The 2022 economic crisis in Sri Lanka drowned its national economy. Now, the country wants to reduce the number of army personnel to 135,000 by next year and 100,000 by 2030. This article will trace some of the recent developments in Sri Lanka since the economic crisis. It will also put light on some of the emerging issues in South Asia that the countries must beware of.
WHY SLASH THE MILITARY?
Sri Lanka’s defense ministry announced that it will have to slash the Lankan military as the country is trying to bring its economy back on track after facing the world’s worst economic disasters in a decade. The nation will cut the number of army personnel by a third to 135,000 by next year and 100,000 by 2030, the state minister of defense said on Friday. Many have also said that this will allow Sri Lanka to create a technically and tactically sound and well-balanced defense force by 2030.
Ranil Wickremesinghe, President of Sri Lanka has been asking for financial support from global institutions like the International Monetary Fund (IMF) since last September. “The only option we have now is to seek the support of the IMF, otherwise, we cannot recover,” he said. The country is trying to seek a bailout package of $2.9 billion from the IMF. China, India and Japan are also the biggest creditors to the country since the beginning of the economic crisis.
Wickremesinghe has talked about adopting a debt restructuring program with these nations to help the economy. There was also the intent on selling the state-owned enterprises to boost reserves. The government has already made clear its plans to privatise Sri Lanka Telecom and Lankan Airlines. The tourism industry flourished in before the economic crisis and was the highest contributor to the nation’s GDP has also been swamped.
Wickremesinghe, mentioned this, saying, “the economic growth in Europe and America is now slowing down.” “Under such a situation, our export market may drop by next year and we have to develop our tourism industry.” He made these comments in a recent meeting with trade unions.
The size of the Sri-Lankan army peaked between 2017 and 2019 and so has its economic share. The defence sector expenditure in 2021 occupied 2.31% of the economy but with the coming economic crisis, it fell to 2.03%.
On the 12th of January, Sri Lanka’s central bank urged India to reduce the loan debt. This becomes crucial as IMF has denied giving loans to the island nation until some relief on earlier loans offered by India and China is given. India’s External Affairs Minister, S. Jaishankar is going to visit the island on 19th January to hold debt-restructuring talks.
The bigger questions remain unanswered. Will debt- restructuring help, Lanka? If India and China do ultimately agree to write down their loans another potential problem looms in the form of private creditors, who account for 40% of the country’s external debt stock.
Asked about Lanka’s private bondholders, Mr. Weerasinghe said: “We engage with private creditors in good faith negotiations. And what we are seeing is that they are very positive and they are willing to engage with us.”
SOCIO-ECONOMIC TENSIONS PENETRATE IN SRI LANKA
Sri Lanka’s 22 million people endured months of food and fuel shortages, chronic blackouts, and runaway inflation last year, inflaming public anger. The situation still not have recovered properly. The state spending has been asked to shrink to 5%. The payments of citizens living below the poverty line have been delayed for months.
The electricity prices have risen another 65% now, after increasing the prices up to 75% last August. Education and health face the most neglect.
The government is also expecting that the situation will improve by the first quarter of 2023, and complete progress will be achieved by 2024. People have not celebrated festivals for a long time, first due to COVID-19, then the economic crisis, and now the faltering economy. There are no tourists in the country at any spot after the Easter Bombings.
Parents have to choose between food and education; if they can afford food, they cannot afford to send more than one child to school. Food inflation is at an all-time high of 95%, and 3 million people are facing food insecurity. Even though school education is free, the cost of uniforms and travel is so high that education has become a luxury.
TRACING THE 2022 ECONOMIC CRISIS OF SRI LANKA
If we were to believe the government (the Rajapaksa Family) it was the low tourism revenue due to the COVID-19 pandemic that drove away the foreign currency. But a lot of reasons need to be taken into account.
To begin with, we should take into account the economic mismanagement of the Rajapaksa government. Secondly, the Eastern Bombings of 2019- a deadly bomb attack that scared many incoming tourists. The exports of the country have always been low but imports have seen a significant rise. At the end of 2019, the foreign currency of the nations had dropped to $250 million.
In the same year, Mr. Rajapaksa made big tax cuts which lost the government income of more than $1.4 billion. The government further restricted exports by banning chemical farming and going completely organic. This resulted in crop failure, and the island nation was dependent on other nations for food supply which hit the foreign currency even more.
Only a few months into the crisis, the government could not handle the public anger. In July 2022, Mr Rajapaksa fled to Singapore and resigned from his position. In the end, Ranil Wickremesinghe was appointed as the new President who is still in power.
Another reason for the economic crisis is China’s infiltration into Sri Lanka’s economy which is explored in the next section.
SOUTH ASIA TO BEWARE OF CHINA’S DEBT TRAP
China has been investing heavily in the developing and underdeveloped Third world. Countries in South and East Asia, the Pacific islands, the Middle East, and North Africa, are heavily indebted to China. China expands itself by giving loans, grants, and economic assistance to smaller and underdeveloped nations for infrastructural development and when they fail to repay the debt, China ends up taking key control of their assets- helping the nation assert a geopolitical influence.
This is known as the debt trap. This debt trap is being witnessed in the case of Sri Lanka’s Hambantota Port, or with the African nations of Djibouti, Angola, and Ethiopia.
50% of the world’s trade happens via Sri-Lanka and its four ports- Colombo, Galle, Trincomalee and Hambantota. The Hambantota Port gained attention in 2017 when the Lankan government leased it to China for 99 years.
It is known that Hambantota was meant to fulfill the strategic interests of China as it was only 4, 213 nautical miles away from Shanghai, 3,862 nautical miles away from the Suez Port, and relatively closer to Kenya’s Mombasa port. In a way, China has served its interest in Belt and Road Project by connecting, Shanghai to the Middle East via Africa and Asia and making Sri Lanka’s port Colombo less functional. By investing heavily, some scholars argue that China took the Lankan hostage.
This adversely impacted the already existing structural weaknesses in the Sri-Lankan economy. If not the main, the heavy borrowing contributed to the economic crisis that Lanka faces today. By June 2022, Advocate Institute (Think Tank of Lanka) presented the amount the island nation owed to China. It was estimated that Sri-Lanka had to pay US $232 million to both the China Development Bank and the Export-Import Bank of China.
If this continues the global South will be caught by the affluent West and powerful China. On the one hand, Western neo-imperialism is spreading through the strand of globalization, and on the other hand, China is fulfilling its imperial goals via trade and debts. South Asia, therefore, is stuck between a rock and a hard place.
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