Biden Presidency Initiates Significant Policy Shifts

Sri Lanka and the Gotabaya Executive may be in for a rough ride

by Kumar David

The changes in both domestic and foreign policy initiated by the Biden Administration are quite significant. On the domestic side changes include a sharp turn in economic strategy, an energetic intervention in dealing with the pandemic, a more plural approach to race relations, positive environmentalism and rethinking border controls. I can touch only on the first today. The effect of American economic policy on Sri Lanka will be felt through the appreciation of the dollar against LKR and the possible upward movement of global interest rates both of which are bad news for a country mired in foreign debt. The determination of the US administration to chart a sharply different economic strategy from that of the last four years, and given the importance of the dollar and the size of the US economy, this will have sizeable effect on the rest of the world. I will spend a few paragraphs on this before turning to human-rights issues which are more likely to impact us directly.

It is likely that there will be an upturn in the US, Chinese and global economies in the next two quarters as the worst of the pandemic passes – fingers crossed since the devastation that covid-variants may inflict on the world is still a known unknown. The $1.9 trillion covid relief, unemployment support and handout package that Biden forced through Congress last week comes atop $2.7 trillion injected into the economy for covid relief since the start of the pandemic and Obama’s stimulus package of 2009 which finally grew to $830 billion by 2019. American Federal debt has risen to about $25 trillion; this is separate from Quantitative Easing whereby the Federal Reserve (FED) bought corporate and government bonds to stimulate the economy after the 2008-9 Great Recession. It is difficult to estimate how much of this still remains on the FED’s balance sheet but I estimate that at its peak the FED had doled out about $5 trillion.

Indications at the moment are that most economies have weathered the pandemic-induced dip with varying degrees of damage and that the next 12 to 18 months will be a period of modest recovery. The US, China and India – I am not too confident of the EU and Russia – will experience a return to pre-pandemic growth, at least for a while; others like Sri Lanka may be less fortunate for reasons I will discuss anon. The relevance of this to today’s column is how this could impact on the Sri Lankan Double-Paksa (two Rajapaksas) led state? Usually a universal upturn will benefit all players in the global market and Sri Lanka should see some increase in demand for its products but there are also three downside factors. The consequences of a very likely rise in world interest rates and appreciation of the dollar, the American led onslaught on human-rights violators and the anti-BJP backlash in Tamil Nadu. The consequences of the first of these is of course directly economic, the second and third will have political consequences with economic spill over.

Although a school known as Modern Monetary theory (MMT) thinks otherwise, it is impossible to avoid inflation if there is endless money creation. The response of central banks to inflation is to raise interest rates. True enough the FED has for a long time aimed at an average inflation rate of 2% but it has doggedly remained much lower – in fact US inflation has remained below 4% for the last 30 years despite the US Federal debt increasing from $3 trillion to $25 trillion. Now in the context of the current bout of planned expenditure the FED hopes inflation will climb from very low values to 2.4%, enabling it to raise interest rates to above 3% sometime in 2022.

This would help stabilise US monetary policy but spells bad news for heavily indebted countries like Sri Lanka. Inflation has a knock on effect on interest rates and bond yields. Without getting technical about it we can expect our debt servicing costs – Lanka will need to keep borrowing to meet its current account deficits and take new loans to service repayment and interest on existing debt – to become more onerous in the coming years as a consequence of America, China and other rich countries pouring funds into new domestic programmes. There is now talk of a new $3 trillion infrastructure programme being steered through Congress by Team Biden before the 2022 Congress elections at which the Republicans are expected to recapture some ground. Team Double-Paksa will have no option but to offer its rear to China in exchange for further loans if it is not to default on debt servicing; a new 10 billion yuan ($1.5 billion) swap-deal was signed a few days ago. The rupee briefly crossed the 200 to a US$ mark on March 17 and is at 199 at this time of writing. It will drift beyond 200 as the bludgeoning in Geneva seeps into the calculations of market players.

The post-Geneva wasteland

There has been a profound shift of foreign policy from Trump’s idiosyncratic and droll circus. The obvious change is a much greater emphasis on human rights as the Double-Paksas are learning to their cost. The UNHRC resolution calls for enhanced monitoring of Sri Lanka’s progress in reconciliation and accountability. Since the government will do damn-all, the oral update to the Council at its 48th session and written update at its 49th session will be negative (unless you believe that leopards can change their spots and tigers their stripes). A comprehensive report is to be presented at the 51st including recommendations for action. There are three Regular Sessions per year in March, June and September. Funding of $3 million for the Commissioner’s Office for this part of the work has been promised by Australia and others and monitoring will commence immediately. The Resolution had over 40 co-sponsors and there may be long term impact on trade and restrictions may be imposed on alleged miscreants.

The Biden Administration is going out on a limb to show that it is different from Trumps insane interlude. This is partly for domestic consumption and partly to correct damage that Trump did to American interests around the world. His love affair with North Korea’s Kim reduced the mighty US into a caricature; America wants NATO as much as NATO needs America and Biden now has a salvage operation on his plate both on NATO and environmentalism. These should be doable but what may be more difficult to salvage is the Iran Nuclear Deal. Iran has made further progress towards a bomb since Trump scuttled the agreement which it obviously will not be willing to reverse. The US for its part is demanding new concessions before it lifts sanctions. Most likely over time individual countries will overlook the American stand and do business with Iran as suits their own interests.

A tougher human rights regimen will be prominent. Sri Lanka will not have an easy ride with Asian countries including those who abstained in Geneva (India, Japan, Indonesia and Nepal) or for that matter those who voted in its favour such as Pakistan and the Philippines. No one will overtly assist the Sri Lankan state to defy or undercut the stipulations of the Resolution. The country seems to be sailing into uncharted waters and the horizon looks gloomy. Worst of all the Captain is an inexperienced novice and the older and shrewder First Officer is keeping out of sight except for a short holiday in Bangladesh – a successful one!

Secretary of State Antony Blinken said in Alaska: “There are a number of areas where we are fundamentally at odds, including China’s actions in Xinjiang, Hong Kong, Tibet and Taiwan . . .” America may take limited action against China over its “genocidal campaign” against Uighur Muslims. China’s top diplomat Yang Jiechi reacted strongly, warning the US against meddling in its “internal affairs” and challenging its own rights record using the Black Lives Matter as an example. The Chinese unfortunately picked a very bad example because the massive BLM movement drawing in whites, blacks and Hispanics is a demonstration of the strength not the weakness of a more open society. The attack on Putin too is focussed on issues of democratic rights and attempts to murder opposition leaders. Therefore to return to my starting point, given the turn of the Biden administration to rights issues as its foreign policy plank, Gotabaya would be wise to learn three Singaporean principles enunciated by two Prime Ministers, Lee Kuan Yew and Lee Hsien Loong.

= Always put Singapore’s interests first and make it clear to the big powers that Singapore has no intention of meddling or taking sides in geopolitical manoeuvres.

= Ensure that the Government of Singapore functions within the remit of Singaporean law and give no room for outsiders to allege that it curtails or violates the rule of law or its binding responsibilities.

= Maintain fairness between ethnic communities (Chinese, Malay and Tamil) so that rifts that open the door to outside interference are precluded.

The Sri Lankan government is not free to do any of this because the economy is in near collapse and the possibility of default on foreign debt makes it dependent on China. This undermines its ability to act as a free and independent agent. At home the regime is beholden to extremist nationalists and monks. The military is treated by the Executive as though it embodies the state. A military that has been brutalised in a civil war is unsafe. Last week I pleaded with international actors to assist the people to protect their freedoms. The mechanisms that the UNHRC has put in place to monitor the regime are admirable and will very helpful. I am confident that not even this neophyte Executive will spurn world opinion brazenly.