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* As Bangladesh Rises, Sri Lanka Finds India is Not the Only Neighbour With Deep Pockets
Thu, Jun 10, 2021, 06:40 pm SL Time, ColomboPage News Desk, Sri Lanka.

June 10 (Wire) About two weeks ago, Bangladesh’s central bank approved, in principle, a $200 million currency swap deal for Sri Lanka, intended to bolster the latter’s dwindling foreign exchange reserves.

This has evoked more than a little surprise, given the overall development levels of the two countries: Sri Lanka’s income per person is twice that of Bangladesh (in terms of current US dollars), and the global perceptions of Bangladesh are not always flattering. How did it come to this?

The proximate cause of Sri Lanka’s plight is government borrowing, especially from foreign sources. When its civil war ended in 2009, Sri Lanka enjoyed a peace dividend. Its economic growth accelerated from 3.5% in 2009 to 8, 8.4 and 9.1% over the next three years. However, this growth was driven by unsustainable increases in government spending, with the rolling out of mega infrastructure projects, largely financed by the public sector. One example is the economically unviable Hambantota Port.

In recent years, Sri Lanka’s growth has plummeted, from 5% in 2015 to 2.3% in 2019, the pre-COVID year, and to an estimated -3.6% in 2020. External debt as a share of gross national income grew from 39% in 2010 to 55% in 2014, and further to 69% in 2019. Most of this increase originated in the public sector. The Spring 2021 World Bank economic update shows Sri Lanka facing a high risk of debt sustainability, and rating agencies have downgraded its long-term debt rating.

However, a big part of the crisis owes to Sri Lanka’s trade regime and the resulting trade outcomes. In 1977, Sri Lanka became the first country in South Asia to start liberalising its protectionist trade stance; it reaped handsome dividends in the form of a rising share of exports and trade in its economy. Unfortunately, this course was reversed in the early 2000s, with the introduction and increasing importance of non-transparent “para-tariffs”: tariffs that have different nomenclatures such as cess, ports and airport levy, etc., but that are import duties in all but name. If such para-tariffs are included in the calculation of overall tariffs, as they should be, Sri Lanka’s reported average tariffs (2016 data) shoot up from 10.8% to 22.4% (see Chapter 2 in A Glass Half Full). Moreover, these average tariff calculations obscure the much higher overall import protection as well as “effective protection” in sectors of domestic interest. Overall, these changes led to an increasingly “anti-export bias” in the economy, with growth being propelled by non-tradable sectors. Such impulses have seen a renewed boost since a new government, led by President Gotabaya Rajapaksa, came to power in late 2019.

The starkest evidence of the anti-export bias can be seen in the share of Sri Lanka’s trade and exports in its overall economy. Its trade to GDP ratio peaked at 89% in 2000, but then saw an unprecedented decline to 46% by 2010; it was 52% in 2019. Similarly, exports as a share of GDP declined from 39% in 2010 to less than 20% in 2010; they rose somewhat to 23% by 2019. But the overall decline in exports and imports since 2000 is possibly without precedent in a small, modern economy.

Read More:: Wire (Source)