Popular belief is that recessions are the worst events to take place around the globe and should be

avoided like the plague. In reality however, both recessions and plagues, simply put are inevitable in
the socio-economic cycle as we are learning from the Coronavirus pandemic and the associated
global downturn that is presently taking shape. While this is a lesson repeated throughout the
course of history, sadly it is yet to be heeded by humankind.

Pathology is a crucial science, it helps to determine the underlying cause of death in life forms.
Similarly, the pathology of many a boom and bust in the global economic cycle reveals some
inviolable truths pertaining to recessions.

Primarily, recessions are unavoidable and in fact are an inevitable part of the economic cycle.
Secondly, recessions are definitely manageable and lastly recessions occur within days in stark
contrast to a boom which takes years to bear fruit.

In Sri Lanka, the administration led by the President has ordered a total lockdown of major districts
for the past one month in a bid to contain the Coronavirus, this same action simultaneously sounded
the death knell to the perceived confidence in the already ailing and indebted Sri Lankan economy
thereby causing the inevitable recession to set in.

Debts Servicing Moratoriums and Pay Cuts – an oxymoron

As early as March 17th , the Sri Lankan President issued a decree to grant a six month moratorium on
debt servicing, an economically sound and prudent measure to ensure a higher disposable income to
the populace and thereby stave off an economic downturn.

In contrast, from the very outset of the lockdown, a leading Private sector entity was gunning for pay
cuts ranging from a cut in allowances to lower levels and starting from 35% to executives, up to a
60% pay cut at top tiers, sighting falling revenues from lack of local sales and exports. It is expected
that many other private ventures sans a few Private Sector Heavyweights to have followed suit.

While the State Sector had so far been insulated from a pay cut, some institutions deferred
performance pay for the previous year which is traditionally due before the dawn of the Sinhala and
Tamil New Year.

In an even more baffling move, on April 17 th, the Secretary to the President, Dr. P. B. Jayasundara
announced that he had voluntarily contributed his salary for the month of May to the Widows and
Orphans Fund and had addressed all heads of state institutions requesting state servants to follow
suit or part with half a month’s, a week’s or at least a day’s wages to the said fund. All in the name of
cutting down the government’s debt obligations.

Thus on one side we have the President himself unveiling policies that strive to ensure a higher
disposable income and on the opposite we have most of the Private sector businesses ensuring its
employees have less disposable incomes. At a glance it is an oxymoronic turn of events.

Worse still is the fact that, even the Secretary to the President does not seem to share in his
superior’s wisdom and has thrown in his lot with the harbingers of economic downturn. The ensuing
storm of protests have elicited a muted response from the government bigwigs limited to claiming
the Secretary’s stance was his private view and his actions voluntary and is not binding upon state
servants.

Even stranger is the administration’s silence on the wayward private sector entities’ behaviour,
which would suffice to negate whatever positive outcome achieved by the debt servicing
moratorium and thereby directly contradicting the President’s policies.
What started has a resolve to implement the Keynsian Economic Theory of Stimulus Spending, in an
attempt to increase disposable income has petered out, which is not unusual for Sri Lanka. One only
needs to look back at the economic history of Sri Lanka post-independence to acknowledge
numerous promising economic policy initiatives that were started only to be shelved by successive
governments leading to one constant witnessed till today – steady economic decline.

The Debt Trap – A vicious Cycle

Generations of poor public finance management in Sri Lanka, has successfully led to the rise of a
burgeoning national debt, which as of the end of 2019 was standing at Rs. 13,031.5 billion. Given
that the total gross domestic product of Sri Lanka is estimated at Rs. 15,016.1 billion, leads to a Debt
to GDP ratio of 86.8%. The subsequent negative outlook given by rating watchdogs, further
exacerbates the situation prompting the government to offer a premium yield on Sri Lankan bonds
to lure international lenders, relegating the nation to issue Samurai and Panda Bonds. Thus
borrowing afresh to pay off earlier borrowings – a vicious cycle. This backdrop is by face value alone,
an ominous sign of an oncoming economic catastrophe.

However, to declare that a ballooning national debt by itself to be a cause for economic crisis is far
from the truth. In fact, many a developed nation have recorded excessive national debts, sometimes
exceeding their gross domestic product. As of January 2020, the USA recorded a national debt of
USD 23.2 trillion, the highest national debt on record in the world and is 108% of its GDP. Yet, the
economic resilience of the USA remains unhampered with the demand for US sovereign bonds
remaining high and therefore keeping yields low.

One may argue that, the USA owing to its status as a global superpower and the strength of the US
Dollar being a global currency lend credence to its sovereign status amidst international lenders
which are unavailable to Sri Lanka and hence comparing both is inconsistent. However, it should be
reminded here that many states of the mighty USA reneged on their debt obligations in the past.
Most western economic powerhouses such as France, Germany, Turkey, Sweden, Denmark and the
Netherlands have also defaulted on their sovereign debt in the past only to regain their economic
prowess today. Similarly a number of other states including Russia, Greece, Iceland, Italy, Spain,
Thailand and Argentina have temporarily suspended servicing debt obligations in the past only to
spring back stronger.

Given this history, it is reassuring to note that, Sri Lanka post-independence or as colonial Ceylon
prior to that, has never once defaulted on her sovereign debt. This fact alone puts Sri Lanka in a
league of a few elite nations that command the respect of lenders.

Hope springs eternal

Contrary to ruthless international money market speculators and their myopic enablers the ratings
watchdogs, Sri Lanka is not in dire straits. In fact, it is in a unique position to avail of many
opportunities in addressing the unfolding economic crisis.

If Sri Lanka is forced to service its debts when it is unable to, the country will have no option but to
default. This simple logic is clear to all lenders who in order to avoid a unilateral suspension of debt
servicing by Sri Lanka would be more than eager to come to terms, far more favourable to both
parties.

As a preliminary measure, the President in collaboration with other non-aligned nations has
requested international lenders to grant a reprieve in view of the economic meltdown cause by the
coronavirus by means of a temporary debt servicing moratorium until as such effected nations can
get back on their feet. A commendable move, which with proper diplomacy will bear fruit.

In addition, the president should address the concerns of the private sector by ensuring they do
have working capital by means of quantitative easing measures that the Central Bank could enact.
This would ensure their operations are carried out optimally without resorting pay cuts. In addition,
this will ensure investment in local businesses and industries, raising incomes and then fuel demand.

Further, the declining exchange rates is an added bonus in incentivising exports while making
imports unpopular due to the cost, as well as increase tourism, especially the health and eco variety.

While stricter austerity measures are the proven recipe to ensure economic recovery in the shortest
span it remains a bitter pill for the masses to swallow. As a compromise, some fiscal discipline in the
form of maintaining social and welfare services for the people while imposing a cap on subsidies that
make industries inefficient, a strict clamp on public recruitment and minimising inefficient public
enterprises would go a long way to assuage the fears of international lenders while remaining
palatable to the people.

While the President has demonstrated clarity in the direction to be taken in terms of economic
recovery, it remains to be seen whether his subordinates would share his vision, rising above petty
party politics at this time of unprecedented economic and social upheaval.