retail sectors need to be brought under the tax net in order to boost revenues and reduce dependence on foreign loans in our budget. The most pressing need of all is to reduce foreign borrowing for large infrastructure projects which only adds to the growing balance of payment crisis.

Projects like China Pakistan Economic corridor need to shift focus towards increasing industrialization in the country through joint ventures and establishment of special economic zones rather than just focusing on transforming Pakistan into a transit route for Chinese goods or a dumping ground for cheap Chinese products. Except for import substitution, export diversification and cheap energy sources development, all other measures can be taken within a one year time period and even the former require about 3 to 5 years.

A joint effort needs to be made by all political parties to keep economy separate from political squabbles and not to follow in the footsteps of Sri Lanka with regards to economic policies in order to prevent the similar tragedy unfolding on a nation once known as paradise island from playing out in our own country.

                                                                          Muhammad Ragheeb-ud-din

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