By Kividi Koralage
Malaysia’s economic journey during the Asian financial crisis (1997-1998) and its resistance to International Monetary Fund assistance offer significant lessons to Sri Lankans today, as Sri Lanka navigates its economic challenges marked by high debt, inflation, and declining foreign reserves. Understanding Malaysia’s approach to crisis management can provide key insights into balancing domestic interests with global financial realities.
In 1997, Southeast Asia faced a massive financial crisis, which led several states to seek IMF assistance. Malaysia, however, chose a different approach. Despite the severe economic downturn, the sharp depreciation of the ringgit, the collapsing stock market, and high levels of debt, Prime Minister Mahathir Mohamad decided against an IMF bailout.
Malaysia implemented capital controls, froze the ringgit’s exchange rate, and prioritized stabilising its domestic financial markets, without compromising economic sovereignty. These decisions were vastly contrasting and challenging to the alternative approaches taken place by Thailand and Indonesia which followed IMF programs and imposed severe fiscal austerity leading to social unrest and slower steady recoveries.
To prevent further speculative attacks on its currency, Malaysia imposed restrictions on capital outflows and trade in ringgit outside its borders. These controls insulated the domestic economy from volatile short-term capital flows.
The Malaysian government fixed the ringgit to the US dollar, which helped to stabilize currency fluctuations, prevent further devaluation and restore confidence in the economy. In addition, Malaysia used expansionary fiscal policies rather than adopting to traditional approaches of IMF austerity measures. The government increased spendings on infrastructure projects and provided stimulus to boost economic activity and job creation that resulted in enhancing livelihood of people.
Malaysia set up Danaharta, a government agency responsible for buying bad loans and recapitalizing struggling banks which provided the state to manage their debt situation effectively without IMF intervention. Mahathir’s decision was influenced by a desire to maintain control of economic policies and arguing that IMF intervention would lead to long term loss of economic sovereignty.
As Sri Lanka tackles the economic turmoil these key lessons could be drawn from Malaysia’s experience, Malaysia’s resistance to IMF intervention helped it retain control over its economic policies. For Sri Lanka, engaging with IMF doesn’t mean abandoning national priorities but could involve renegotiating terms that align with long-term development goals such as poverty alleviation, social protection and sustainable growth.
Although controversial, Malaysia’s use of capital control shielded its economy from external shocks. For Sri Lanka, managing the outflow of foreign currency, particularly during times of crisis, may prevent the rapid depletion of reserves. However, implementing these measures in an era of globalization requires careful planning to avoid investor panic.
Malaysia’s creation of a domestic mechanism to handle bad debt is a model Sri Lanka could follow. Establishing a local framework for debt restructuring and managing default risk could offer an alternative to strict IMF programs that often prioritize repaying international creditors over domestic welfare.
In addition, Malaysia’s refusal to implement harsh austerity offers a lesson in prioritizing economic growth over fiscal contraction. While Sri Lanka needs to stabilise its public finances, over-reliance on austerity could lead to social discontent and long-term economic stagnation. Instead, a balance between spending cuts and targeted investments in infrastructure, education and health may be more effective in long run.
Furthermore, Malaysia’s emphasis on long-term industrial development, infrastructure investment export diversification and transformation of the economy from primary industry to secondary and tertiary industry diversified the risk, boosting exports, while aiding Malaysia to recover quickly. Sri Lanka too should focus on diversifying its economy, boosting exports and investing in human capital to be assure sustainable growth beyond short-term crisis management.
Malaysia’s crisis management provides useful lessons, however, Sri Lanka faces difficult challenges. Malaysia had a relatively stronger institutional framework and higher foreign reserve during its crisis, allowing more flexibility in policy choices. With Sri Lanka’s expectation to join BRICS as an emerging economy, the landscape can severely been affected.
The criticisms of Bretton Woods institutions, particularly the IMF and World Bank, are highly relevant to Sri Lanka’s ongoing economic challenges and its engagement with these global financial bodies. One of the central criticisms is the one-size-fits-all approach these institutions adopt in prescribing economic solutions.
In Sri Lanka’s case, the IMF’s conditions for financial assistance often emphasize fiscal austerity, market liberalization, and privatization. While these policies are intended to stabilize the economy, they frequently result in severe cuts to public spending on essential services like education, healthcare, and social protection. This has a disproportionate impact on vulnerable populations, exacerbating inequality and increasing social unrest. In a country where economic inequality and public discontent are already significant, these measures can lead to long-term social and political instability.
The undemocratic nature of these institutions is another criticism that affects Sri Lanka. With decision-making power concentrated in the hands of wealthy nations, particularly Western countries, Sri Lanka has limited influence over the terms of financial assistance and the broader global economic policies that affect it.
As a result, the country is often left implementing reforms dictated by external actors whose priorities may not align with Sri Lanka’s long-term development goals. This imbalance reinforces a dependency on international creditors and leaves little room for Sri Lanka to pursue more tailored economic solutions that reflect its unique challenges, such as poverty alleviation and sustainable development.
The conditionality attached to IMF loans is a particular point of contention for Sri Lanka. The country has had to agree to austerity measures, including tax hikes and reductions in public sector spending, as part of its IMF agreements.
These conditions, while aimed at addressing fiscal imbalances, often worsen the economic plight of ordinary citizens by shrinking government support during times of crisis. In Sri Lanka’s case, the emphasis on stabilizing debt and repaying international creditors tends to overshadow domestic needs, such as investing in infrastructure, healthcare, and education, which are critical for long-term economic recovery and development. This approach risks deepening poverty and hindering sustainable growth.
The focus on large-scale infrastructure projects by the World Bank is also a double-edged sword for Sri Lanka. While infrastructure development is necessary, many projects have been criticized for prioritizing economic growth over social and environmental concerns. For example, some projects have led to the displacement of communities and environmental degradation, with little accountability from the institutions funding them.
In Sri Lanka, the push for large infrastructure investments, often funded by external loans, has also contributed to its unsustainable debt burden. This creates a cycle where the country is forced to seek further financial assistance, often under stringent conditions that limit its economic sovereignty.
Lastly, the lack of accountability from these institutions in the aftermath of their interventions presents a long-term issue for Sri Lanka. There are few mechanisms to hold the IMF and World Bank accountable if their policies fail or cause harm to the local population. In the case of Sri Lanka, this means that even if austerity measures or economic reforms lead to worsening conditions, there is little recourse for the country to demand changes or compensation. This erodes public trust in both the government and international institutions, leading to increased social and political unrest, as has been seen in protests against IMF-backed austerity measures.
As Sri Lanka continues to navigate its economic crisis, the criticisms of the Bretton Woods institutions underscore the limitations and risks of relying on these bodies for recovery. While financial assistance from the IMF and World Bank may be necessary in the short term, their policies could constrain Sri Lanka’s long-term development, making it crucial for the country to seek alternative strategies that better align with its own economic, social, and political realities.
Sri Lanka has been severely reliant on traditional partners like the IMF and China for financial support during its economic crisis. BRICS with the New Development Bank and potential new currency for trade presents a platform for accessing alternative sources of funding. Membership in BRICS will open new door for Sri Lanka to access more favourable terms for loans and investments particularly infrastructure projects and utilize the country as economic hub to connect the East and West.
As a member of BRICS, Sri Lanka could potentially gain greater leverage in global diplomatic affairs, positioning itself as a key player in the region and this could help Sri Lanka to navigate its geopolitical relationships, particularly with neighbouring India and regional powers like China.
However, Sri Lanka will face threats and challenges, economic stability and eligibility will be questionable due to high debt, inflation and low foreign reserves. Further Sri Lanka as a small state does not have an influential power in the global arena. While New Delhi’s stance on Colombo’s potential membership is uncertain as the tensions and rivalry enhances with Beijing and New Delhi. BRICS itself is not a homogeneous bloc consists of various dynamics and power struggles within the bloc itself.
In addition, Sri Lanka should strengthen its economic fundamentals by gaining the confidence of BRICS members. Sri Lanka must prioritize economic reforms aimed at stabilizing its currency and reducing the debt burden. Sri Lanka’s foreign policy must remain non-aligned and pragmatic, ensuring that its BRICS aspirations do not strain relations with the West.
Sri Lanka can strengthen its case for BRICS membership by positioning it as key player in the region and bolstering geo-economic stances. However, to realize the benefits of BRICS Sri Lanka must navigate both internal and external dynamics with care to ensure that its pursuits of BRICS membership align with its broader economic and foreign policy goals.
Kividi Koralage is a graduate of ECU Sri Lanka majoring in International Business. She is currently reading for her LLB and following an international relations program at the University of Aberystwyth in the UK. She is also a CIMA passed finalist and a past student of the BCIS in Colombo. She can be reached at kivikoralage345@gmail.com.
Factum is an Asia Pacific-focused think tank on International Relations, Tech Cooperation, and Strategic Communications accessible via www.factum.lk.
The views expressed here are the author’s own and do not necessarily reflect the organization’s.
