Sri Lanka: A two-act drama unfolding in Colombo

By Dr Kumar David | South Asian Analysis Group
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The large and quite unexpected (by the ordinary person) hike in all prices that Sri Lanka woke up to in the first week of February set off protest movements that are growing and could swell into something very serious within weeks or months. Then, apart from, or some say as an attempt to divert attention there from, the government unleashed a wave of street protests against “the imperialist plot to destabilise Sri Lanka and undermine its sovereignty” at the UNHCR sessions which opened in Geneva on 27 February. People in knowledgeable places say the diversion theory and the panic theory are both true. Hence the startled, jerky, anti-West campaign the regime has instigated.

It is clear that the government is very frightened. I do not know what Maria Otero and Robert Blake did or said to Lanka’s political leaders but they seem to have pressed on all the panic buttons; the behaviour of GoSL has changed dramatically since this January visit. What has been publicly said by the Americans is that they will move a resolution at the UNHRC calling on Sri Lanka to implement the Lessons Learnt and Reconciliation Commission’s (LLRC) recommendations and follow up on the accountability issues that the LLRC pussyfooted around with. (Accountability is a euphemism for alleged human-rights violations and alleged war crimes by the Lankan military).

Is there more than meets the eye?

True, if such a resolution is carried by the assembly (it is by no means clear whether this will happen) it will be a slap in the face for the Rajapakse siblings, but not for the country. What’s wrong with implementing excellent LLRC recommendations or probing the bloodletting in the Vanni in the final stages of the war? There could be other reasons for the government to get into a funk; perhaps incriminating personal evidence, perhaps broad economic threats. There are two ways in which the West can cripple Lanka’s economy; enforcing an embargo on imports of Iranian oil and imposing trade sanctions. The EU and US are our biggest export markets accounting for 50% between them.

An oil embargo is quite frightening because 93% of Lanka’s petrol, diesel and kerosene are derived from Iranian crude and our only refinery (Sapugaskanda) is designed for that type only. Alternative supply lines for similar crude have proved difficult to source and Lanka has a line of credit with Iran which it can forego only at a cost. Newspapers are talking of petrol rationing, but fuel supply disruption will be curtains for the haulage fleet, public and private transport, industry and tea factories. It is unlikely to come to this since Lanka’s leaders will capitulate before the precipice unless they intend to set off on a xenophobic, isolationist and militarist strategy in the belief that it will stir waves of mass support. But this is a very dangerous option. Washington and Delhi are unlikely to countenance military rule by an erstwhile China embracing Lankan regime.

An interesting side show is that the US State Department has brushed New Delhi aside and taken control of the international ‘Sri Lanka desk’. Priority is now reversed; Delhi is number two and follows at a respectful distance. The US had no option, given Delhi’s monumental blunders in handling the Sri Lanka issue in recent years when it was assigned the lead role. The latest gaffe was when Indian External Affairs Minister Krishna pranced on the Colombo stage six weeks ago attributing various promises to President Rajapakse ; four days after he waltzed away the President all but called him, in effect, a downright liar. From Delhi since then: Dead silence!

The Delhi-Colombo relationship has become a Jack and the beanstalk story. Brave Jack has felled the beanstalk with a mighty made in China axe and the giant is splayed in a thin paste all sputtering on the ground. Obviously Indian policy makers are foxed by what to do in Geneva; not even a hint of a leak creeps out. A tough line backing Washington will reassert authority but the current Indian Administration has timidity stamped all over it. Hence I am not taking bets.

The panic in Colombo is objectively justified. Even a best case scenario: Defeat of the US resolution and an Indian abstention (can India vote against a pro-LLRC, pro internal accountability resolution without making itself irrelevant to Lanka once and for all?) will only buy time. Old father clock is grinding forward with determination and the Rajapakses are with their backs to the wall. Its do or die time, so will they swallow the bitter medicine and ‘do’? The alternatives are suicidal.

Empty pocket goes to market

The way in which the Sri Lankan government mishandled the February price hikes is incomprehensible folly. It removed a fuel subsidy that had been in place for years, raising prices of diesel and kerosene by nearly 37% and 49%, respectively; it let the rupee float (fallen 5% already, probably settling 10-15% lower next month); imposed an 18% annual credit growth curb on banks (credit growth has been bounding along at nearly 40%); raised domestic electricity prices by 25% to 40% depending on consumer category, and upped central bank benchmark interest rates by 0.5%.

Justification or otherwise of these steps apart, isn’t this all-in-a-day big-bang a manifestation of suicidal inclinations? And there was an IMF team in town with euthanasia kit ready to hand. I cannot see how the government can avoid mass confrontation when inflation will soon soar to high double digits (despite manipulation of statistics). Has it decided it is ready for a show down and will crush unrest? The military in Sri Lanka is ruthless, so is the hegemonic core at the centre of state power; on the other hand the SLFP, the ruling party, is known for its populism and enduring soft relationship with a large mass base. It’s not that I can’t predict what will happen between the options of retreat and repression; this time it is inherently unpredictable. At times there is a Heisenberg’s uncertainty principle in politics as well; intrinsic unknowability.

There was much pressure on the exchange rate of the Lankan rupee (LKR) but only because of gross mismanagement by the Central Bank (CB). The country’s foreign reserves have fallen from $8.3 billion in August 2011 to about $5.2 billion at the time of writing. Why? Because CB depleted the reserves desperately fighting to shore up the LKR (sell dollars and buy LKR) and hold it at 114 to the dollar. But why such a big demand for dollars? Because the government relaxed import controls on luxury items, especially cars, which came flooding in (Colombo’s streets have become a driver’s nightmare), the trade deficit rose to the sky ($10 billion in 2011), and the tottering LKR rapidly lost value concealed by the CB pumping in dollars to buy it.

Now to continue in layman’s terms- this turned into a witch’s brew of recycling nightmares. The credit boom of the last two years was not because industry was borrowing for productive investment; no the chattering classes were borrowing and importing everything from luxury SUVs to simple Nanos by the boatload, not to mention stacks of consumer durables. Borrow and eat; recipe for disaster. When the CB soaked up LKR selling dollars, it had to find ways of getting LKR back into the market for circulation and economic activity, hence the low interest rate regime. “Come on banks, borrow from me and re-lend” said uncle CB. This is the story of Sri Lanka’s self-inflicted devaluation.

The petrol price story is another tragic-comedy. It is true that fuel prices have been subsidised for some years and the situation was not permanently sustainable. Well this is not quite true, petrol was marked above cost price to cross-subsidise kerosene (used for lighting and cooking in the tea plantations and some rural areas where firewood is short) and diesel (because of the haulage fleet and public buses). The subsidy was also spread over electricity prices and the Ceylon Electricity Board is a permanently loss making institution due to no fault of its own. The CEB does not pay its fuel bills, therefore the Petroleum Corporation is permanently ill-liquid, and somewhere along the line the government (the citizenry) picks up the tab. Oil prices have been hovering in the $100 per barrel region for a long time now and the government should have gradually adjusted the prices to market levels over the years. No, it did nothing for three years and then the Big-Bang; it removes in one fell sweep a subsidy so that the price of the fuels that most affects the subaltern classes rise by 40% to 50%! This is why I said suicidal tendencies.

Devaluation, jacked up fuel prices, rising interest rates and a credit squeeze all at once, all together, will mean not only high inflation (and visible instant anger on the street) but also a decline in GDP growth rates. The government claimed that real annual GDP growth in 2012 would be 8.3%, but that was before these fireworks. My personal estimate now is that it will be more like 6.5%; still not bad, but not enough to hold back anger because of great inequity of distribution, complicated, much more than in India, by corruption, because of a greater lack of transparency. This in turn is a consequence of much lower public civic consciousness.

I will close my story of the second drama in Colombo with some remarks about how the opposition to the government’s economic policies may develop. First I must remark, however, that the effort to divert attention by turning xenophobic anger in 150 orchestrated demonstrations starting 27 February to be sustained for the duration of the Geneva sessions did not get off to an impressive start. On the first day public servants (my friends) were told that they can depart from office, without taking leave, and join demonstrations. Marine Drive Colpetty, near the US Embassy, was a vast parking lot for vans in which protesters were bussed in. The Colombo demonstrations were moderately large but friends who had driven in from Tangalle in the deep south had seen nothing and the suburbs of Colombo stayed sleepy. I think there isn’t much enthusiasm and interest seems to be flagging from day-one. Turning attention away from economic concerns is not working.

The mood against price increases is building up in three sectors; fishermen from Chilaw (one life has been lost there in police firing) to Moratuwa and in Colombo City, in the trade unions, and more slowly but more ominously in the upcountry plantations. There is a possibility of Tamil fishermen in the north and east throwing in their lot. There is visible activity but it is not possible to say for sure whether a natural groundswell, apart from mobilisation by trade unions and the political opposition, is building in a big way. The next few weeks will show the shape of things to come.

© SAAG