The resignation of the entire Sri Lankan Cabinet of ministers, as well as the governor of its central bank, is unlikely to assuage public anger against the Rajapaksa government, as the catastrophic economic crisis gripping the country, and the resultant hardships for the people, is unlikely to be mitigated anytime soon.
Sri Lanka’s Lemony Snicket-esque series of unfortunate events which triggered the downslide were present in many other countries as well, including those which are similar to Sri Lanka in the size and shape of their economies. But Sri Lanka’s responses to these events — or in some cases the lack of it — has precipitated the current acute crisis that the island nation is experiencing. These hold valuable lessons, not only for those who have to steer Sri Lanka out of its current troubles, but for chief executives and business leaders everywhere.
Recap of the troubles
First, a recap of the troubles. Sri Lanka’s current crisis arguably had its roots in the 2019 Easter terror bombings of churches and luxury hotels in Sri Lanka, which began the disastrous downfall in tourism, Sri Lanka’s biggest source of foreign exchange earnings. This was followed by the Covid pandemic which hit other foreign exchange earning sectors like apparel and tea exports as global growth and trade faltered.
The global economic slowdown also hit Sri Lanka’s second biggest exchange earner — remittances from overseas Lankans — as thousands of overseas Sri Lankan workers lost jobs. And all this was made worse by Sri Lanka’s debt-fueled infrastructure spree over the past decade or so, which had saddled it with crushing domestic and overseas debt at a time when its foreign exchange reserves were dwindling and the current account deficit widening.
The point is that all these have been experienced by other countries as well. Bali bounced back from the 2002 terror bombings which destroyed its tourism-dependent economy, as have global cities like New York, Paris and London. Countries like the Philippines, Bangladesh and Myanmar too have been impacted by the Covid impact on apparel exports or even overseas worker remittances. And Sri Lanka’s estimated $11 billion debt exposure to China (including private sector loans) is actually smaller than that of Laos and is comparable to that of Bangladesh or Malaysia.
But none of these countries are in quite the kind of hole that Sri Lanka is in at the moment. Sri Lanka’s problems are uniquely Lankan because of the series of policy miss-steps and blunders, particularly by the Gotabaya Rajapaksa government after its return to power in 2019.
In retrospect, these now amount to almost a textbook case of what not to do. However, it is not just policymakers and administrators who can learn from the Sri Lankan experience. There are actually signal lessons that CEOs — whether in the government or the private sector — can learn from the Lankan muddle.
Tax reforms
The first Lankan lesson is this: what was a good idea in the past need not necessarily be a good idea now. The Rajapaksa government undertook some sweeping tax reforms after it returned to power in 2019. This was a poll promise of Rajapaksa’s party the Srilanka Podujana Peramuna.
The tax changes drastically altered the structure of both indirect and direct taxes. While the Value Added Tax rate was almost halved from 15 per cent to 8 per cent in most cases, the VAT registration floor was raised to LKR 300 million per year. The VAT on services provided by hotels, restaurants and such like who were registered with Sri Lanka’s tourism development authority was cut to zero provided they procured 60 per cent of their supplies locally.
On the income tax front, the exemption limit was raised to LKR 3 million per annum, and the progressive tax rate slashed to a maximum of 18 per cent for individuals and corporate income tax reduced to 14 per cent for many sectors. All income from agriculture, livestock, fisheries, as well as IT services and provision of services overseas was made exempt from income tax.
All of these combined to induce a disastrous drop in the government’s revenues, derailing its debt-repayment programme and precipitating the current foreign exchange crisis which has led to acute shortages of imported fuel, food products and power. So why did they do it? That was because back in 2009, the Mahinda Rajapaksa government had used sweeping tax reforms to kickstart consumption after the end of the decades long civil war, and the current dispensation had promised a return to that golden era by doing the same thing.
However, 2019 was very different from 2009. The unanticipated terror strikes, followed by the Covid pandemic, effectively derailed the revival. At a time when the government needed funds the most, it was left struggling for revenues. So that’s CEO lesson number one: just because something has worked in the past doesn’t mean it will work again in the future.
Organic farming
The second lesson lies in the disastrous decision to shift overnight to organic farming. The total ban on the use of chemical fertilisers and pesticides wreaked havoc with the country’s critical plantation sector and nearly halved the output of the key rice crop. Although the decision has been mostly rolled back now, the impact will take much longer to repair.
And thereby hangs CEO lesson number two: listen to the experts, don’t be blinded by an idea because it’s yours. What you may think is a brilliant idea may not actually be so. The Rajapaksa government’s decision went against scientific advice from its own specialists. And the country and its farmers paid the price.
Infrastructure projects
The third CEO lesson is this: don’t let vanity or personal ambition decide how you expend your resources. Nothing illustrates this better than Sri Lanka’s white elephant infrastructure projects — the barely used Hambantota port, the spanking new Mattala Rajapaksa International Airport now being used to store paddy and the Colombo Port City reclamation project, all funded by costly Chinese debt which the country is now unable to repay.
These were vanity projects of the Mahinda Rajapaksa government, driven by the elder Rajapaksa’s desire to be seen as the builder of a modern Sri Lanka. Unfortunately, vanity combined with lack of vision and economic sense is a dangerous combination. This is as important for corporate CEOs to remember as it is for presidents and prime ministers.
The writer is a senior journalist
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