A subcontinent on edge

Abstract-South Asia’s recent spate of economic crises expose the elite high-handedness and disregard at the heart of the region’s political processes. Years of reckless fiduciary policies have created a domino effect of crumbling economies that have left the common man struggling to avail basic amenities. How and why these nations ended up in this predicament is no surprise but responsible policies and plans have to be implemented to prevent a future recurrence.

Keywords- Economic Crisis, Sri Lanka, Pakistan, Maldives, Nepal, South Asia

As of June 1, the Pakistani government has exponentially hiked the rates of ghee and cooking oil by as much as Rs 208 and Rs 213 respectively. The nation’s economic woes run parallel to that of Sri Lanka, which has been plagued with a similar disaster for months. The Pakistani currency has seen a sharp decline with prices of necessary goods seeing a sharp price hike while Sri Lankan continues to face an acute shortage of essential items and became the first nation in the Asia Pacific to declare a sovereign default (a sovereign country’s failure to pay its debts) in the 21st century. Both the Pakistani and Sri Lankan monetary collapse can be attributed to the huge amounts of external debt owed to one country in particular- China. Beijing has continued to discredit all critiques of fostering what is known as ‘debt trap diplomacy,’ insisting its investments in both nations were “responsible and well planned out.” Why and how then, did they convince the governments in Islamabad and Colombo to channel much of the money borrowed towards ‘white elephant’ projects whose returns would never match the billions invested? To add to the considerable panic, the countries now have to rely on the IMF or World Bank to overcome their predicament. These multilateral organisations have long harboured predatory money lending practices that force the borrower country to override constitutional and institutional frameworks to accommodate the caveats of the agreed loan.

This seemingly domino effect of economic crises exposed once again the structural mismanagement that lies at the root of the region’s complex political and economic systems. The Pakistani administration’s overzealous military budget and endemic corruption do not make for novel headlines anymore. However these factors have certainly exacerbated the current  state of affairs. The political turmoil that occurred in April propitiously minted Shahbaz Sharif as the man at the helm of an ever spluttering machinery. Sharif may have taken to his brother, Nawaz Sharif, as far as a career in politics is concerned, but if fraternal ties run any deeper, his story will not have a happy ending. His government faced a severe dilemma- whether to continue the fuel subsidies that the Imran Khan government had upheld or honour the IMF demands which call for it to be removed as a precondition for renewing Pakistan’s loan program. They tilted towards the latter to accommodate and ensure the IMF bailout, essentially increasing the fuel prices by a whooping 30 Pakistani rupees (around Rs. 12 INR). Now the price per litre has crossed PKR 209 for petrol and PKR 204 for diesel.

Meanwhile Sharif’s Sri Lankan counterparts- headed by the Rajapaksha’s- decision to levy untimely tax cuts and grotesquely underestimate its falling forex reserves (that all but depleted in the midst of the pandemic), has plummeted the island nation into an unparalleled situation. Under the family’s rule, Sri Lanka has incurred a huge stack of Chinese debts that have notoriously yielded little to no income. One such project close to the Rajapaksas’ hometown was dubbed “The World’s Emptiest International Airport ” (Forbes). The Hambantota International Port, for which the Sri Lankan government has taken loans at commercial rates from the Export-Import Bank of China (EXIM Bank) between 2007 and 2016, has failed to generate revenue from transit fees, servicing fees, cargo fees, and leasing land for commercial and industrial activities. Once again, governmental mismanagement and inadequately backed policies ensured a complete erasure of state revenue and personal incomes.

Nepal on its part has also shown classic symptoms of a brewing economic crisis. Foreign exchange reserves have fallen by 18 per cent in mid-March since last July, enough to last for just six months of imports. Inflation in the country at 7 per cent is the highest in the last 67 months with crop loss due to last floods adding to its food-fuel inflation already exacerbated by the Ukraine-Russia war. Another country disadvantaged by this development is the Maldives. Oil imports constitute the highest part of its GDP with 20 percent of its tourists coming from war-hit Russia and Ukraine. India has shown great resilience in the face of its neighbourly pandemonium but an eight-year-long inflation, soaring energy and commodity prices due to the Russia-Ukraine war, are threatening to squeeze the economy.

A careful analysis of the current political turmoil in these countries clearly shows the common trend- a failure to adapt to the pandemic, improper policy initiatives and an over enthusiastic habit of borrowing from countries like China. The lack of well thought out foreign investment plans

reflects the woeful apathy of the ruling elite and a constant misdirection of priorities. The Sri Lankan crisis has already turned violent whereby politicians have been targeted and physically tortured by rioters whenever they were seen in public. Mobs have burned buses and torched hundreds of homes owned by allies of the Rajapaksas. A lawmaker from their party was beaten to death, his body dragged through the streets. Mahinda Rajapaksha has already resigned from his Prime Ministerial post and anointed Ranil Wickremesinghe as his successor. Meanwhile his brother Gotabaya refuses to resign as President, insisting that he can turn this spot of bad luck around, by appealing to international donor agencies and friendly nations for urgent financial assistance. Critics have insisted that this is a rude wake up call for the end of dynastic politics, the likes of which has dominated Sri Lanka for nearly 20 years.

Even before the pandemic, South Asian economies were showing signs of weakening, with the World Bank pointing this out in its 2019 report. Prior to that, the region was unmatched as the ‘world’s fastest growing region,’ until it lost to East Asia and the Pacific in 2019. COVID-19 and an overt dependance on remittances and tourism, have crippled cash flow. In the long term, this economic malaise is fundamentally a structural failure. Chinese debt comprises a hefty 10 percent of the entire Sri Lankan debt but populist tax cuts and ill-timed measures are also major reasons for this decline. Similarly, thrusting the entire blame on ‘China-Pakistan Economic Corridor’ for Pakistan’s isn’t an entirely rational analysis. The country’s political economy has traditionally always favoured the military and big businessmen.

Another pressing issue with these countries is their over-reliance on loans and remittances for foreign exchange because of their own dismal export performance. Nepal, Pakistan and Sri Lanka have seen a steep decline in exports within the last two decades. Falling exports ipso facto call for a thorough restructuring of the economy to become more efficient while focusing on trade as a source of foreign exchange. Trade deficits further highlight the need to curb non-essential imports and encourage domestic industries through rigorous taxation policies and subsidies instead of blatant appeasement. South Asia’s dependence on remittances and sectors such as tourism becomes especially worrying due to their debt-seeking behaviour. Ideally, these nations must reiterate prudent fiscal policies and diversification of exports but the elite’s preference for populism creates a certain roadblock. Amidst all this chaos it is important to note that while the common man struggles to avail basic amenities, their leaders and politicians routinely let bad politics triumph over good economics.

Ayanika Das

Intern, Asia in Global Affairs