Previous Quarterly Editions
Expropriation Risk: 58 58 58 61 ► Political Violence Risk: 48 48 48 48 ▲ Terrorism Risk: 55 55 55 55 ▲ Exchange Transfer and Trade Sanction Risk: 55 55 55 55 ▲ Sovereign Default Risk: 57 57 57 57 ►
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Government's commitment on climate policy Weakest 1 2 3 4 5 Strongest
As a small tropical island nation, Sri Lanka is especially vulnerable to the effects of global warming and climate change. Extreme weather events such as droughts, river and coastal flooding, and cyclones are expected to increase. Rising temperatures and sea levels, plus acidification of the oceans could affect major sources of livelihoods such as rice farming and fisheries. Sri Lanka is also likely to have to bear significant adaptation costs to protect its substantially coastal zone-based tourism, and tourism is vital to the country’s economy.
These and other factors have influenced climate policy in two ways. First, the government has been willing to commit to significant contributions to the global climate change mitigation effort, though its own carbon footprint is extremely low with a 0.08% share in global greenhouse gas (GHG) emissions. The government has committed to reduce GHG emissions by 14.5% and increase its forest cover by 32% by 2030. In 2019, Sri Lanka pledged to help achieve targets of the Paris Agreement on climate change by reducing dependency on fossil fuels. The country is committed to achieving Carbon Neutrality by 2050, to not increase its coal-based power plant capacity, and to ensure renewables will account for 70% of electricity generation by 2030.
Since Sri Lanka by itself can only make a marginal difference, these pledges are most likely an effort to pressure high GHG emitting nations to make significant reduction commitments.
Second, the Sri Lankan government has been planning large investments in adaptation projects, to mitigate the effects of climate change. For a foreign exchange-strapped nation dependent on imports of capital equipment and manufactured intermediates, this requires assistance from abroad. The Sri Lankan government has entered into a USD92 million financing agreement with the World Bank that would, among other things, seek to improve forecasting and early warning capabilities and
invest in landslide and flood risk mitigation in the Kelani River region.
These commitments and actions notwithstanding, climate activists and observers are not convinced the Sri Lankan government, weighed down by a host of other problems and crises, would focus on climate change investments and policies. For example, the government seems to be considering attracting substantial foreign investments in oil and gas capacity. This neglect of implementation is also attributed to the fact that the sections that are likely to be more affected by climate change are less powerful. These are the poorest population groups and neglected populations in the northern regions. But compounding the existing deprivation among these populations could provoke conflict and prove to be a threat to security for the rest of the population.
Addressing climate change is likely to be neglected also because of the severe balance of payments crisis that has overwhelmed Sri Lanka. Already facing difficulties servicing the foreign exchange costs of accumulated external debt, Sri Lanka’s export revenues and earnings from tourism fell sharply after the onset of the COVID-19 pandemic. The International Monetary Fund (IMF) too held back an instalment of an ongoing loan programme because of missed targets. Foreign exchange reserves collapsed, the country’s credit ratings fell, and Sri Lanka was being considered a bankrupt nation. These circumstances are not the most propitious for focusing on medium and long-term crises that could be precipitated by climate change.
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For months now, Sri Lanka has been on the verge of debt default, managing to meet debt payments falling due with transfers and swaps from China, India and even Bangladesh. Debt servicing has absorbed much of Sri Lanka’s available reserves; the year began with reserves down to USD1.6 billion. The government has declared it is committed to meeting payments due to its foreign creditors, even if that requires cutting back on essential imports. Shortages have hit the poor and middle classes badly, and political observers argue the country could experience food riots.
The actions of the Rajapaksa administration threaten to revive the communal and ethnic violence that has racked Sri Lanka in the recent past. In 2021, the government set up a Presidential Task Force on the theme “One country One Law” to possibly draw up a uniform civil code for all ethnic and religious denominations. In a provocative move, it appointed the ultra-nationalist Buddhist monk Galagoda Aththe Gnanasara Thero , known for propagating violence against Muslims, as the head of the task force. Thero, who had earlier been in prison, was granted a presidential pardon immediately after the 2019 Easter Sunday attacks. This is one more in a series of similar discriminatory actions that has upset minorities and could provoke minorities and trigger domestic unrest and violence.
Terrorism remains a major, long-term risk in Sri Lanka, as the Tamil separatist movement and the Easter Sunday bombings of 2019, attributed to militant Islamists, made clear. The administration’s treatment of Tamils and Muslims does not help, nor does its misuse of the Prevention of Terrorism Act against these sections and other dissidents.
Human rights organisations have for long been calling for the Act’s repeal. The European Union has reportedly held out a threat of withdrawing the benefit of its Generalized Scheme of Preferences Plus (GSP+) which would hurt textile exporters should Sri Lanka not make the act fully comply with the relevant international norms. However, the foreign exchange-starved government is unwilling to relent. Meanwhile, worsening economic conditions provide fertile ground for the spread of militancy.
The severe foreign exchange shortage Sri Lanka is experiencing heightens a range of exchange-related risks. Early in March 2022, the central bank in effect devalued the rupee by 15%, by raising the ceiling exchange rate to 230 rupees to the dollar as compared to the 200-203 ceiling that was in place from October. While this devaluation is reportedly in keeping with what the IMF would require if it is to revive its loan programme, there are likely to be more episodes of devaluation pointing to enhanced currency risks for foreign investors.
The fragile balance of payments situation could also push the government to impose restrictions on imports and controls on foreign capital flows. In fact, the decision taken in April 2021 to stop imports of chemical fertilisers, which was justified as a measure to encourage organic farming, is seen as having been driven by the need to save foreign exchange. Due to this measure, rice production in the Maha season (September-March) is projected to fall by around 30% from its normal level of 3.2 million tonnes. With exports already curtailed, restrictions on the exit of foreign capital and/or default on debt service payments are real possibilities.
In January 2022, when the Sri Lanka central bank announced that it was allocating USD500 billion for a debt repayment instalment, leading economists urged the bank to default and divert that foreign exchange to access crucial imports. This highlights the risk of sovereign default. Since the neglect of the welfare of domestic populations to service foreign debt may prove difficult to sustain, default is a real possibility.
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