‘Will what happened in Sri Lanka happen here in the Maldives too?’, is a question haunting the lived life of many Maldivians today. My answer had always been an emphatic ‘No’, when I had been posed this question multiple times. And while circumstances are becoming more concerning and remain in rapid flux, my answer today, still remains, ‘No, what happened in Sri Lanka will not happen here in the Maldives.’
Even as I confess to being a ‘the glass is half full’ type of person wearing rose tinted glasses to boot, I am confident of my assertion and will attempt to offer my reasoning.
The case of Sri Lanka
Working on a consultancy assignment, I had the occasion to travel to Sri Lanka frequently during late 2021 and 2022 and was therefore, afforded the occasion to witness, from very close quarters, the political and economic convulsions the country and the people experienced- the fiscal hardships, the cessation of essential imports, and the Aragalya movement that led to the resignation of the President in April of 2022. My travels also took me to villages where hardship was most felt, and I was witness to, albeit only for brief moments the turmoil the common folk were facing in their lived experience.
2 years later, I am also fortunate to witness first-hand the slow recovery as the currency is bouncing back from north of 400 to below 300. The April 2024 development update by the World Bank, appropriately titled ‘Bridge to Recovery’ states that Lanka has started it’s rebound proclaiming that ‘growth is expected to turn positive in 2024’
A student guide to the Sri Lankan economic collapse of 2022
So exactly why did Sri Lanka face this calamitous disaster. Allow me to quote from the April 2024 World Bank report re-stating the reasons for the collapse of the Lankan economy.
Poor governance, a restrictive trade regime, weak investment climate, and monetary indiscipline contributed to macroeconomic imbalances. Fiscal indiscipline led to high fiscal deficits and large gross financing needs(GFN). Together with risky commercial borrowing, this elevated debt vulnerabilities and led to a rapid growth in debt to unsustainable levels. After losing access to international financial markets in 2020, official reserves dropped to less than a week of imports in early 2022, and the forex liquidity constraint led to severe shortages of essential goods. The country announced an external debt service suspension in April 2022, pending debt restructuring.
World Bank, Sri Lanka Development Update, ‘Bridge to Recovery’, April 2024
A confluence of the 3 B’s; Bad economic climate in a country with bad fiscal discipline coupled with bad political decisions can lead any country down a ruinous path, which at times result in a total collapse of the economy. The well-heeled economists of the World Bank, of course say this more smoothly reporting in their April 2024 Development Update that Sri Lanka went on this track because of ‘structural weaknesses, exacerbated by exogenous shocks and policy mistakes.’
The 3Bs
Like almost other countries, even while the Secondary and Tertiary sectors were highly impacted by the lockdowns of the Covid pandemic, the primary sector or Sri Lanka helped keep the population steady and in good health during those troubled times.
1. Bad Fiscal Discipline:
Travelling through a tortuous fiscal landscape, successive ill-disciplined leaders challenged each other on how best to beat their predecessor for additional heights of fiscal inanity. The counsel of elders and the learned of Sri Lanka, friends from abroad and from international institutions alike were ignored. And in 2021 the International Monetary Fund in a review of Lanka’s public debt declared that it had hit “unsustainable levels” and that foreign exchange reserves are insufficient for near-term debt payments.
Even while noting the dangers of the fallacy of ‘post hoc ergo propter hoc’ let us list some specifics that can be reasonable assumed as having not only led to, but directly caused the fiscal default of Sri Lanka in 2022.
2. Bad political decisions:
In the last days on campaigning for the presidency, in November of 2019, the successful candidate proposed sweeping tax cuts, so absurd that opposition leaders thought they were too bizarre to be genuine. After being in elected, in May of 2021, against all rationale the President, announced a blanket ban on the import of chemical fertilizer leading to the crippling of the until then robust agriculture industry, the main-stay of the primary sector of the country and the savior of the extended lock-down period.
3. Bad Economic Climate:
The lockdowns of Covid 19, like in many countries resulted in an unfavorable economic climate. Even though the highly productive primary sector allowed for essential nutrition, exports ceased and tourism were suspended during the Covid lockdowns. Sri Lanka in 2022, was off the ventilator and recovering, but had not yet been discharged when the storm broke.
And by then of course the slide was almost inevitable.
But not in the Maldives?
The ‘butterfly effect’ a la’ Chaos Theory warrants that even similar circumstances will not unfold with high fidelity next time around, even in the same country. And of course, no two countries are exactly alike. Sri Lanka, even though our closest neighbor has a vastly different economy, with a healthy primary sector, a respectable secondary and a stout tertiary economic sector.
While we here in the Maldives too, face turbulent fiscal waters, and the fiscal numbers and other critical statistics are eerily similar, ‘a priori’ circumstances are not the same and even if they are, matters shall not unravel on the same trajectory.
Years of living beyond our means resulting in a widening fiscal gap, abuse and misuse of public funds, waste and corruption in the public sector and in SOEs are familiar territory. Concerns arising from these had been explicitly raised in World Bank and IMF reports and echoed by submissions to the Parliament by the Governor of the Central Bank. Heavily inflated large-scale infrastructure projects, designed to line the pockets of politicians with shaving off the top line, are a fact of our life too and becoming even more familiar. So, we can cross out the first B; – ‘Bad Fiscal Discipline’.
A litany of ill-advised fiscal and political decisions, a la’ the 2nd B, have becoming familiar feature in our context too. The 25th August fiasco around BML; -the biggest and majority state owned bank, is perhaps one of the most noteworthy. Injudicious decisions by the state and the Central Bank about a BML decision regarding dollar convertibility resulted in a 6+ Richter scale movement in our financial landscape, resulting in the 2nd Fitch drop in 3 months; with Bloomberg reporting that our Sukuk bond was being quoted in the international market at below 70 cents to the dollar and the CEO of the bank tendered his resignation.
Even if politicians of all ilk have led us astray for many a decade and more, the economic climate is in our favor. Even during the Covid pandemic our geography allowed us to re-open borders in 6 months while most other countries could not even offer a schedule.
The world economy, even though unsettled because of shifting geopolitical tectonic plates, the world economy is certainly not in the doldrums. And our particular brand of tourism,- private islands, geographically separate from the resident population, keeps our tourism numbers buoyant. After having broken previous arrival numbers, we are on course to break the 2 million ceiling this year.
While the performance of our fishery industry has been held back because of ill-advised policies, the stock is alive and healthy. And when the politicians finally get the policy framework right, our fishery harvest and therefore our export earing too will increase.
So, presently we are not subject to the 3rd B;- bad economic climate, either internally and externally too.
Therefore?
Granted our politicians may not have realized the gravity of the situation, they certainly do not act like they do. However, fortunately, the world economy is not in a tailspin and the blessings of our geography are indeed working for us.
Therefore, as I have been adamantly maintaining we are not due for a repeat of what transpired in Sri Lanka during 2022.
But the incline is steep, the ravine treacherous. A few more ill-advised stumbles can lead us down a slippery slope. But I for one, remain confident, we shall seek safe harbor safely with ship and crew safe, even if not totally sound.
