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Lessons from Sri Lanka on populist economic interventions

Opinion
 Protesters, many carrying Sri Lankan flags, gather outside the presidents office in Colombo, Sri Lanka, Saturday, July 9, 2022. [AP Photo]

A recent Daily Mirror editorial on Sri Lanka mentions that since independence, the country had implemented a number of welfare measures such as, “subsidizing costs of food and fuel.”

It adds that “these measures were intended to gain electoral popularity, but they also led to a weakening of the economy.”

Last year, Sri Lanka reached the zenith of its economic and financial crises. Angry protestors converged on the presidential residence.

The Prime Minister declared a state of emergency and a curfew. Despite the police firing teargas, the protesters were undeterred even as violence and political chaos gripped the country. The president eventually fled to the Maldives.

Analysts attribute the sad state of affairs in this island nation to economic mismanagement that weakened the country’s public finance. The situation was exacerbated by deep tax cuts enacted by President Rajapaksa’s government soon after taking office in 2019. 

Runaway inflation reached dizzying heights of over 60 per cent. The country’s currency collapsed by 80 per cent. It was soon unable to make interest payments on its loans. It became commonplace for Sri Lankans to skip meals as they lined up for hours to buy scarce fuel and cooking gas. Despite the necessity, Sri Lanka held off talks with the International Monetary Fund (IMF).  The country instead banned imports of fertilisers and precipitated the decimation of the nation’s staple rice crops. This only drove the price of rice higher.

Eventually, much too late, Sri Lanka got into talks with the IMF and other lenders to restructure its debt. These events sound far removed from Kenya. But to analysts who have been warning of profligate public borrowing and spending on vanity projects, these occurrences instill a sense of foreboding.

Last year’s fuel shortages across the country were a warning shot across the bow. The country’s staple maize, having reached an unprecedented Sh250 for a two-kilo pack spoke, of an impending crisis.

And aspersions were cast on Kenya’s ability to repay its onerous public debt mostly acquired under the former Jubilee administration.

But the country has defied all odds and managed to stay afloat. Only just! It has taken hard and painful decisions to undo the financial damage of a putative bibulous former leader.

Eschewing food and fuel subsidies in favour of fertiliser subsidies, the antithesis of the Sri Lankan approach, is proving beneficial. There are no fuel shortages reported.

Maize meal is now available at under Sh200 for a two-kilo pack. Inflation has been brought down from 9 percent to under 7 per cent, well within the Central Bank of Kenya’s target. Tax cuts have been avoided even as the country engages in timely talks with Bretton Woods institutions on the management of its debt.

No doubt, Kenyans are hard hit by these measures. But there is no other way around them. Not if the country wants to avoid going the Sri Lankan way. While calling for reintroduction of food and fuel subsidies and tax cuts poses a seemingly arresting prospect, it is nothing more than manifest bunkum. It is impractical, populist and like former Sri Lankan leaders, meant to gain electoral popularity. It must be called out.

-The writer is a public policy analyst

 

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