Diversification can help Sri Lanka

Govt needs to restructure industrial base, avoid overreliance on volatile global markets, say analysts

With Sri Lankans taking to the streets over rising fuel prices and other concerns, experts say people’s needs could be served better through greater efforts to develop a more diversified industrial base in the country and avoid an overreliance on international markets.

The unrest in Sri Lanka is caused by “both long-term and short-term reasons”, said Sirimal Abeyratne, an economics professor at the University of Colombo.

Recent causes of discontent include tax cuts in 2019, the impact of the COVID-19 pandemic and fuel prices that rose due to the Ukraine crisis. The tax cuts led to the downgrading of Sri Lanka’s credit rating in 2020, which makes it harder for the country to borrow, Abeyratne said.

“Then, the pandemic worsened the situation because of the decline in the tourism industry and workers’ remittances,” he said. “Because of the collapse of the two important sectors, the country ... could not (meet its) annual debt obligations.”

The long-term factors include the weak exports and a lack of foreign direct investment, he said.

Growing protests late last week over shortages of fuel and other essential supplies led to a Cabinet reshuffle.

Hours after Cabinet ministers tendered their resignations en masse on April 3, Sri Lankan President Gotabaya Rajapaksa on April 4 appointed four new ministers. According to the presidential office, more ministers are expected to be sworn in later.

Also on April 4, Rajapaksa extended an invitation to all political parties to join the government in resolving the crisis. But the opposition seems not quite ready to cooperate.

Rajapaksa’s ruling coalition lost its parliamentary majority on April 5.

Sri Lanka’s economy has suffered due to the pandemic in recent years. Though the country’s Department of Census and Statistics announced on March 29 that its gross domestic product grew 3.7 percent in 2021, GDP still fell short of the 2019 level.

Lin Minwang, deputy director of the Center for South Asian Studies at Fudan University, said Sri Lanka’s economy is heavily dependent on international markets, which means that the “entire outside environment can have a huge impact on its internal social, economic and political life”.

Sri Lanka has been facing power cuts since February due to dwindling electricity production in hydropower plants as well as diesel shortages that have crippled the operations of thermal power plants, the Public Utilities Commission of Sri Lanka said.

Wang Se, assistant researcher of the Institute of South Asian Studies at China Institutes of Contemporary International Relations, noted a sharp decline in Sri Lanka’s foreign exchange reserves and soaring inflation starting from last year.

“The best solution for Sri Lanka is to develop modern industries, and then improve its export capacity, diversify its industries, and try to avoid the disruption … (from volatile) international markets,” Wang said.

The World Bank has pledged to give assistance for buying essential medicines. China will provide 2,000 metric tons of rice as emergency food aid.