As politicians bicker and multilateral agencies dictate terms, it will be a long and painful road to recovery.
New Delhi – From an idyllic tourist destination with long stretches of sun and sand, with the best public health and education infrastructure in South Asia, to becoming a bankrupt country, unable to feed its people or run its industries, the fall for Sri Lanka has been steep and fast.
But the fall was not entirely unexpected. Experts had seen it coming and had warned those in power.
The government led by President Gotabaya Rajapaksa is accused of ignoring these warnings and crashing a once thriving economy into its current mess.
The president is also accused of arrogance, nepotism, misgovernance, and arbitrary policy decisions.
On his part, President Rajapaksa has refused to resign, blaming the opposition, the COVID pandemic, and the current conflict in Europe instead for the mess.
How Bad IS Sri Lanka’s Economic Crisis?
Very bad. Sri Lanka has a total foreign debt of $51 billion. As per the latest statement by Sri Lanka’s central bank, the country had a total foreign exchange reserve of just $1.93 billion in March. Analysts say even these reserves are depleting fast as the government uses these to import fuel and essential food.
The massive jump in the prices of many commodities after the start of the Russia-Ukraine conflict has made matters worse.
The crisis has led to massive shortages of essential commodities and empty shelves at supermarkets. There are long queues at petrol pumps and power cuts of over 10 hours every day across the island nation.
These shortages have triggered protests on the beach front outside the president’s palace in Colombo seeking the resignation of Gotabaya Rajapaksa and that of the prime minister, his brother Mahinda Rajapaksa.
These protests have added to the worsening political instability.
The Rajapaksa government is in the minority. After members of the ruling alliance quit, the main opposition alliance plans to bring a no-confidence motion in parliament during the session that convenes on April 18th. Negotiations by the Rajapaksas’ to convince erstwhile allies to rejoin their alliance too have failed so far.
The island nation’s central bank, in an expected move, announced in a statement on April 12th that it would suspend payments on all foreign debt. It said this was until it had come to an agreement with creditors on how to restructure the loans.
While Sri Lanka has bought itself some time to negotiate and plan its repayments and possible bailout, it urgently needs political stability and strong leadership to steer it through this crisis.
How Did Sri Lanka Spiral Into This Mess?
The political leadership, its arrogance, nepotism, reckless, arbitrary, and sometimes populist policies are mostly to blame.
During the last stages of the country’s 30-year civil war, the government – then – headed by Gotabaya Rajapaksa’s brother Mahinda Rajapaksa borrowed billions of dollars to buy weapons. The repayment of some of these loans is now due.
Gotabaya Rajapaksa is known as a military strategist and was the defense secretary of Sri Lanka when the army finally defeated the ethnic Tamil militant group Liberation Tigers of Tamil Eelam (LTTE). But observers say his arbitrary economic policies have pushed the nation into crisis.
The first major economic decision that was a blow to the fragile Sri Lankan economy was taken in 2019 when he decided to cut taxes after his party won the elections.
This decision was taken with little thought about how the revenue loss would be recovered. The government’s expenditure continued to spiral, and this decision meant the fiscal deficit mounted to unmanageable levels.
In April 2021, Rajapaksa imposed a nationwide ban on the import and use of chemical fertilizers and pesticides, and he ordered the country’s two million farmers to go organic.
This decision had a devastating effect on the country’s agriculture and food security. Rice production fell 20 percent in just the first six months. Long self-sufficient in rice production, Sri Lanka was forced to import $450 million worth of rice even as domestic prices for this staple surged by around 50 percent. The ban devastated the nation’s tea crop, its primary export.
This decision is estimated to have pushed half a million people into poverty in the tiny country of 21 million.
While this decision hit traditional agriculture commodity exports, the country’s other foreign exchange earning sector, tourism, was devastated by a series of national and international events.
The first blow came in April 2019 when a terror attack on a church in Colombo pushed tourist inflows down by about 30 percent. The brutal crackdown on the minority Muslim community after the attack also impacted tourist flows.
The COVID pandemic brought tourism to a grinding halt and starved the country further of foreign exchange.
The recent Russia-Ukraine conflict has been a death blow to the industry. Experts say the current political and social unrest and shortages will keep tourists out of the nation for a long time now.
The Rajapaksa family has dominated the government, with President Gotabaya Rajapaksa’s brother Mahinda being the prime minister and his brother Basil being the Finance minister. Mahinda son Namal too is a minister. All of them except Gotabaya and Mahinda were forced to resign recently after street protests. Many observers blame this blatant nepotism and the control of one family as a significant reason for misgovernance and economic turmoil.
Can Things Get Worse?
Yes. If political stability is not found soon through an acceptable transition government that addresses the immediate economic challenges, things could worsen.
Political stability is required to make tough decisions to get the economy back on track. Negotiations need to take place with multilateral agencies like the IMF and the World Bank etc., for a bailout package. A repayment moratorium and terms need to be negotiated with the creditors.
But this will not be easy. IMF and World Bank will impose strict conditions on Sri Lanka before they help. This could include higher tax rates, cuts in subsidies, and unpopular policy changes that will add to the people’s suffering.
While countries like India and China have offered help and have committed credit lines and humanitarian assistance, this too will come with strings attached.
China has already made clear that it is unwilling to write off any part of the loan it has given Sri Lanka.
The Future
The Sri Lankan economy will take many years to recover. The social unrest and anger on the streets, too, will take a long time to settle. Countries and agencies that bail out Sri Lanka will continue to dictate terms to its sovereign government for years.
Rajesh Sundaram
Rajesh Sundaram is an author and journalist based in New Delhi. Has worked with media houses like Al Jazeera, NDTV, and the India Today Group for over 26 years. He was part of the leadership teams that launched 7 news stations in various languages. These include NewsX, an English language Indian national station, News Nation in Hindi, News7Tamil in Tamil, Lok Shahi in Marathi and ANN7 in South Africa. Rajesh is passionate about new and emerging technologies for digital and television news.
