A robust economic recovery for Sri Lanka requires an understanding of how the country fell into economic precarity. The learnings of both the Civil Society Governance Diagnostic Report and the International Monetary Fund’s Governance Diagnostic Assessment of Sri Lanka made it apparent that Sri Lanka’s economic crisis is first a crisis of governance. In other words, Sri Lanka’s economic crisis is primarily the product of issues in governance rather than economic failure. Moreover, unless the “foundational governance issues” are addressed the policies and plans for debt sustainability and economic recovery are likely to “be on shaky ground” (TISL 2023: 3). As the aforementioned reports already identify Sri Lanka’s governance issues and offer recommendations, this Brief does not replicate that exercise. Instead, it intends to tangibly demonstrate how said issues contributed to the economic crisis through a selection of case studies. More specifically, the Brief demonstrates how the excessive powers and discretion held by the executive branch of government, as well as weaknesses in tax policy and revenue administration, the public sector, public procurement, central bank governance, and anti-corruption — all issues of governance — heavily contributed to Sri Lanka’s economic crisis.
Of the issues and subsequent case studies examined within the Brief, a few are worth reiterating here. Firstly, the concentration of power within the executive presidency, intended to enable decisive action towards economic development, has resulted in unilateral and opaque decision-making. This has, in turn, facilitated incompetence or corruption. Presidential decisions that contributed to the crisis demonstrate this issue. For instance, in 2019, then President Gotabaya Rajapaksa disregarded economic expertise and introduced a tax policy that severely reduced government tax revenue. This adversely affected the country’s capacity to repay debt and further depleted its foreign currency reserves, catalysing Sri Lanka’s trajectory towards national insolvency. The lack of checks and balances on the President meant that there was no way to prevent him for following through on his reckless election promises even though the danger was foreseen. Therefore, it is essential to abolish the executive presidency and vest its powers in the collective deliberation and decision-making of Parliament. At a minimum, reducing individual discretion in decision-making will prevent the colossal errors that have resulted from the absence of checks and balances on the executive presidency.
Secondly, government expenditure in the public sector is excessive and has little impact. The large number of public sector employees burdens the government purse, nor does it have anything to show for it in the form of efficient public service delivery. The military illustrates this in having and spending on far too many personnel which does not translate to the country’s defensive needs. This is unlikely to be the only example of this from the public sector. The public sector should be proportionate to each government department’s needs.
Thirdly, the state must have a coherent rationale for engaging in the market. Due to its limited capacity with state-owned enterprises, the state should exit competitive markets where the private sector can deliver goods and services more cheaply, efficiently, and at better quality. Before being acquired back by the Sri Lankan government in 2008, Sri Lankan Airlines managed a profit of LKR 9.29 billion in its last year of private operation (The Sunday Times 2016). Despite increased tourism and low fuel prices over the next seven years, Sri Lankan Airlines as a state-owned enterprise experienced a loss of LKR 128.2 billion (ibid.). Privatising such state-owned enterprises would boost tax revenue, productivity, and reduce government expenses.
Lastly, the absence of punitive action against corruption has resulted in its prevalence throughout government. It is essential that anti-corruption measures are shielded from political influence and sufficiently resourced to recover losses due to corruption, and more importantly, to serve as a deterrent to corruption. Ensuring the autonomy of the Commission to Investigate Allegations of Bribery and Corruption and establishing an independent Public Prosecutor’s office are first steps in that regard.
Of course, this Brief does not exhaustively discuss Sri Lanka’s issues in governance that contributed to the crisis. However, the central takeaway is that Sri Lanka is experiencing a crisis of governance and its recovery from national insolvency and overall economic precarity necessitates addressing the foundational governance issues that plague the country.
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