Recent images from Sri Lanka of protesters storming the presidential palace in Colombo and setting fire to prime minister’s residence presents a cautionary tale for Pakistan. Our economy is on a similar trajectory which should give us a serious cause for concern. The protests led to the resignations of both president and prime minister.
While the violence and destruction must be condemned unequivocally, leaders in Pakistan would do well not to wait for the axe to fall. The crisis in Sri Lanka presents a vital learning opportunity to draw lessons for timely course correction.
Dynastic Politics
If Shehbaz Sharif as prime minister and his son Hamza Shehbaz as chief minister of Punjab sounds bizarre to you, try this. Gotabaya Rajapaksa (73) was president of Sri Lanka from 2019-22 while his elder brother Mahinda Rajapaksa (76) served as the prime minister, and younger brother Basil Rajapaksa (71) served as the finance minister from 2021-22. Eldest brother Chamal Rajapaksa (79) is a former speaker. Their sons are now being groomed as the next crop of leaders.
Nine members of the Rajapaksa family have been members of the parliament. Dynastic politics is rife the world over. But in South Asia, it seems to be particularly entrenched. It serves to decrease the circulation of ideas and stifles choice available to the general public. Research shows that constituencies run by dynasties exhibit lower growth, higher income inequality, higher poverty rates and lesser accountability. Coronavirus outbreak and the Russian-Ukraine war are not the root causes of the state of Sri Lankan economy, as the Rajapaksa family would have the world believe. Economic mismanagement and a series of unchecked populist decisions over the years have led to the collapse.
In Pakistan, it is hard to forecast a future free from political dynasties. An independent and fresh crop of political leadership is only possible if the establishment truly takes a backseat and does not stifle any voice that threatens to challenge the system. We keep choosing the same crop of washed out and outdated leaders because the limited non-traditional options available either do not command electoral support or are stooges for the establishment. Democracy must be given a proper chance which can only happen with a break from dynasties, hybrid rules, and establishment interference.
The Economy
Sri Lanka has a narrow export base. After the coronavirus outbreak, tourism and foreign remittances dropped drastically, pushing Sri Lanka towards a default as its foreign exchange reserves dried up, leaving it with no money to finance its deficit, and pay back its loans. The country is now left with $50 million in foreign exchange reserves, down from $7.6 billion at the end of 2019. It will now have to resort to even greater borrowing.
Pakistan is not in as grave of a situation as its foreign exchange reserves currently stand at $9.8 billion, boosted from a $2.3 billion transfer from China in June. The IMF has also agreed to release $1.17 bn. However, we are on an unsustainable path. Pakistan holds an exorbitant amount of foreign debt (nearly $130 billion) of which $23 billion has to be repaid within the next year. Continued reliance on borrowing will push us into deeper debt traps. As an example, Sri Lanka, holds $51 billion in foreign debt. It requires $7 billion to finance its debts for fiscal year 2022-23. To help, India is lending $3.4 billion, World Bank $600 million, IMF $3 billion subject to conditions, and the G7 countries are also providing debt relief.
This is a perfect illustration of debt trapping: taking smaller loans to finance bigger loans. It stifles growth and undermines economic sovereignty by realigning the economy to satisfy the conditions imposed by foreign lenders.
Pakistan cannot continue living pay check to pay check. And band-aid measures will not do. The government’s decision to ban the import of 41 luxury or non-essential goods had the meagre impact of cutting $600 million from our overall import bill of $80 billion, while negatively impacting growth and sustainability.
Sri Lanka experimented with a similar albeit more drastic measure to crack down on imports. In early 2021, Sri Lanka banned the import of fertilisers and forced farmers to rely on domestic fertilisers. It led to massive crop failures, including tea and rubber, a main source of its agricultural export revenue. This led the government to increase import to supplement falling food stocks which made its foreign exchange reserves even worse.
Course Correction
Our efforts must be geared towards propping up our export base, which will require tactful diplomacy to tap new markets. It is unfortunate that our regional situation is messy, with Iran under sanctions, Afghanistan facing a humanitarian and economic crisis, and India diplomatically landlocked with Pakistan. We must find a way to manoeuvre out of these differences and realise that politics and economics are closely intertwined. One cannot change without the other.
We must also expand our export basket and make it more competitive without relying on cheap and low-value exports. There must also be a push to reduce trade barriers, eliminate subsidies and create a business-friendly environment.
Populist decisions to promote growth at the cost of inflation and a cost-of-living crisis is counter-productive and reckless. The Rajapaksa family gave huge tax cuts in 2019 which cost the government $1.4 billion in one year alone. Unfortunately, in Pakistan, too, the economy takes backseat to the political needs of the day. Petrol price freeze in April by the outgoing PTI government is a prominent recent example.
Reforms must be focused on unnecessary expenditure. This includes non-combat defence budget, land grabs, and government subsidies. Currently, Pakistan generates most of its wealth from disproportional means of taxation which impact the poor far more than they impact the rich. The budget makes a poor attempt to include the agriculture, retail, wholesale, and propertied classes within the tax net.
A targeted and structured approach is needed to tackle the issue of tax evasion to prevent the leaking of trillions of rupees in untapped revenue every year. Cash-guzzling state-owned enterprises must be closed or privatised. Sri Lanka is rightfully looking to privatise Sri Lankan airlines. Moreover, the development budget must be restructured, and the pension scheme needs to be overhauled.
These are all common-sense measures that must be imposed if we are to become a self-sustained economy. Why is that the only thing that always seems to be standing between us and a default, is a foreign loan or bailout. Instead of villainising the IMF for imposing harsh conditions, our economy should be geared in such a way that we do not have to look towards foreign lenders every so often. This calls for unpopular decisions. With every incoming leader fighting for their own political survival, it is not clear if and when such reforms will happen. But they are beyond due.
While the violence and destruction must be condemned unequivocally, leaders in Pakistan would do well not to wait for the axe to fall. The crisis in Sri Lanka presents a vital learning opportunity to draw lessons for timely course correction.
Dynastic Politics
If Shehbaz Sharif as prime minister and his son Hamza Shehbaz as chief minister of Punjab sounds bizarre to you, try this. Gotabaya Rajapaksa (73) was president of Sri Lanka from 2019-22 while his elder brother Mahinda Rajapaksa (76) served as the prime minister, and younger brother Basil Rajapaksa (71) served as the finance minister from 2021-22. Eldest brother Chamal Rajapaksa (79) is a former speaker. Their sons are now being groomed as the next crop of leaders.
Nine members of the Rajapaksa family have been members of the parliament. Dynastic politics is rife the world over. But in South Asia, it seems to be particularly entrenched. It serves to decrease the circulation of ideas and stifles choice available to the general public. Research shows that constituencies run by dynasties exhibit lower growth, higher income inequality, higher poverty rates and lesser accountability. Coronavirus outbreak and the Russian-Ukraine war are not the root causes of the state of Sri Lankan economy, as the Rajapaksa family would have the world believe. Economic mismanagement and a series of unchecked populist decisions over the years have led to the collapse.
In Pakistan, it is hard to forecast a future free from political dynasties. An independent and fresh crop of political leadership is only possible if the establishment truly takes a backseat and does not stifle any voice that threatens to challenge the system. We keep choosing the same crop of washed out and outdated leaders because the limited non-traditional options available either do not command electoral support or are stooges for the establishment. Democracy must be given a proper chance which can only happen with a break from dynasties, hybrid rules, and establishment interference.
Research shows that constituencies run by dynasties exhibit lower growth, higher income inequality, higher poverty rates and lesser accountability.
The Economy
Sri Lanka has a narrow export base. After the coronavirus outbreak, tourism and foreign remittances dropped drastically, pushing Sri Lanka towards a default as its foreign exchange reserves dried up, leaving it with no money to finance its deficit, and pay back its loans. The country is now left with $50 million in foreign exchange reserves, down from $7.6 billion at the end of 2019. It will now have to resort to even greater borrowing.
Pakistan is not in as grave of a situation as its foreign exchange reserves currently stand at $9.8 billion, boosted from a $2.3 billion transfer from China in June. The IMF has also agreed to release $1.17 bn. However, we are on an unsustainable path. Pakistan holds an exorbitant amount of foreign debt (nearly $130 billion) of which $23 billion has to be repaid within the next year. Continued reliance on borrowing will push us into deeper debt traps. As an example, Sri Lanka, holds $51 billion in foreign debt. It requires $7 billion to finance its debts for fiscal year 2022-23. To help, India is lending $3.4 billion, World Bank $600 million, IMF $3 billion subject to conditions, and the G7 countries are also providing debt relief.
This is a perfect illustration of debt trapping: taking smaller loans to finance bigger loans. It stifles growth and undermines economic sovereignty by realigning the economy to satisfy the conditions imposed by foreign lenders.
Pakistan cannot continue living pay check to pay check. And band-aid measures will not do. The government’s decision to ban the import of 41 luxury or non-essential goods had the meagre impact of cutting $600 million from our overall import bill of $80 billion, while negatively impacting growth and sustainability.
Sri Lanka experimented with a similar albeit more drastic measure to crack down on imports. In early 2021, Sri Lanka banned the import of fertilisers and forced farmers to rely on domestic fertilisers. It led to massive crop failures, including tea and rubber, a main source of its agricultural export revenue. This led the government to increase import to supplement falling food stocks which made its foreign exchange reserves even worse.
Course Correction
Our efforts must be geared towards propping up our export base, which will require tactful diplomacy to tap new markets. It is unfortunate that our regional situation is messy, with Iran under sanctions, Afghanistan facing a humanitarian and economic crisis, and India diplomatically landlocked with Pakistan. We must find a way to manoeuvre out of these differences and realise that politics and economics are closely intertwined. One cannot change without the other.
The Rajapaksa family gave huge tax cuts in 2019 which cost the government $1.4 billion in one year alone. Unfortunately, in Pakistan, too, the economy takes backseat to the political needs of the day. Petrol price freeze in April by the outgoing PTI government is a prominent recent example.
We must also expand our export basket and make it more competitive without relying on cheap and low-value exports. There must also be a push to reduce trade barriers, eliminate subsidies and create a business-friendly environment.
Populist decisions to promote growth at the cost of inflation and a cost-of-living crisis is counter-productive and reckless. The Rajapaksa family gave huge tax cuts in 2019 which cost the government $1.4 billion in one year alone. Unfortunately, in Pakistan, too, the economy takes backseat to the political needs of the day. Petrol price freeze in April by the outgoing PTI government is a prominent recent example.
Reforms must be focused on unnecessary expenditure. This includes non-combat defence budget, land grabs, and government subsidies. Currently, Pakistan generates most of its wealth from disproportional means of taxation which impact the poor far more than they impact the rich. The budget makes a poor attempt to include the agriculture, retail, wholesale, and propertied classes within the tax net.
A targeted and structured approach is needed to tackle the issue of tax evasion to prevent the leaking of trillions of rupees in untapped revenue every year. Cash-guzzling state-owned enterprises must be closed or privatised. Sri Lanka is rightfully looking to privatise Sri Lankan airlines. Moreover, the development budget must be restructured, and the pension scheme needs to be overhauled.
These are all common-sense measures that must be imposed if we are to become a self-sustained economy. Why is that the only thing that always seems to be standing between us and a default, is a foreign loan or bailout. Instead of villainising the IMF for imposing harsh conditions, our economy should be geared in such a way that we do not have to look towards foreign lenders every so often. This calls for unpopular decisions. With every incoming leader fighting for their own political survival, it is not clear if and when such reforms will happen. But they are beyond due.