Professor Mick Moore OBE (University of Sussex) on the economic crisis in Sri Lanka  

22-04-2022, Amsterdam: In the latest series of EFSAS interviews, Mr. Junaid Qureshi (Director EFSAS) welcomed virtually Professor Mick Moore, a highly regarded political economist and professorial fellow at the Institute of Development Studies at the University of Sussex. He is also the founding CEO of the International Centre for Tax and Development and was appointed as an Officer of the Most Excellent Order of the British Empire (OBE) in 2021 for his services to international development. Moore has conducted field research in Asia and Africa, particularly Sri Lanka, India, and Taiwan, and has taught at the Massachusetts Institute of Technology. He has almost 50 years of experience in researching political and economic trends in Sri Lanka. In his interview with Mr. Qureshi, Moore deliberated upon the current political and economic landscape of Sri Lanka and its possible trajectories of development.

To begin with, Professor Moore suggested that the current economic conditions in Sri Lanka translate into the country’s worst economic crisis in recorded history and that this crisis, although exacerbated by falling tourism revenues due to COVID-19 travel restrictions and rising food and fuel prices, was caused almost entirely by unwise policy decisions made by the Rajapaksa administration.

Professor Moore outlined that a rapid decrease in national foreign exchange reserves has created major restrictions on the availability of imported everyday goods, creating fuel, energy, food, and medicine shortages. The decrease in foreign exchange reserves has come as the result of the government taking on a growing number of loans in foreign currencies without being financially capable of servicing the thus created debt. Professor Moore highlighted that this growing payment pressure has not been sprung on the Rajapaksa government: it was already evident for more than a year that the national foreign exchange reserves would run out soon, and the government’s refusal to acknowledge and respond to this looming balance of payments crisis up until this point robbed the country of valuable negotiation time that would have been required to enter debt restructuring negotiations.

Most of the acquired debt has been accumulated due to the government taking out significant loans to fund domestic infrastructure projects that were politically popular, which practically reinforced rent-seeking behavior and patronage networks, while economically they made very less sense. Tying into his professional expertise in taxation and its relation to governance, Professor Moore noted that domestic financial issues are further reflecting decreasing tax revenues, with Sri Lankan governments gradually collecting less and less taxes over the past thirty years. Although Professor Moore emphasized that the issue of taxation is not one that originated with the Rajapaksas, he did note that the post-2019 Rajapaksa government has exacerbated taxation issues by simply giving up 30% of taxation revenues following the electoral victory in 2019. Due to the reduction in tax revenue, the government grew less capable of repaying government bonds, resulting in bonds being hit with higher interest rates and the government borrowing at higher interest rates to service the growing debt. Professor Moore aptly described this form of economic and financial management as being defined by “gross incompetence”.

Domestically, Professor Moore pointed out, the Rajapaksas, who have inserted several family members into key political positions, have enjoyed significant support due to their role in the civil war. This base of popular support, however, has been rapidly eroded by economic and financial mismanagement and the Rajapaksa’s assumption that the family could push through any kind of policy. The government’s mishandling of the economy is particularly apparent due to Sri Lanka’s comparatively good economic performance over the last decades, a result of the island working as a key trade node in the Indo-Pacific. Professor Moore further highlighted that the civil war, which ended in 2009, did neither significantly derail the economy nor led to the immense accumulation of foreign debt. The debt denominated in foreign currencies was only accumulated after 2009 due to the growing economic mismanagement by the Rajapaksa governments.

When discussing the role of Chinese investments in infrastructure and their alleged contribution to the economic and political crisis in the country, Moore stated that it is important to mention that China is not the only funding body in those projects and thus the responsibility for the status quo is shared together with other actors. According to him, the current unfavorable circumstances are result of debt accumulation, policy missteps and ill-conceived infrastructure projects built with Chinese funds. He gave the example of the Hambantota port, which is far too large in size, based next to an airport which is rarely used, both being situated in a rural area which provides little economic activity, ultimately causing over expenditure and small returns. Therefore, as Professor Moore stated, it becomes clear that the Chinese government cannot be solely blamed for this economic fiasco, but it is also not blameless. Given the dismal situation of the Hambantota port, its handing over to China became one of the only solutions for the Sri Lankan government to deal with the accumulating debt. In addition, initially this project generated employment opportunities and business opportunities for intermediaries to generate further profit, which further lured the Sri Lankan government to proceed with it. As Moore explained, it is difficult to ignore the Rajapaksas’ excessive self-confidence and sense of power in analyzing their decision-making behaviour. As neither of them possess substantive knowledge in macro-economics, which also translates into their appointed staff which is highly incompetent, the thoughtless and inefficient use of Sri Lankan government funds becomes evident.

Professor Moore continued explaining how given the geostrategic importance of Sri Lanka, the competition for economic and political influence on behalf of foreign actors is inevitable; hence, the involvement of China is not isolated. India in recent times is also building its presence and has pledged a $2 billion economic aid package. Interestingly, Moore noticed, China has been remarkably quiet and has not responded to requests for emergency loans, which could be interpreted as Beijing not wanting to be associated with the Rajapaksas due to their negative reputation and hoping for a new government, with whom they could forge relations.

Mr. Qureshi further asked Professor Moore, what the latter assesses is the state of the security landscape in the country, particularly in regard to terrorism. Moore argued that while Tamil separatism still remains a reality, he does not see it reviving in the foreseeable future. When it comes to the 2019 Easter bombings allegedly orchestrated by ISIS, he stated that most likely this was a one-off event which ‘succeeded’ precisely due to the incompetence of government security agencies expressed earlier. Thus, there are grounds to argue that it is unlikely for an Islamic terrorist attack to take place again.

Yet, a relevant security threat, according to Moore, is the possibility of the armed forces to intervene on behalf of the government against protesters and demonstrators. So far, the situation is less concerning than one would imagine, Moore stated, particularly given prior experiences; nonetheless, the military has said that they will not target any peaceful protestors, which is a good trend. As a result, a successful military coup is improbable until and unless there is a major breakdown of law and order.

Approaching the end of the interview, Mr. Qureshi inquired what shall be seen as the bigger issue in the country – the political or economic crisis. Professor Moore explained how these are two interwoven concerns; on one hand, the nation carries a long history of political conflict and division, exhibited via civic dissent and demonstrations, and on the other, this has been exacerbated by the energy shortages and economic woes experienced by the people. In addition to that, other sectors of society have started expressing their discontent with the government. Notably, the private sector, which until now had remained silent, has released statements on behalf of different members of the chambers of commerce supporting the designation of the country’s leaders. Similarly, the Buddhist order has done the same, which is particularly curious given that Buddhism is virtually built into the country’s constitution.

On the question what parallels he sees between the situation in Sri Lanka and Pakistan vis-à-vis Chinese investments, and what projections could be drawn, Moore stated that this is to some extent due to the India factor, given these are junctions where China would like to gain presence in order to keep poking India. This is a good example of the Sino-Indian rivalry playing out in the region.

To conclude, Mr. Qureshi asked what are the long-term structural reforms that Sri Lanka needs to undertake to keep loans at a reasonable rate, while ensuring economic growth and less dept-finance growth. Moore argued that the long-term economic outlook for Sri Lanka is not at all bleak, as the country has benefited greatly from Asia’s economic growth, and there are new economic activities emerging; thus, putting aside the debt crisis, the economy would be fine, especially if people from the public sector are released and redeployed in the private sector. When it comes to the fiscal crisis, one conceivable solution would be to reverse the recent changes made by the government regarding the tax cut.-(EFSAS Interview)