An unprecedented crisis is unfolding in Sri Lanka. The president Gotabaya Rajapaksa had declared the national emergency after violent protests quelled the island in the past weeks. The order was lifted last Tuesday when the socio-political turmoil intensified due to the mounting anger of the population over the unfolding economic crisis and the government’s mishandling of the situation. Extreme food and fuel shortages matched with blackouts and long queues have caused major disruptions into Sri Lanka’s society, which is going through the most serious economic meltdown since independence from the British in 1948.
People are scrambling to buy cooking gas, fuel, medicines – which are mostly imported – and the most basic items such as milk powder, as the country run out of foreign currency to pay for imported goods. The Sri Lankan rupee has sunk to a record low against the US dollar, annual inflation is skyrocketing and the country is walking on the edge of default. Over the past months, Sri Lanka has been battling an acute financial crisis on multiple sides, only partly triggered by the impact of Covid-19, which battered the economy, as well as mounting foreign debts, rising inflation and economic mismanagement by the government.
Sri Lanka’s cabinet has so decided to resign, besides for the prime minister, Mahinda Rajapaksa, a sibling of president Gotabaya. Rajapaksa sought to form a unity government as public unrest mounted over the handling of the economic situation. The coalition is in distress after a number of defections including the just-sworn-in financial minister weakened the cabinet which left the government in a minority in parliament. Gotabaya Rajapaksa has recently called for a 13-member task force to handle the crisis, headed by a hardline Buddhist monk known for his anti-Muslim stance.
President Gotabaya Rajapaksa is the brother of Mahinda, Sri Lanka’s Prime Minister since 2019, and previously from 2004 to 2005. Mahinda also served as President of Sri Lanka from 2005 to 2015, when the peace agreement with the Tamil Tigers was negotiated and when he also sevred as Minister of Finance, a post he covered again from 2019 to 2021. The Rajapaksa family rule the island: President, prime minister, finance minister, agriculture and sports ministers, all belong to the Rajapaksa political dynasty.
Sri Lanka has now been forced to turn to foreign assistance: China is considering offering additional aid over the $2.8 billion already granted and India has offered $2.4 billion to its neighbour. Rajapaksa’s government is currently negotiating with the International Monetary Fund and the World Bank for a bigger aid package – something he had previously resisted, for the onerous terms it requires. Sri Lanka has signed different agreements with the IMF since the liberalization of its economy back in 1977.
But what triggered the economic meltdown in Asia’s first democracy? The country – who has emerged from a 26-year-long brutal civil war between the Sinhalese (Buddhist) majority and the Liberation Tigers of Tamil Eelam (LTTE), which ended in 2009 amidst atrocities committed from both sides – in recent months experienced what economists call a ‘twin crisis’: a combined balance of payment and sovereign debt crisis. According to experts though, this crisis has long been in the making, at least for some decades.
“Today’s crisis sinks its roots into the liberalization at the end of the 70s”, according to Ahilan Kadirgamar, a political economist, Honorary Chairman of the Northern Co-operative Development Bank and Senior Lecturer at the University of Jaffna. “Sri Lanka was the first country in South Asia to open its economy in 1977-78, when international trade and the financial system were liberalized. We entered globalization even before many other countries and that led to the neglect of our own production capacity”.
He argues that in terms of trade and financial liberalization, the inflow and outflow of capitals have greatly contributed to this crisis. In between, the country went through civil war, so the government couldn’t take these reforms forward as urgently as planned, he points out. “After the end of the war there was an acceleration of these kinds of policies of both trade – where we started importing goods very freely – and also financial liberalization – where we started to float sovereign bonds in the international capital market – which led to the increase in the external debt stock”. It was a moment of great euphoria with lots of investments in infrastructures and the real estate, which slid into a bubble of speculative finance.
“After 2013-14 we were already headed towards a crisis so, again, in 2016 we went for an IMF agreement that allowed us to go ahead and borrow more in the capital market: that kind of borrowing continued, whereas our trade deficit continued to widen. The whole structure of our economy had become very dependent on the external sector” explains Kadirgamar. “And when the Covid crisis hit us as it has hit many developing countries, the situation of Sri Lanka has become much more crisis-prone and we were pushed quite quickly into deeper and deeper crisis”.
According to the political economist, the dependence from the external sector has become a huge burden in terms of debt: 40 percent of Sri Lanka’s external debt is in sovereign bonds that is swelling into a debt trap. “Every year we roll over debt with new sovereign bonds”, says Kadirgamar. He argues that when the Covid crisis hit, tourism and remittances (among the main revenues for the island country) were disrupted and the country’s rating started to fall so it could not roll over its debt. Sovereign bonds are a symptom of the broad dependency of the Sri Lankan economy. “We have become much more dependent on imports and we have been producing much less, with the difference between import and exports increasingly widening”.
Moreover, president Rajapaksa’s move to cut taxes at the end of 2019 meant that government revenues fell to historical lows of 9 percent of the GDP. “Soon after president Rajapaksa came to power, he went through tax cuts which meant that one third of our revenues was lost and therefore the government could not provide much in terms of relief during the pandemic”, explains Kadirgamar. “In 2020 it only spent about 0.8 percent of GDP towards addressing the Covid crisis, whereas most South Asian countries spent much more than that: the tax cuts made it hard for the government to provide relief”. It was the common people to suffer the most.
On top of all this, in June 2021, Sri Lanka started an organic farming program and imposed a countrywide ban on chemical fertilizers and pesticides, which is now aggravating the food crisis. The ban on all chemical fertilizers led to a surge in prices and food shortages. Agriculture is seriously distressed and even if the country wants to import fertilizers now, due to the war in Ukraine fertilizers aren’t available. “If you take paddy rice on which we are self-sufficient, the ban led to a situation where we have lost 40 percent of the production”. In a time where the country is facing a balance of payment crisis and it has no foreign exchange to import rice, this has created a lot of anger and distress.
“Already two years ago, it was clear that we were headed towards an economic crisis but the government did not take any steps: their focus was only on consolidating power”, explains the political economist. He argues that the government focused on the parliamentary elections and soon after, it passed the 20th amendment to the constitution aimed at centralizing the power in the hands of the president, then it pushed through the Port City (a controversial financial hub on reclaimed land) Bill: they were only focused on consolidating power and taking forward their projects rather than being concerned about the people”.
Experts believe it will be a long crisis. Lots of people, especially young people, are demanding the resignation of president Gotabaya Rajapaksa – who has clearly said he won’t resign. “This is also the focus of the protest by the people: they want the entire family to go home. That is the slogan”, argues Kadirgamar. “You know, Sri Lanka has a long history of democracy, we were the first country in Asia to get universal suffrage back in 1931, we have never allowed a military coup, we have thrown out very strong regimes from time to time. That kind of democratic ethos is very strong and even now out on the streets, is what we are seeing at work”.
Cover Photo: A protest by Sri Lankans in front of the Presidential Secretariat office in Galle Face, Colombo – April 9, 2022 (Pradeep Dambarage / NurPhoto via AFP).
If you like our analyses, events, publications and dossiers, sign up for our newsletter (twice a month) and consider supporting our work.