Delusion appears to be a national affliction in Sri Lanka. When confronted with stark realities, the state consistently refuses to take proactive measures to avert dire consequences. For example, it refers to national liabilities, like the national airline, as national assets. Despite regular doses of life-saving intravenous injections in the form of hard cash by the Treasury, bleeding of the state-owned enterprises continues. The senior management of the national Airline, which has been in deep red for nearly a decade and a half, its employees and trade unions collectively fail to appreciate that the general public cannot continue to pay for its existence.
Amid the country's economic woes, Sri Lanka defaulted on its loan obligations to international lenders in May. With that, SriLankan Airlines too followed suit, which might result in legal action against SriLankan Airlines by aircraft leasing companies, as was Sri Lanka's recent experience with Aeroflot, the Russian Airline. However, on July 26, the airline reported that it had serviced the interest relating to USD175 million Treasury guaranteed bond due in 2024.
The predicament of SriLankan Airlines is not entirely new. The national Airline has been gasping for breath since its takeover from the Emirates in 2008 and all attempts made to divest the Airline five years ago ended without a positive result. Considering the loss-making behemoth was an asset, the government attempted to identify an investor who would take over the Airline while reserving its right to retain 51 per cent shares of the venture. Several international firms sniffed around but understandably failed to take a bite.
SriLankan Airlines can continue its wayward behaviour as long as the Treasury coughs up millions in foreign currency as it used to do over the years. However, this time around, Treasury itself is in deep trouble and will not be able to come to the rescue of the national Airline yet again. That means operations of SriLankan Airlines will grind to a halt soon, which might happen within a few months, not in years.
The national Airline will soon be gone as the dodo unless the Finance Ministry, the senior management and the trade unions recognize the dire situation and decide to take proactive action to avoid a financial catastrophe, which Sri Lanka cannot afford.
The danger is that not only SriLankan Airlines would fail but also all operations at the BIA, as ground handling facilities provided to all other airlines are part and parcel of SriLankan Airlines’ operations. With ground handling services coming to a standstill and the computer systems leased by the national Airline ceasing to operate, the airport will not be able to service even other airlines that still fly to Sri Lanka.
Since SriLankan Catering is an independent entity, it may survive the crash. Still, it will not be able to function due to foreign airlines deciding against flying into the country due to a lack of airport facilities and aviation fuel. That will put the last nail on the coffin of the already ailing tourism industry, which brought as much as 4.3 billion US dollars as recent as 2018.
SriLankan Airlines is not the only Airline that has faced similar financial predicaments. Air India, which operated a fleet of over 153 owned and leased aircraft, was also in the red for many years. The Indian government tried various stratagems to sell off the Airline. All those attempts failed, and eventually, it settled all debts amounting to INR 61,000 crore and sold the Airline to the Tata Group for nearly US$ 2.4 billion. It was sweet revenge for Tatas, as it was their Airline, which the government took over in 1953 and eventually returned to them in early 2022, unable to shoulder the mounting burden of losses. In that sense, SriLankan Airlines is an orphan with no home to return to!
Clearly, the Sri Lankan government cannot follow the Indian example, as it does not have the resources to settle the Srilankan Airline’s debts before trying to divest the Airline. All it could try to do in the current circumstances is to avoid an uncontrolled nosedive, which would isolate Sri Lanka with a non-functioning international airport, even for a short period.
However, all is not lost, and the government could still take decisive steps to address the situation. However, it has limited time to succeed.
First, it should arrange an urgent study to assess how many weeks or months the national Airline could operate with current finances. By doing so, the government will not repeat its mistake of delaying an intervention by the IMF to save the national economy.
The second measure is, while that study is being carried out, it should put a team consisting of representatives of the national Airline, the Finance Ministry and the AG's Department to unbundle ground-handling operations from SriLankan Airlines and make it an independent entity like SriLankan Catering Services.
The third measure is to decide how to dissect the national Airline so that interested parties could take over operations of its revenue-generating routes.
It is abundantly clear that Sri Lanka will not be able to repeat the performance of India by settling its national Airlines’ debt, which is said to be in the region of USD1.7 billion. The newly elected President is fully aware of the ground situation. The question is, will he be allowed to take crucial but unpopular hard decisions in the interest of the national economy?
An economic tsunami affecting the island's tourism potential is at close range. Already foreign airlines are curtailing their flights to Sri Lanka due to the non-availability of fuel, and SriLankan Airlines is forced to seek the precious commodity outside the country. Should the government wait until the inevitable calamity occurs or prepare in advance to manage the looming disaster? It is time to take hard decisions.
Like many countries, Sri Lanka continues to face a daunting economic landscape. The World Bank projects economic contraction of – 6.7%; the ADB -5% and the IMF – 4.6% for 2020. Even the most pessimistic of these projections is not unfavourable when compared with other countries in the region and beyond. In addition, there has been a loss in employment and an increase in poverty as in almost all countries. The successful handling of the pandemic during April - September 2020 served to contain output and employment losses.
The Republic of Korea (ROK)’s development record is arguably the most impressive since the end of the Second World War. The country experienced harsh Japanese rule and subsequently the Korean War (1950-53) which resulted in the partition of the peninsula. ROK has, therefore, had to come through periods of conflict involving each of its two larger neighbours: Japan and China during the last 100-years. Despite this, thriving economic relations with its two neighbours have been a major part of ROK’s success over the last five decades; as has been the US defence umbrella and economic support.
Time to grasp the opportunity?
In recent days, important voices have been raised about the dangers of completing the Comprehensive Economic Partnership Agreement (CEPA) with India and constructing a land bridge between the two countries. It is noteworthy that the focus has not been on exploring whether the CEPA and the land bridge can be favourable for Sri Lanka. Instead, there has been a clamour to throw the baby out with the bathwater. This article seeks to make the case that both the CEPA and the land bridge are opportunities rather than threats. However, it is important that the CEPA is negotiated in a manner that furthers Sri Lanka’s interests. The article also makes the case that the land bridge should be seen in the context of a pan-Asian and sub-regional push towards greater connectivity.
Indian support in time of need
The RBI has stepped in to provide timely support to Sri Lanka when its external finances were deteriorating and the currency was under pressure. The $400 million, drawn upon by the CBSL under the SWAP arrangement with the RBI, was one of the outcomes of Prime Minister Modi’s visit to Sri Lanka. There is a further $1.1 billion which can be utilized. These arrangements are providing much-needed insurance against depleting external reserves and a boost to the creditworthiness of the country. However, it is important to realise that the support provided by the SWAP arrangement with the RBI only serves to buy time. It does not address the underlying causes of the elevated risks associated with the country’s external position.
රාජපක්ෂ රජය විසින් ආරම්භ කරන ලද සංවර්ධන ව්යාපෘතීන් ¥ෂණයෙන් හා නාස්තියෙන් පිරී ඇති බවට වූ චෝදනාවන් ඉකුත් දා පැවැති ජනාධිපතිවරණ ව්යාපාරය ආරම්භයේ සිට ම අසන්නට ලැබිණි. නැෙ`ගමින් පවතින එ් චෝදනාවන් අධිකරණයක දී තවමත් තහවුරු වී නැති නමුදු ¥ෂණයන් හා අක්රමිකතාවන්ට එරෙහි මතයක් ජනතා සන්තානයන් හි පහළ වී තිබෙන බව බැහැර කළ නො හැකි යථාර්ථයයි. මෙවැනි ව්යාපෘතීන් වෙතින් ලද හැකි දිගුකාලීන සමාජ ආර්ථික ප්රතිලාභයන් මෙකී විවේචකයන් ගේ අවධානයට යොමු වී ඇති බවක් නම් පෙනෙන්නට නැත. අසූවේ දශකයේ මුල් භාගයේ දී කඩිනම් මහවැලි සංවර්ධන ව්යාපෘතිය භාජන වූයේ ද මේ හා සමාන ම වූ විවේචනයනට ය. මෙම අවස්ථා දෙකෙහි දී ම කතාබහට ලක් වූයේ ක්රියාවලියෙහි විනිවිද භාවය විනා ඒවායෙහි ප්රතිඵල නොවේ. දැඩි දෝෂාරොපණයට භාජන වන්නා වූ පැවැති රජයේ ප්රධානතම කාර්යය වන්නේ විවිධාංගයන් ගෙන් සමන්විත ඒකාබද්ධ කොළඹ වරාය නගර ව්යාපෘතියයි. මෙබඳු යෝධ ව්යාපෘතියක වැදගත් අංගයන් මතු කොට පෙන්වමින් ඉන්දියන් සාගරය තුළ සුවිශේෂී තැනෙක පිහිටි ශ්රී ලංකාව වැනි රටක් විෂයෙහි එවැන්නකින් ඇති කැරෙන බලපෑම පිළිබඳ විශ්ලේෂණයක යෙදීම මෙම ලිපියෙහි අරමුණයි.
With the end of the 100 days, moves are currently afoot to complete the constitutional amendments and electoral reform. Elections are also on the horizon. The Pathfinder Foundation is of the view that once these important measures are completed, high priority should be attached to the imperatives for urgent economic reforms. Recent developments have made this even more important.
Since the beginning of the recent Presidential election campaign, development projects initiated or implemented by the Rajapaksa administration have come under severe criticism by the opposition, mainly on the grounds of corruption or wasteful expenditure. Although the allegations are still being made and are yet to be substantiated in a court of law it is reasonable to assume that a perception has been created among the public against corruption and malpractices. However, long term socio-economic benefits of most of these projects have not been questioned by even the anti-corruption critiques. The writer can vividly remember a similar uproar against the Accelerated Mahaweli Development Project and its numerous components during the early 1980s. In both these situations, criticisms were not necessarily on the outcomes of the project implementation but on the transparency of the processes. Among the projects initiated by the previous administration which came under severe scrutiny, the largest, most diversified and integrated development project is The Colombo Port City Project (CPCP). The purpose of this article is to highlight the salient features of this landmark project and analyse the impact of implementing a project of this nature on the Island of Sri Lanka, strategically located in the Indian Ocean.
Every election in Sri Lanka has been contested by all parties on populist policies. Every government formed after the elections implemented unviable promises during their first few months. They hoped that they could find revenue and cut expenditure by eliminating waste and corruption. Invariably, they later faced hard realities within the domestic as well as the global setting and were compelled to reverse actions taken to fulfill election promises. This democratic process has ended up with fiscal deficits annually and has resulted in high levels of both domestic and foreign debt. This, in turn, demands high debt servicing from the annual budget. The government deficit increases aggregate demand in the economy. This pushes up demand for both imports and domestic goods and services which, in turn, creates inflation as well as exchange rate depreciation. The government borrowings also reduce available credit to private individuals and businesses and hence push interest rates up. These domestic macroeconomic trends are becoming increasingly played out in a context where countries are integrated to global trade, tourism, and labour markets as well as capital movements and financial transactions. This means that national economic sovereignty is becoming increasingly diluted in the modern global economy. This increases the importance of disciplined economic management as countries become more exposed to international markets.
The Pathfinder Foundation (PF) has been consistent in its call for prudent fiscal management and market oriented policies. In Economic Alert no: 67 titled ‘The Election Manifestos: An Auction of Non-existent Resources and Beyond’, it highlighted the populist nature of the manifestos of the two main candidates and the need for fiscal discipline. The subsequent Economic Flash 57 titled ‘Economics of the 100 day program: Word of Caution on Populist Measures’ developed upon the same theme. This piece seeks to assess the Interim Budget presented by the new government last week, from both a short and medium-term macroeconomic perspective.
Sri Lanka’s Transformative Opportunities
The Foreign Minister’s visit to India offers an opportunity to reflect on the role of the Indo-Lanka economic partnership in charting the future prosperity of the country. The Pathfinder Foundation (PF) has previously advocated a ‘resetting’ of the Indo-Lanka relationship and it has emphasized that it should be one of ‘irreversible excellence’(article titled ‘ Resetting Indo – Lanka Relations – Irreversible Excellence is the Goal 200414’).
Regrettably, more of the same
The Presidential candidates have issued their electoral manifestos. This note seeks to compare the two documents put out by the two main contenders with the Pathfinder Foundation’s (PF) blueprint for economic reform ‘Charting the Way Forward: Prosperity for All’. It focuses on the contents of the manifestos and not on various public statements made by the two candidates and their supporters.