Colombo, December 31: The coronavirus pandemic, which began in March and is still on, made 2020 a very stressful year for Sri Lankans of all classes, particularly the poor and the lower middle classes. The pandemic directly stalled economic development because of lockdowns, curfews and movement restrictions. It indirectly disrupted communal harmony when the government banned the burial of the COVID dead – a prohibition which hurt the Muslim minority for whom cremating the dead is “haram” – a religious taboo. The country is now seeing demonstrations for and against burial.
Gotabaya Rajapaksa took over as Executive President of Sri Lanka a little over a year ago with ambitious plans for his country. A former military man and Secretary to the Ministry of Defense from 2005 to 2015 who defeated terrorism, aimed to bring order to a government which had been torn apart earlier by an unceasing conflict between President Maithripala Sirisena and Prime Minister Ranil Wickremesinghe. The consequences of that struggle at the top were far reaching for the Lankan economy and also for internal security.
The pro-West Wickremesinghe regime put on hold China-funded projects initiated by the previous Mahinda Rajapaksa government. A delay of a year and a half raised project costs. The Wickremesinghe government talked a lot about grand development schemes but failed to walk the talk. About a dozen MoUs signed with India were left to gather dust. President Gotabaya inherited a non-functioning government and a weak economy.
In 2019, the annual growth rate was only 2.3%. Government revenues accounted for only 12.4% of the GDP, while expenditure constituted 18.6% of the GDP. The government’s gross debt was equivalent to 83% of the GDP. Annual debt repayments comprised almost 5% of GDP or around 40% government revenues.
After the pandemic struck in 2020, and lockdowns and movement restrictions were clamped, the Department of Census and Statistics reported that the second quarter of 2020 showed an unprecedented fall of 16.3% in real GDP, the steepest drop ever recorded in Sri Lankan history. There was contraction in all the three major economic sectors, namely, Agriculture, Industry, and the Services, by 5.9%, 23.1% and 12.9% respectively.
A telephone survey undertaken by UNICEF and UNDP at the beginning of May 2020 exposed the severity of the crisis at the grassroots level.
Overall, 39.4% of respondents reported that they had lost all income while a further 31.6% had lost partially. A survey conducted in April 2020 by World Vision Sri Lanka found that 93% had been affected by the pandemic, with 78% either fully or severely affected. In addition, 44% respondents had lost their jobs, with average salaries falling from Rs.24,400 (US$130) to Rs. 6,800 (US$ 36.7) per month.
Among daily wage earners, 65% had lost their entire incomes while 31% had experienced reduced incomes. Among those paid monthly, 19% no longer had any income while 30% were living on reduced incomes. A recent UNICEF survey found that 74% of the families were surviving on less than Rs. 613 (US$ 3.4) per day.
Therefore, the vast majority of families were not in a condition to withstand an economic shock on the scale of COVID-19, a UN study published in June 2020 said. Children, persons with disabilities, and older persons were particularly at risk.
Government’s Decisive Response
To be able to act effectively, the newly elected President Gotabaya enhanced the power of the Executive Presidency by getting the 20th. Constitutional Amendment passed by parliament. He also entrusted the task of tackling the pandemic to the Army Commander, Gen.Shavendra Silva.
The Government of Sri Lanka quickly recognized the need to protect families during the crisis and provide the economy with a fiscal stimulus, the UN study acknowledged. A government team led by Basil Rajapaksa, designed a program that, in April, delivered almost 5.4 million cash transfers of Rs.5,000 (US$ 27) to each household across the country. This was repeated for a second time in May, expanding the number to around 5.7 million transfers following appeals from households which had been excluded in the first round.
The total cost of this financial support system had been around Rs. 55 billion (US$ 297.3 million), or 0.33 per cent of GDP. The response was impressive given the fact that it was announced a few days after the imposition of the curfew and reached an estimated 66% of Lankan households.
However, 31% of respondents in the UNICEF-UNDP survey had not received the support. Nearly a third of the children and those over-70s, and around half of all single parents/caregivers, might have been left out, the UN report said.
There were also significant variations across the labor force: only 51% of daily wage workers were able to access the support. Among those receiving monthly wages, the proportion was 83 per cent, suggesting that those working in the informal economy, namely, the vast majority of the labor force on daily wages, were excluded, the UN report said.
Central Bank’s Corrective Measures
In October 2020, the Central Bank of Sri Lanka (CBSL) reported that the economy had contracted by 1.6% in the first quarter of 2020, year-on-year as buinesses had stopped and unemployment had risen. There was a decline in government revenue too.
To counter these trends, the CBSL reduced policy rates and the Statutory Reserve Ratio (SRR) to inject liquidity into the market and lower borrowing costs significantly. Concessional credit schemes were introduced alongside debt moratoria. By August-September, the private sector showed a significant improvement.
The external sector, which was severely affected in the initial stages of the pandemic, eventually showed an improvement in the trade balance, a revival of workers’ remittances, a stable exchange rate, and a reasonable level of official reserves. External sector stability was supported by the restrictions placed on non-essential imports, the CBSL said.
Significantly, Sri Lanka met all its debt service obligations including the settlement of the International Sovereign Bond (ISB) that had matured in early October 2020. Meanwhile, subdued demand helped maintain inflation broadly within the target range of 4-6%.
Security and Communal Divide
Negligence on the security front by the earlier regime had resulted in a bunch of Islamic suicide bombers killing 259 people in Colombo and two other towns on April 21, 2019 East Sunday. The bombings and the subsequent anti-Muslim riots disrupted economic activity and widened the rift between the Sinhala-Buddhist majority and the Muslim minority.
The effect of the rift led to a sharp political and electoral divide in the November 2019 Presidential election and the August 2020 parliamentary elections. Gotabaya Rajapaksa won the Presidential election almost solely with Sinhala-Buddhist support. His Sri Lanka Podujana Peramuna (SLPP) won the parliamentary elections again with the same kind of communal backing. Therefore, 2020 saw a political consolidation of the majority Sinhala-Buddhist on the one hand, and the minority Tamils and Muslims on the other.
The alienation of the Muslims was accentuated in April 2020 when the Gotabaya government banned the burial of the COVID-19 dead on the grounds that burial would contaminate ground water. The Muslims’ plea that burial was sanctioned by WHO and that viruses would not survive in dead bodies fell on deaf ears. Agitations on this issue were ignored.
Reversing Mahinda Rajapaksa’s policy of not bowing to the West on the politically sensitive war crimes issue, the Wickremesinghe government agreed to co-sponsor a resolution against itself at the UN Human Rights Council (UNHRC) in Geneva in 2015. The resolution enjoined the government to set up accountability mechanisms which meant arraigning army “war heroes” before internationally supervised judicial mechanisms.
Since the Sinhala-Buddhist majority community considered this an affront to their country and national pride, the successor ‘nationalist’ government of Gotabaya Rajapaksa declared that it would withdraw its co-sponsorship in March 2021.
Thus the Sinhala-Tamil divide continued in 2020 and relations with the US and the West, which had taken a strong stand against alleged war crimes, worsened.
Given US influence over the Wickremesinghe government, Colombo agreed to accept a grant of US$ 480 million under the Millennium Challenge Corporation (MCC) Compact for a project which included digitalization of rural land records to make land marketable. Government was also inclined to sign the Status of Forces Agreement (SOFA) with the US Department of Defense.
Eventually, both the MCC and SOFA were buried by the successor ‘nationalist’ government of Gotabaya Rajapaksa, because both pacts ran counter to the constitution of Sri Lanka and abridged national sovereignty. This also contributed to the lack of warmth in Sri Lanka’s relations ties with the US.
The Sri Lankan President had suggested to the visiting US Secretary of State Mike Pompeo that instead of talking only strategic issues and Chinese projects, the US could invest in Sri Lanka in areas like railways, ICT and energy. But Pompeo expressed some interest only in tourism, thus leaving Sri Lanka with no option but to seek China’s assistance to fund its large scale infrastructure projects.