The country should not rely solely on foreign lenders, top-down policy directives, or the tricks of central banks. Instead, recovery should come from within, starting with a re-evaluation of the political and policy choices behind the economic crisis.
The country should not rely solely on foreign lenders, top-down policy directives, or the tricks of central banks. Instead, recovery should come from within, starting with a re-evaluation of the political and policy choices behind the economic crisis.
By Mehmet Enes Beşer
While being the most developed middle-income economy in South Asia, Sri Lanka is a political cautionary tale about instability and fiscal imprudence. The 2022 sovereign crisis of the country, marked by default, fuel shortages, and civil unrest, was not caused by sheer bad luck or unforeseen circumstances. Rather, it stems from years of mismanagement, debt overload, and reckless policy. Despite signs of a nascent recovery, Sri Lanka continues to struggle with political volatility and stagnation. Its future hinges on much more than IMF programs and international assistance. It hinges on transformative change.
Sri Lanka can take pride in achieving some degree of economic stability. The IMF-backed program of $2.9 billion was an important step in restoring macroeconomic stability in the country. While the country still suffers from double-digit inflation, its financial reserves have slightly recovered, and the currency has stabilized. Nevertheless, the results of the program so far remain precarious.
Indeed, at the core of Sri Lanka’s crisis is an ongoing gap between the government’s actions and economic considerations. In each consecutive Sri Lankan administration, short-sighted populism took precedence over strategic planning. The pre-election tax cuts in 2019, the unaffordable subsidies, and borrowing heavily abroad were only part of the recipe for disaster. The ban on imports of chemical fertilizers, a so-called green initiative of the government, decimated the agrarian economy of Sri Lanka.
Most recently, the IMF-backed reforms have sparked a wave of protest. The rise in electricity prices, the austerity measures, and the restructuring of state-owned enterprises have alarmed the financially stretched middle and working classes. Without clear strategies and public backing, even a good-faith policy can fall victim to criticism and opposition.
For the sake of recovering Sri Lanka, it is not enough to apply purely technical and macroeconomic solutions to the problem. Indeed, the system of political governance in the country has deteriorated significantly, and the country faces an equally serious issue as budget indicators. Without governance reform commensurate with economic stabilization, Sri Lanka might continue falling prey to a self-propelled cycle of booms, busts, and bailouts.
First and foremost, there is a need for public sector accountability in Sri Lanka. Inefficient state-owned enterprises have been wasting taxpayers’ money and providing poor-quality services for decades. Companies like Sri Lankan Airlines and the Ceylon Petroleum Corporation have run up significant debts, hiding behind a veil of political patronage and corruption. Reforming these enterprises should focus on transparency, depoliticization, and performance-based management, rather than privatization.
Second, the issue of tax reform needs addressing immediately. Sri Lanka has one of the lowest tax-to-GDP ratios in the region, leaving the state with insufficient resources to perform basic functions. A new strategy of increasing revenues is required, but it should focus on fighting evasion, not on squeezing more taxes out of wage earners. This can be achieved via taxation of high incomes, closing loopholes, and improving tax administration.
Third, Sri Lanka should reconsider its approach to economic growth. The country relies on external debt as the primary method of funding infrastructural projects despite dubious returns on investments. As examples, one can look at the infamous cases of Hambantota Port and Mattala Rajapaksa International Airport. Any further development should be aimed at productivity, inclusiveness, and sustainability with a particular focus on agriculture, tourism, manufacturing, and services.
Fourth, small and medium-sized enterprises are a key feature of Sri Lanka’s economy. However, during the crisis, SMEs have been exposed to inflation, foreign-exchange fluctuations, and logistical problems. The policy response has focused primarily on improving macroeconomic indicators and large companies, thus leaving the latter behind. However, revitalizing the sector can create more jobs and help reduce inequality.
Finally, Sri Lanka’s youth should become engaged in rebuilding the economy. Unemployment among young adults and even university graduates poses a considerable risk of brain drain and political apathy. Skills training, entrepreneurial support, and civic education are crucial in turning the demographic dividend into social capital and preventing polarizations.
In addition, Sri Lanka should develop its external relationships further without compromising sovereignty. With its strategically located in the Indian Ocean, the country finds itself under constant influence from various parties like China, India, and Western countries. Although Chinese loans had previously brought Sri Lanka into debt trouble, currently, India is emerging as a key actor in its stabilization process.
Overall, Sri Lanka’s diaspora and civil society should be incorporated into the discussion of the recovery. The 2022 uprisings, although leaderless, demonstrated democratic aspiration and collective discontent. This momentum should not be wasted. Building inclusive governance, creating an independent judiciary, and protecting press freedom should be seen as critical prerequisites for economic revival.
Conclusion
The Sri Lankan crisis is as political as it is economic; thus, the solution needs to consider both aspects. The country should not rely solely on foreign lenders, top-down policy directives, or the tricks of central banks. Instead, recovery should come from within, starting with a re-evaluation of the political and policy choices behind the economic crisis.
In addition, it offers an unprecedented opportunity to reimagine what Sri Lanka’s economy could look like in the future: sustainable, equitable, and resilient. To achieve such goals, however, it takes more than temporary and superficial measures. The country must build institutions beneficial to the populace, craft evidence-based policies, and develop capable leaders trusted by the population.
Only then can Sri Lanka move beyond the survival mode and embrace the development trajectory fitting its ambitions.