Challenges before SL in achieving its Economic Goals | Daily News
Defusing Foreign Interferences and Influences

Challenges before SL in achieving its Economic Goals

The World Bank Headquarters in Washington, D.C.
The World Bank Headquarters in Washington, D.C.

In the previous week, this column argued that we need to take the neutrality stance more seriously. It is not to be merely bandied about. We need to be both assertive and a strategy to ensure our neutrality stance. Merely declaring neutrality and invoking codified provisions in the “Hague Convention (V) Respecting the Rights and Duties of Neutral Powers and Persons in Case of War on Land” will not do.

Simultaneously, it was pointed out that the reason we adapted our neutrality is to keep out of the tension brewing between China and those against China’s growing power in the Indian Ocean, namely the US, Japan, Australia and India. These four nations together make the Quadrilateral Security Dialogue (Quad).

Therefore, we have a defined scope for neutrality. We should not thus put ourselves into a straight jacket over our neutrality stance and obscure our other aspirations - especially those concerning our economy.

Can an International Rule of Law Alone Protect Sri Lanka?

Researcher and analyst Neville Ladduwahetty, agrees with this writer that in event one or more of the sparring powers decided to violate our territory or sovereignty the other will not rush into our rescue.

He writes that “it would be stupid to even think of entertaining the prospect of any power coming to our rescue, as we historically did.”

However, he disagrees with the point that our economic goals should not be tied to our neutral position.

In his view, “Sri Lanka has to develop guidelines as to how Neutrality should work in its relations with other countries and in particular, a system of Standard Operating Procedures as to how it should achieve its economic goals, similar to the call by the President to handle Ocean going vessels calling at Sri Lanka’s Ports.

The Quad Alliance comprises US, Japan, India and Australia. 

“In the context of these hard realities the only option available to Sri Lanka is the refuge in International Rule of Law. Hence, the declaration of the policy of Neutrality as codified in the ‘Hague Convention’. Having thus declared, if Sri Lanka conducts its relations with any country in a manner that compromises the concept of Neutrality and favours one country over another in the pursuit of its economic goals, Sri Lanka would be compromising the protection offered under provisions of International Law, even if it amounts to a “see-through nightie”, because under the former policy of Non-Alignment there is no protection whatsoever.

Furthermore, once compromised, Sri Lanka would lose its credibility and the International community would be justified to turn their backs and ignore Sri Lanka’s appeals. On the other hand, without any alternative other than the protection of International Law, Sri Lanka without any protection would be stark naked.”

First and foremost it must be pointed out that the very reason to adapt the neutrality stance is because we do know that unless there is a strategic self-serving purpose to be achieved, no one will come to our rescue in the event one power violates our territory or sovereignty. Even if they did, history may repeat and we may not be able to dislodge our rescuer from our territory thereafter for a very long time - especially as both powers are keenly interested in maintaining a permanent presence in the region.

Therefore, we must understand even if we conduct every aspect of our business along the neutral lines, no one would hear our appeals if a power decided to take undue advantage from us. This was the experience of World War II (WWII) as well.

In this context, Cate Lineberry’s How the Neutral Countries in World War II Weren't So Neutral published in is most relevant to this discussion.

“Neutrality was often more complex than simply avoiding choosing sides,” Lineberry writes. When WWII erupted, “Dozens of countries, still recovering from the horrors of World War I, tried to remain neutral to avoid invasion and more bloodshed. But a declaration of neutrality did little to insulate countries from the conflict if they were geographically desirable.”

Even the US, separated by two Oceans, could stay neutral for only two years. Japan sucked America right into the War by bombing Pearl Harbour.

“Only 14 countries remained officially neutral throughout the entire war,” observes Lineberry. However, she quotes Dr. David Woolner, Marist College professor and author of The Last 100 Days: FDR War and Peace, “But even those states that managed to stay out of the war, such as Sweden and Switzerland, found their ability to maintain strict neutrality hampered by the intensity of the conflict.”

Consequently, states Woolner, these nations had to adapt “a somewhat ambiguous — and still controversial— role in the war.”

What Makes Sri Lanka an Attractive and Easy Target

Sri Lanka could attract unwarranted attention from either of the powers over two reasons.

1. Strategic geographical location and/or

2. If one power had significant economic interest or a presence in the Island nation. Thus, attacking Sri Lanka would be akin to inflicting damage to the foe.

The fact that Sri Lanka is economically vulnerable, unable to procure even the essentials and likely headed to a currency crash, makes us an easy target. On April 12, 2022 we declared ourselves bankrupt. To this day, we are not entirely sure if this was the right move. The former and incumbent Governors of the Central Bank (CB) Ajith Cabraal and Dr. Nandalal Weerasinghe are caught in a bitter debate, disputing each other.

The former insists that we had enough funds in the pipeline to service our debt. The latter claims we had insufficient funds at hand to meet the payments that were due round the corner.

Either way, Sri Lanka at present has lost all her credit worthiness. Added to the worries are the high interest rates and the increased taxes we would see in 2023. The CB is battling to keep the inflation down. The current strategy is to contract the economy as Dr. Weerasinghe believes that businesses must first survive before growing. This is causing worry amongst the business circles, especially the manufacturing sector.

While these debates rage on, the World Bank (WB) July 2022 statement on Sri Lanka conveys deep concern over Sri Lanka’s dire economic situation and its impact on the people. The World Bank Group are thus “repurposing resources under existing loans in our portfolio to alleviate severe shortages of essential items such as medicines, cooking gas, fertilizer, meals for schoolchildren and cash transfers for poor and vulnerable households”.

“To date, about USD 160 million of these funds has been disbursed to meet urgent needs,” further read the statement. However, these funds are not coming directly to our coffers. Instead, the WB is “working closely with implementing agencies to establish robust controls and fiduciary oversight to ensure these resources reach the poorest and most vulnerable”.

“Until an adequate macroeconomic policy framework is in place, the World Bank does not plan to offer new financing to Sri Lanka,” continued the statement. The WB expects Sri Lanka to first address the root causes that led to this crisis and adapt the necessary structural reforms.

Likewise, the IMF too will not roll out the agreed bailout package of USD 2.9 billion to be spread over 48 months until we meet its prerequisites. While the Government is working hard to satisfy the IMF on this endeavour with steps as increasing taxes and putting State Owned Enterprises (SOE) on restructuring, getting creditors to agree to restructure debt has hit a stumbling block.

While all creditors have participated both rounds of talks with reassurances, all eyes are on China, who holds 19.6 percent of Sri Lanka’s public debt. China also happens to be creditor to many other countries.

Bangladesh PM Sheikh Hasina says after helping Sri Lanka with the USD 200 million Currency SWAP in August 2021 many countries have requested assistance from Bangladesh. As she observes, this shows that many countries are without adequate forex reserves.

While the debt restructuring discussions are ongoing, China continues to assist Sri Lanka in other ways. Late last month, China donated an oil tanker carrying 10.6 million liters (9,000MT) of diesel to the Sri Lankan farmers and fishermen. Few days later another consignment of 1,000 MT (100,000 packs) of rice was donated by China to Sri Lankan students. Since June, China has donated a total of 8,000 MT of rice.

The very fact that we must count on China’s goodwill for the IMF to proceed, which is expected to assure our other creditors to trust us to lend again has put enormous pressure on our neutrality stance. If China decided that Opposition MP Shanakiyan’s foolish remarks and empty threat is the last straw and cold shouldered Sri Lanka, an already dire situation would turn catastrophic. This highlights the extent of our vulnerability.

How is Sri Lanka being Threatened

In this scenario, Sri Lanka would not be able to protect herself militarily as we have done throughout these past decades. Three generations of Sri Lankans narrowly dodged a number of bullets as we came dangerously close to losing our territorial integrity and sovereignty. We need to thoroughly analyze the past fifty years if we are to map our way forward.

It is noteworthy that Sri Lanka has been in the midst of a geopolitical tussle since the 1970s. Hence, our challenge to stay out of these power struggles outlives the Cold War. Throughout these decades, we never had a military invasion. Even the IPKF landed in the guise of neutralizing terrorism and establishing law and order. At the time the Indian boots landed on Sri Lankan soil, the Indian Government too was under the impression that the terrorist groups would be brought to heel within 72 hours.

Yet, without such an outright military intervention our territorial integrity and sovereignty continued to be under threat. Even after terrorism was completely eradicated from Sri Lanka in 2009, we find ourselves continually having to fight off efforts to subjugate us.

Interestingly, our focus has been centred on dealing with the unsubstantiated allegations. We have not undertaken a serious study as to the West’s desired objectives hoped to be gained by leveling these charges against Sri Lanka. There are a number of speculations but none of them are completely satisfactory.

Simultaneously, we must factor the negative impact we suffered because of these accusations. We have pinpointed causes as overconsumption of imports, lack of productivity, living off on loans and so forth for our current economic dilemma. However, we need to understand that allowing ourselves to be insulted as a human rights violator and a war criminal too has had an effect on our economy.

Powerful organisations such as the EU have directly used these allegations as a leverage. As such, Sri Lanka is under constant pressure to change the perimeter and parameters of our national security. Again, we fail to question as to why this is important for the EU.

On the face of it, Sri Lanka is not at war with any of these nations. Yet, Sri Lanka is being treated belligerently and in a belittling manner. The effort to take control of the nation’s resources by outside forces is ongoing. The effect of IMF’s prescription to privatize SOE or enter into Public-Private Partnerships (PPP) for instance must be fully understood, if entities such as the Ceylon Petroleum Corporation lands in the hands of another Government.

Contentiously, all these events are unfolding before us without firing a single bullet. This is the challenge before us as we try and steer through these smoke screens to stay clear from the brewing geopolitical tensions in the neighbourhood.

To Protect Sri Lanka

Therefore, the first step towards a neutrality stance is to stabilize our economy. During the Mahinda Rajapaksa Administration, we added many assets to our infrastructure. Most of these were done by China. This is not due to any preferential treatment but simply because China has the deep pockets that other countries do not have.

German Chancellor Olaf Scholz’s controversial visit to China in November 2022 attest to this fact. He earned much opprobrium from fellow EU nations but managed to save the one thing that is important for Germany - its economic interests. China happens to be Germany’s largest trading partner.

India too has managed to separate its objectives from the Quad and economic aspirations. India is firmly with the US to counter China’s rise, but will not sacrifice relations with Russia or its economy in the process.

China’s heavy investments attracted much criticism and speculation. It eventually led to the toppling of the Mahinda Rajapaksa Administration and was replaced with an anti-Chinese Government. Again, the relevant questions has not been entertained as to the failure of those that brought the Yahapalana Government to power to intervene against the long term leasing of Hambantota Port. This must be compared against the reaction to the berthing of Chinese research ship in Hambanthota Port and smaller scale projects as solar hybrid power plants in Nainativu, Analaitivu and Delft islands.

Sri Lanka needs to learn to manage such speculations and criticisms better. Adverse propaganda aside, Sri Lanka must be mindful in granting investments. Allowing a natural selection process might lead to a situation where one country holds most of our investment projects or business interests. Just as our investment portfolio were mostly with China, our apparel sector concentrates in the West.

As with our experience with the EU, allowing our industries to be dependent on one market can lay us vulnerable to unwarranted interferences and demands. Therefore, we may have to consider other factors than only “economic sense” and diversify accordingly.

This kind of pick and choose need to be done mindfully to avoid corruption. This means, regardless of our foreign policy, we must get our house in order, increase transparency and do our own due diligence so we do not get short changed. This will also allow us to look at the FDIs positively and not suspiciously as we generally tend to do. It is most unfortunate that when an investment comes our way, we look for ways to chase it away than to make it a reality.

We must also understand that our strategic location has a value. That is the reason we are being bothered so much overtly and covertly. It is time we capitalize on this value and convince the roving powers that it is in their best interest to let Sri Lanka be neutral.

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