Sri Lanka may be back on the tourism map but its recovery is fragile

Sri Lanka’s 1.5 million tourists in all of 2023 looks paltry against Thailand’s 6 million in January and February 2024 alone.
Sri Lanka’s 1.5 million tourists in all of 2023 looks paltry against Thailand’s 6 million in January and February 2024 alone.

Summary

  • Just back on the economic recovery wagon, the country’s policymakers must proceed with care, given the risks the economy faces. Plenty could still go wrong.

Sri Lanka’s bustling Colombo airport is busier than it has been in the past few years. Last year, the country welcomed 1.5 million tourists, a fifth of them from India. Long-stay Russians number 300,000 and have transformed some of the country’s southern resort towns, not always for the better. An airport might seem a peculiar barometer by which to gauge the recovery of a developing economy, but as a small, open economy trying to claw its way back to economic stability, it is a reasonable one. Tourism contributed $2.1 billion to the Sri Lankan economy in 2023, almost double the 2022 level. What Cambridge historian Sujit Sivasundaram characterizes as oceanic countries of the Pacific and Indian Ocean often share this dependence on tourism.

Sri Lanka’s dependence is more acute; along with textiles and tea, tourism is a principal money spinner for the economy and one with the most upside, as last year’s dramatic increase indicates. But Sri Lanka, which is undergoing an International Monetary Fund (IMF) restructuring of its large foreign debt, is also an emblematic case of a different sort. Ordinarily, a sharp currency devaluation would boost exports in a big way. But in today’s global economy of slowing developed-world demand, global value chains and lean inventory management, buyers in the West are likely to continue favouring countries such as Bangladesh for garment production, for instance, because its factories are embedded in their supply chains and are deemed more efficient. To some extent, Bangladesh and Vietnam are therefore immune to a competing nation’s lower labour costs via the currency weakness Sri Lanka has had. When I think about it—and I do think about it as a well-wisher of Sri Lanka as well as of India’s flagging labour-intensive industries—it is worrying that of my last four purchases from Marks & Spencer (M&S) in India, three were made in Bangladesh and only one in Sri Lanka, a country that used to be a favourite for buyers like M&S and Victoria’s Secret.

Colombo airport is thus akin to one of the island’s melodramatic sunsets, both an impressionist postcard and an omen of darkness ahead. The recent announcement that visa extensions for Russians and Ukrainians would be summarily withdrawn was an omen; Russians account for the second largest number of visitors. This may have been a knee-jerk reaction to a contemptible “whites only" party at a Russian beach establishment this month. But, President Ranil Wickremesinghe is reported to have asked this week for an inquiry into how this order was passed without consultation or warning. Both realpolitik and economic realities suggest it will be rescinded. Sri Lanka’s 1.5 million tourists in all of 2023 looks paltry against Thailand’s 6 million in January and February 2024 alone.

But as a January IMF report notes, there is plenty of good news. Real GDP grew 1.6% year-on-year in the third quarter of 2023, Sri Lanka’s first growth figure in half a dozen quarters. Inflation in February dropped to about 5%, not very different from India’s. Gross international reserves increased by $2.5 billion last year. But, as the IMF notes, “Staying the course on the reform agenda is necessary for… broad-based and stable growth."

The worry is that bigger reserves and lower inflation will lead to backsliding, arbitrary decision-making and dysfunctional politics as usual. The past week’s news points to this. The government faced flak in parliament because of a planned 70% hike in salaries of central bank employees, while the employment minister grandly declared that Sri Lankan women should not be allowed to work overseas as housemaids. Such a generous pay hike at the central bank is bad optics as well as bad budget management. And hundreds of thousands of Filipinas have worked as house help for decades and helped turn the Philippines’ economy around with their hard-earned remittances.

Meanwhile, increased borrowing to stabilize the Sri Lankan economy means interest payments are forecast to jump to an alarming 8.4% of GDP in 2024, much higher than the 7.2% IMF estimate in March 2023. Interest accounted for about 40% of government expenses in revised estimates for 2023, as Citi Research observes. This leaves little money to kickstart the economy by significantly boosting government investment. If revenues miss targets, like last year, expect public investment cuts.

These are unenviable choices, worsened by the obstinacy of private Western creditors. Sri Lanka is also a casualty of the Belt and Road Initiative of the Chinese government, which said this week it would probe allegations of corruption surrounding its projects in Africa and Asia. This month, the Sri Lankan government sent a counter-offer to its private Western bondholders who had proposed a 20% haircut in October. Colombo must sell off public sector enterprises and cut spending on public sector staff, both difficult with a general election in the offing. If its nerve fails, which is likely, it will further increase taxes on people who suffered a loss of purchasing power because of high inflation during the economic crisis (and because imports are so much pricier).

Sri Lankans may find themselves uncomfortably reminded of the lop-sided taxes endured during British colonial rule. The memoirs of English writer Leonard Woolf, an ‘anti-imperialist’ civil servant in the first decade of the 20th century, recount that divers for oysters had to give two-thirds of their catch to the colonial administration.

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