By – Sanjila Shrestha
Policy measures that failed Sri-Lanka: Lessons to be learned by Nepal
The Sri Lankan economic crisis is one of the most discussed global issues. Sri Lanka is facing twin economic crises (debt and foreign exchange). While the country has a huge amount of external debt piled up to be repaid, its broader economic outlook looks abysmal, indicating potential failure to facilitate the same. Depleting foreign reserves, shortage of basic goods, rise in inflation, and prolonged power outages, among others, are making the lives of people miserable. The current turmoil in Sri Lanka is attributable to political instability, years of poor decision-making and poor policy choices, a decline in tourist arrival due to the COVID-19 pandemic, and an exorbitant amount of debt. While the list of mistakes made by Sri Lanka is long, it is necessary to look into the ineffective government policies that sparked this crisis.
Ban on Chemical Fertilizer
One of the policies adopted by the Sri Lankan government that led to the economic turmoil was green agriculture reform that aimed to make Sri Lankan agricultural products 100 percent organic. The Government of Sri Lanka restricted and banned the import of fertilizers and agrochemicals including insecticides and herbicides to attain environmental sustainability in the long run. However, its immediate impact on the agricultural sector in the economy was adverse and catastrophic. Agriculture production declined by nearly 30 percent, which not only made the economy dependent on agricultural imports but also depleted their foreign exchange reserves. Moreover, the ban also agitated the farmers, leading to farmer protests. Consequently, the production of tea and rice – major export items of Sri Lanka – also experienced a downfall, which added a burden on already dwindling foreign reserves
Tax Reforms
Irrational and haphazard changes in tax policies were another factor that led to the downfall of the Sri Lankan economy. In adherence to a populist promise by the Sri Lankan president during the election, the goods and services tax (GST) was reduced from 15% to 8%, and the income tax exempt bracket was raised from 0.5 million to 3 million Sri Lankan rupees. Consequently, the percentage of people who paid taxes fell by a huge percentage and ultimately led to a decline in government revenue. This prompted them to seek another additional loan from the IMF, increasing foreign debt.
Others factors
Relief packages executed during the pandemic period, and increasing borrowing from private international capital markets via the issuance of sovereign bonds were also some other factors that led to a financial deficit and an increase in public debt in Sri Lanka.
So, these were a few major government policies that failed Sri Lanka. As the Sri Lanka crisis didn’t happen suddenly but was led by a series of poor choices and inefficient policy there are certain lessons to be learned by Nepal also.
Lessons to be learned
- As a developing nation, Nepal should carefully evaluate the feasibility and potential effects of the policies before putting them into effect. For instance, the government’s decision to provide fertilizer to farmers has created a fertilizer scarcity in the country. Farmers are complaining that they are unable to obtain fertilizer even during the paddy transplantation season because the government could not import fertilizers at the right time. And this will have a direct impact on crop production.
- Most of the time in general populist policies seem good at first but are found harmful to society and only benefit certain sectors. So the long-term impacts of such policies should be considered before implementation.
- High dependency on remittance with foreign loan grants for foreign currency should be gradually substituted by promoting exports and creating a conducive environment for foreign investors.
- Furthermore, instead of heavily relying upon foreign investment for financing large projects the government can go for alternative methods like introducing attractive development bonds, issuing IPOs of state-owned companies, and Public Private Partnership (PPP). This will also result in the timely completion of the projects.