There is a time to play politics, a time to destabilize governments for political gain, and a time to hide the truth from the people, again for political gain. This is not that time, as the consequences arising from the war in the Middle East are far too devastating for the global economy, and therefore for Sri Lanka. The current behavior of the Opposition and some trade unions is like that of ostriches with their heads in the sand. The underperformance of some ministers makes matters worse for the country. It is time to take stock of the performance of certain ministers and make the necessary changes so that the country can weather the impending storm with the least discomfort for the people. It is time to assess the country’s economic situation before the storm is upon us and take measures to avoid a social upheaval that might become inevitable if action is not taken now.
The article titled “Strait of Hormuz closed by Iran: An economic Tsunami in the making for Sri Lanka?” laid out the scenario facing Sri Lanka should the war in the Middle East continue for a prolonged period. At present, it does not appear that the conflict will end soon, and all indications are that it will continue and cause irreparable damage to the global economy. Sri Lanka is not on a sound economic footing to weather such an economic tsunami, although it has shown very positive signs of recovery in recent times. The economic fundamentals in Sri Lanka are flawed, and successive governments that have ruled the country since independence have not had a strategic economic vision, although various development projects have been undertaken. A strategic vision entails a sound economic foundation where the country borrows for investments that yield good financial returns, rather than for consumption; manages its service expenditure with its own funds; builds a net debt-free economy with high foreign reserves; achieves strong GDP growth and high per capita income to retain its talent within the country; and prepares the economic platform to facilitate ongoing foreign and domestic investment. The bankruptcy in 2022 showed that Sri Lanka never had an economic vision to avoid such a debacle. In order to achieve such a vision over time, a National Economic Governance Framework was suggested in the above article, and it is reiterated here.
Sri Lanka, as well as many other countries, will face negative consequences arising from the current war in the Middle East. These will require both immediate and long-term measures.
The closure of the Strait of Hormuz, along with its impact on the movement of supplies and on the production of oil and gas in Middle Eastern countries, will result in shortages and major price hikes. This will have a cascading effect on the economies of many countries. Unless this conflict ends soon and a solution is found to whatever issue precipitated it, a new world order of shortages, inflation, rising prices, increasing poverty, food insecurity, and general civil unrest could emerge. Sri Lanka will undergo this downward transformation from a country just beginning to recover from bankruptcy, to a lesser or greater degree depending on how it prepares for these possible eventualities.
Sri Lanka spends a considerable amount on food imports. These will be affected by slowing production in exporting countries, transportation challenges arising from fuel shortages and high fuel prices, and shortages of inorganic fertilizers both in producing countries and in Sri Lanka for local cultivation. While assessing local production and its sufficiency, Sri Lanka will have to explore food imports from countries that are relatively less impacted by the Middle East crisis. This must be treated as a top priority.
If the war in the Middle East continues and the global economic impact spreads, the production of drugs by the pharmaceutical industry will be affected. A significant number of pharmaceuticals are petroleum-based or utilize petrochemical derivatives as raw materials in their manufacturing process. Many common drugs, including aspirin, paracetamol (acetaminophen), and various antibiotics, are synthesized from petrochemicals such as benzene and toluene. Transportation challenges will exacerbate the problem. Sri Lanka will have to take immediate measures to assess the availability and duration of existing stocks, at least for essential items, and take steps to procure additional supplies, keeping in mind their expiry dates.
These economic fundamentals could be seriously affected. Foreign reserves (currently USD 7.2 billion), which are sufficient for about 3.5 months of imports, could dwindle if export income and overseas remittances decline—as they likely will—forcing the country to use reserves to fund imports. Considering the likely rise in inflation, pressure on supply unless demand is curtailed, and the economic impact on other countries, the Sri Lankan rupee may have to be devalued to contain foreign exchange outflows and maintain internal revenue at a level sufficient to fund essential services without resorting to significant borrowing.
Inevitable measures, though unpopular, will have to be taken. Politically, the government will face a daunting task in preparing for a situation it had no role in creating. However, this is not how the Sri Lankan Opposition will view it, and it may attempt to use the situation to destabilize the country in hopes of toppling the government. The government will have to minimize the impact of the crisis on the most vulnerable. Expenditure on energy (oil and gas) will have to be reduced. Planned power cuts and fuel rationing for private motor vehicles may become necessary. School days may need to be reduced to three or four days a week, and physical attendance at offices may need similar reductions, thereby lowering transportation costs. A food security assessment must be carried out urgently, and necessary measures taken based on the findings. The health service may need to be declared an essential service, with work-to-rule actions, stoppages, and strikes officially banned under emergency regulations, with strict penalties for violations. Exporters and those sending foreign remittances may need to be given incentive payments of 10–15 percent above the official exchange rate. All infrastructure projects may need to be temporarily halted, with planned expenditure redirected to an essential services reserve fund.
The fundamental premise of long-term reform must be to strengthen the country’s economy and move it towards greater self-reliance. Key components of this strengthening include increasing net foreign reserves and foreign asset wealth to match or exceed foreign debt; increasing export revenue sufficiently to meet these targets; introducing mechanisms to build foreign asset wealth similar to Singapore’s Temasek Holdings and the Government of Singapore Investment Corporation (GIC); expanding the manufacturing base to meet both local demand and export needs; increasing emphasis on preventive healthcare using nontraditional approaches such as Ayurvedic and indigenous medical systems, as well as practices like yoga, which focus on prevention rather than costly curative care; improving food security through a combination of measures; ensuring that recurrent expenditure is funded through local revenue without borrowing, while project expenditure is also largely funded locally with long-term debt used only where necessary; and ensuring that all infrastructure projects are independently assessed for cost and benefit prior to commencement. Energy self-sufficiency should also be a priority, with increased investment in solar, wind, and hydro power, including systems for reusing reservoir water similar to those used in the Snowy Mountains scheme in Australia.
It is strongly recommended that these long-term measures, along with other relevant reforms, be incorporated into a National Economic Governance Framework supported by all political parties and enacted by Parliament as a binding framework, to be reviewed every five years with the participation of all parties. While such a framework is essential to mitigate similar crises in the future, the immediate challenge requires unity. A call is therefore made to the broader political establishment—the government and the Opposition—to place the country before themselves and form a National Governance Committee to discuss, debate, and agree collectively on urgent measures to minimize the impact of the current crisis on the population. One of the committee’s primary responsibilities should be to communicate with the public in a unified voice about the global situation, its impact on Sri Lanka, and the necessity of the measures being implemented. This is not the time to play politics.
