The Economist - USA (2022-01-15)

32 Asia TheEconomistJanuary15th 2022

SriLanka’seconomy

Thanks, but

no thanks

A

lmost three years since terrorists

blew up hotels along Colombo’s lovely

beaches and two years since covid­19 shut

down  international  travel,  tourists  have

begun  returning  to  Sri  Lanka,  providing

sorely needed foreign exchange. The coun­

try’s  stockmarket  has  been  bounding

along, up by more than 80% in 2021, trail­

ing only commodity­rich Mongolia among

global  bourses.  Corporate  profits  have

been strong, too. gdpgrowth last year was

somewhere between 3.5% (by private esti­

mates) and 5% (by the government’s). This

suggests  a  thriving  economy.  Yet  alarm

bells are clanging.

Encouraging  though  the  renewed  tou­

rist  arrivals  may  be,  they  are  still  barely  a

fifth  of  the  pre­pandemic  peak.  Exports

grew strongly in the fourth quarter of 2021

but are still too meagre to prevent a loom­

ing financial crisis. Years of heavy foreign

debt and current­account deficits have tak­

en  a  toll.  Foreign  reserves  have  collapsed

(see  chart).  Supplies  of  oil,  cooking  gas,

milk,  wheat  and  medicine  are  running

short. A rapidly depreciating currency has

helped  the  country’s  exporters,  including

clothing  manufacturers  and  tea  growers.

But it has made servicing foreign­denomi­

nated debt more costly and has stoked in­

flation,  which  jumped  during  2021  to  12%

and appears to be accelerating.

The numbers are sobering. Interest ob­

ligations  on  government  debt  in  2021

amounted to 72% of total revenues, while

public­sector  salaries  and  pensions  came

to 80%. Multiple downgrades have in effect

locked  it  out  of  the  international  private­

credit market. On January 12th s&p, a cred­

it­rating  agency,  downgraded  Sri  Lanka’s

debt further, citing “increasingly likely de­

fault scenarios without unforeseen signif­

icant positive developments”. 

So  Sri  Lanka  finds  itself  looking  down

the barrel of a gun. On January 18th $500m

in  foreign­currency­denominated  debt

will come due. Another $5.4bn in principal

and interest will need to be paid by the end

of the year. Similar payments are required

for years to come. That has provoked a se­

ries  of  complex  financial  manoeuvres.  In

January  the  central  bank  disclosed  that  it

had  sold  off  half  the  country’s  $382m  of

gold  reserves.  Rumours  abound  that  the

rest  has  been  liquidated  too.  One  obliga­

tion—an  oil  bill  of  $251m  owed  to  Iran—

was  paid  in  tea.  The  government  has  also

taken  a  series  of  heavy­handed  actions  to

preserveforeigncurrency.Ithasbanned

theimportofcars.Itbrieflytriedtoban

foreignchemicalfertiliserinthenameof

goingorganic,untilcrashingagricultural

yieldsforcedit tochangeitsmind.

Other measures include a currency

swap with China, nominally expanding

the central bank’s foreign­currency re­

servesfrom$1.6bnto$3.1bn.Itisunclear

whetherthemoneycanbeusedforany­

thing exceptChinese goods.A similarly

complexdealhasbeenannouncedwithIn­

dia,alongwith—perhapsnotcoincidental­

ly—theresolutionofalong­runningdis­

puteoverIndia’sstakeina SriLankanoil­

storage facility. State assets, including

primeproperty,havebeenputupforsale.

Noonehassofarbeenkeentobuythem.

A bigger problem is that Sri Lanka’s

increasingly desperate deals do not ad­

dresstherealreasonforitscurrenttravails.

AfterGotabayaRajapaksawaselectedpres­

identin2019,heabandonedthefiscaland

monetary­policy conditions imposed by

theimfthreeyearsearlierafteranotherfi­

nancialupheaval.Taxeswerecutandin­

terest ratespusheddown. Theapproach

wasnotwithoutmerit.Itmayhavesoft­

enedtheharshconsequencesofthepost­

covidglobaleconomyandreawakenedthe

animalspiritsofbusinessesthatarenow

reflectedbythesoaringstockmarket.Butit

hasprovedtobeunaffordable.Deficitfi­

nancingonthisscaleisunfeasible.

Weretheimftoarrangea restructuring

ofthecountry’sfinances,interestratesand

taxes would probably rise, government

spendingdecline,andbondholderswould

have to take losses. In exchange there

wouldbestabilityandnewfunds.ButMr

Rajapaksa’s government has vocallyop­

posedimfintervention,callingitanin­

fringementofsovereignty.Still,somekind

ofrestructuringseems inevitable,either

undertheoversightofa multilateralagen­

cyorwitha morecomprehensivegovern­

mentplanthathasyettobepresented.The

alternativeisdefault—andtheriskofhigh­

erinflation,fewerimportedgoodsandan

endtothecurrentrecovery.n

C OLOMBO

The Rajapaksa government refuses

outside help as it flirts with default

That Srinking feeling

Sri Lanka, official reserve assets, $bn

Source: Haver Analytics

10

8

6

4

2

0

2017 21201918

Borders

Djebacle

T

he park hotelin Melbourne is not the

kind of place where a gluten­free, veg­

an tennis star typically holes up. But Novak

Djokovic,  the  world’s  best  player  and  per­

haps  its  most  famous  anti­vaxxer,  is  not

typical. For five days he enjoyed the hospi­

tality of the Park, which is better known for

housing  asylum­seekers, after  Australia’s

government cancelled his visa. On January

10th  a  federal  judge  overturned  that  deci­

sion, released him from detention and or­

dered the government to pay his legal fees. 

It  is  still  up  in  the  air  whether  he  will

compete in the Australian Open, the tour­

nament which brought him to Melbourne

and  starts  on  January  17th.  The  immigra­

tion  minister,  Alex  Hawke,  was  consider­

ing  using  discretionary  powers  to  cancel

Mr  Djokovic’s  visa  a  second  time  as  The

Economistwent to press. The minister has

vast  authority  to  remove  unwanted  for­

eigners if he deems it to be in the public in­

terest. If he uses those powers to deport Mr

Djokovic, the 34­year­old could be banned

from returning to Australia for three years. 

The  Serb  would  have  had  no  such  pro­

blems had he been fully jabbed, like 95% of

other  professional  tennis  players.  Some

78%  of  Australians  have  had  two  shots,

among the world’s highest rates. Sympathy

for him has been inversely proportional to

the country’s enthusiasm for vaccines.

The case against him has been spectac­

ularly  bungled.  The  state  government  of

Victoria, where the tournament is held, ap­

proved his medical exemption from vacci­

nation,  thus  allowing  him  to  enter  the

country, on the grounds that he had recent­

ly  recovered  from  covid­19.  The  country’s

conservative  prime  minister,  Scott  Morri­

son,  endorsed  this  decision.  Then,  after  a

public outcry, he changed his mind. When

Mr Djokovic landed in Melbourne on Janu­

ary 5th he was detained for eight hours be­

fore  officials  cancelled  his  visa  on  the

grounds that he is unvaccinated, and sent

him to the Park Hotel to await deportation.

How did the government tie itself up in

such knots? “One explanation for the stuff­

up  is  political,”  says  Abul  Rizvi,  a  former

deputy  secretary  of  the  country’s  depart­

ment  of  immigration.  Australians  are

proudly  egalitarian.  Their  mantra  is  that

everyone should get a “fair go”. Yet during

the pandemic, governments have bent the

rules  for  the  rich  and  famous.  After  they

slammed  state  and  international  borders

shut,  swarms  of  celebrities  arrived  from

S YDNEY

Australia ties itself in knots over

Novak Djokovic