The biggest crisis we are facing in this country is the confusion over the causes for the ongoing economic crisis. Consequently, the path to recovery is obscure to us. Therefore, we are extremely susceptible to the whisperings in the wind, always denouncing and discrediting decisions taken by the Government.
A little knowledge is said to be a dangerous thing and our political wags are living proof of it. We do not make an effort to understand the unique challenges our decision makers attempt to solve. We want everything for nothing. Therefore, the minute we feel pain, we get angry with the Government.
This is akin to the yo-yo diet of an obese person. When the hunger pangs set in, especially after losing the first few pounds, the temptation is to kick out the diet. The change in perception of the Gotabaya Administration after the contentious MCC Compact was pushed off the table is a case in point. The MCC maybe out, but none of the other issues have been resolved, nor was given the chance to be resolved.
Our only solution is to change the Government in power when we are faced with discomforts such as increased taxes, import restrictions or disrupted supply chains. Just as losing weight is necessary to ease the strain on the heart, fiscal discipline is important to sustain, if not strengthen, the economy. 
However, fiscal discipline need not equate to austerity. It must translate to supporting people to meet their basic needs in the least.
Political Cauldron
The irony of handing the reins back to the ousted politicians is lost on us for more than one reason. The future elections to come, whenever it may, will be more complicated than ever before. As of right now, it is almost impossible to keep up with our Parliamentarians’ political affiliations.
Sections of both the SLPP and the SJB are supportive of the Ranil Wickremesinghe Administration. The Opposition Leader is trying to hook up with the small-time JVP (than the other way round). Small parties who were affiliated with the SLPP are presently neither with the Government nor with the SLPP group independent of the Government. They are hurt that the main Opposition party, the SJB, is treating them as their opposition and not as comrades in arms.
Sri Lankan politics thus is now divided as the Government, the Opposition, the Opposition of the Opposition, the Opposition not recognized by the Opposition and the Independent. They all have a self-serving pronouncement to make on the current situation and the related decisions taken.
Added to this cacophony is the opinion of certain entities, often appearing in the guise of professionals, academics or diplomats, hell-bent on discrediting the Government. Their strategy is to topple the Government in power to replace it with one that resists them the least to fulfill their own agendas. Despite various theories that the objective is to control territory, often this is not the case. Their focus is more on weakening the economy. Instability in politics with the masses distrusting their own Government is quite helpful in these kinds of endeavours.
The fact that most people need their preferred political face on the economic solution further complicates the matters before us. Hence there is a segment of the society who are anti-Rajapaksa (namely Mahinda, Basil, Namal and Gotabaya and in that order). For these voters, everything a Rajapaksa does is wrong (or criminal) and everything that goes wrong in the country is the fault of the Rajapaksas.
The Parliament-approved budgeted debt repayment of the ISB of USD 500 million on January 18, 2022 had ignited the suspicion among some that the Rajapaksas and/or their “cronies” somehow stood to gain from it. This is the extent the distrust in our own politicians festers.
In the same manner, there is a group who is anti Ranil Wickremesinghe. They cannot forgive him for the sins committed during the Yahapalana Government. The facts that as President he is yet to return to any of those policies or steered the country from the brink of anarchy to stability are moot points for these voters.
Economic Recovery
To be so consumed over politicians is distracting us from the bigger picture. This is adding to the confusion and distrust of solutions enacted. The controversy over the amount of money printed during the height of the COVID-19 pandemic is a case in point. Many blame the former governors of the Central Bank Dr. Lakshman and Ajith Cabraal for “excessive money printing”, which they believe is the root cause of the current economic dilemma.
So far, Dr. Lakshman has quietly ignored the allegations. Cabraal on the other hand has not. In an interview with HiruEththa anchor Banuka Rajapaksa, Cabraal points out that in the 223 days he functioned as the Governor, money to the value of Rs 446 billion were printed. Under the incumbent Governor Dr. Nandalal Weerasinghe, who at the time of this interview had been in Office for 203 days, the value of money printed was Rs 690 billion.
The important point here is not the accusations leveled against the Central Bank’s highest officer (past or present), but what does this revelation actually mean. Does this mean, that excessive money printing is not the boogeyman claimed to be or that we are still on an economic precipice?
Since Dr. Lakshman and Cabraal’s critics are drawing their analysis from the Zimbabwean experience, it would be worth our while to understand what exactly happened in Zimbabwe to compare with our own experience in Sri Lanka.
Zimbabwean Vs. Sri Lankan Experiences
The currency instability in Zimbabwe began in February 2007. At its peak, inflation was estimated at 79.6 billion percent month-on-month, 89.7 sextillion percent year-on-year in mid-November 2008. The situation got so bad, the Zimbabwean Government stopped filing official inflation statistics.
In contrast, Sri Lanka’s inflation is still within double digits. It is noteworthy that in present times Sri Lanka is not the only country to experience these unprecedented inflation figures. The US’s June inflation figure of 8.6 percent was the highest in 40 years. In the UK the consumer-price index rose by 10.1% in July. This is the highest rate of inflation since the 1980s.
Since 2020, nations across the world have been economically hard pressed because of the global pandemic caused by COVID-19 virus. Countries have been forced to shut their borders, which have disrupted supply chains. All economies, big and small, shrunk. Governments had the unenviable task of managing the increased expenses with reduced income.
Sri Lanka too underwent the same toll. However, as to be expected, in the post pandemic countries with strong economies recovered faster than those with weaker economies.
Unfortunately for Sri Lanka, the economy was ailing. As the IMF noted, ‘on the eve of the pandemic’ Sri Lanka was already inadequate in her external buffers and was at high risk to public debt sustainability, exacerbated by the Easter Attacks in 2019. As such, the island nation was hit hard by COVID-19.
Zimbabwe’s failure was not due to any of these reasons. The Zimbabwean dollar came about after the country regained its independence from the British on 18 April 1980. Though it began at par value with its predecessor, the new currency did not do well against the stronger currencies due to the prevailing inflation in the country.
For some reason, Zimbabweans too did not have the confidence that the new currency will be more stable than the previous currency. Thus, one of the main reasons for the currencies’ continued loss of value, causing hyperinflation, was because so many people expected it to, observes economists.
These issues were exacerbated with President Robert Mugabe’s land reforms program that replaced white farmers with the natives. The intention was to restore the historic inheritance to the Zimbabweans. This was not unlike the land reforms under Sirimavo Bandaranaike in the 1970s.
The intention of both leaders was to rectify the historic injustice suffered by the people of the land by European occupiers. Both leaders however set about it foolishly. The Zimbabwean farms, which were high yielding, were handed over to those with little or no experience in managing these farms. Similarly, Sri Lanka’s lucrative tea estates were given to Bandaranaike’s cronies and today most of it lays as wasteland.
The Europeans took most of the country’s capital as they fled. This too added to the declining economy. Corruption also took its own toll on the economy.
Consequently, since 1999 Zimbabwe productivity in food and other sectors, including banking, declined sharply. Farmers could not obtain loans for capital development. In the years leading to 2007, food production reduced by almost 50 percent and manufacturing by more than a quarter. Unemployment was at 80 percent and life expectancy dropped.
Things took a turn for the worse due to the economic sanctions imposed by the USA and EU. Furthermore, asset freezes and visa denials of 200 persons identified close to the Mugabe Administration affected the Zimbabwean Government. Restrictions were placed on trade with Zimbabwe by both individual businesses and the US Treasury Department.
Clearly, Zimbabwe’s economic woes is not simply due to excess printing of money. There were fundamental issues preexisting when the Mugabe Government started to print more money to finance the wars in Congo. As to be expected, the excess monies that did not support demand of an impoverished nation, which in turn weakened an already weak currency.
Allowing Inflation to Avoid Deflation
Those who fault the excess money printing during the pandemic fail to factor the extraordinary circumstances of the time. It is not only Sri Lanka, but almost all countries were forced to exceed the normal quotas. However, economists did not see this as a problem. In fact, Governments were urged to print more to meet its commitments.
Experts such as Greg Feldberg of the Yale Programme on Financial Stability and Aidan Lawson, a former YPFS research associate pointed out that the COVID-19 induced recession will cost the world more than USD 11 trillion. It was estimated that economies would shrink by at least one third.
Therefore, they urged for Central Banks to consider bona fide debt monetization (money-printing) to support respective Governments to cover these costs. According to the thinking of the University of Yale, by monetizing debt, Governments can use inflation to finance some of its spending.
In countries such as Sri Lanka, where three almost back-to-back lockdowns were imposed most severely, most of the economy halted. Had the Government not supported those in need with handout cash, they would have lost most or all their buying power. This would have led the country to the other extreme and instead of an inflation, would have had a deflation - not to mention a humanitarian catastrophe.
Deflation is when the price for all goods and services declines. This is a consequence of a fall in the supply of money and credit without a corresponding decrease in economic output. Even if producers reduce their prices, even below costs, it would be a death knell to the economy if people still could not afford it.
Thus, the excess money printing during and even afterwards the pandemic cannot be compared to Zimbabwe’s monetizing to finance two wars against Congo. Therefore, before criticizing the monetizing by Sri Lanka, one must ask what would have happened had governments, including Sri Lanka, not taken the risk and printed the money needed at the time.
Sri Lanka’s financial situation is scary. Inflation, which was a single digit, is almost touching three digit numbers. Though there is a slight dip at the beginning of this month, whether we can push or keep it down remains to be seen. Already, there is another shortage of gas on the horizon. Yet, compared to the Zimbabwean experience, we can heave a sigh of relief. Things are still not that bad and we can still turn the situation around.
Therefore, it behoves on us to refrain from equating ourselves to extreme and unrelated examples as the Zimbabwean experience. At the end of the day, confidence in ourselves matters. This can only be accrued by making a sincere effort to understand the ground realities of Sri Lanka. Our other option is to allow ourselves to be misled by half baked theories, spread by those with hidden agendas.
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