The roots of Sri Lanka’s economic and political turmoil
SRI LANKANS SEE THE MESS AROUND THEM AS THE RESULT OF THE INEFFICIENT, CORRUPT AND OLIGARCHIC RULE OF THE RAJAPAKSA FAMILY. IF THE SITUATION IS NOT BROUGHT UNDER CONTROL, PROTESTS MAY LEAD TO SOCIAL VIOLENCE AND POLITICAL CHAOS
Economic mismanagement began during the Mahinda Rajapaksa regime in 2005. However, its continued ruin is due to economic laxity, a casual approach to populism and the erosion of foreign exchange reserves. There are lessons here for developing countries
Sri Lanka is on the political boil. In the midst of widespread popular protests against President Gotabaya Rajapaksa and his failed attempts to control these protests through curfew, emergency and a blackout of social media, his government lost its two-thirds majority – from 157 to 109 members in a House of
225. Besides its coalition allies, more than 40 members of the ruling party,
Sri Lanka Podujana Peramuna (SLPP), have deserted the government. The President’s moves towards reconstituting the Cabinet and forming a unity government have been rejected. The Opposition, led by Sujith Premadasa of the Samagi Jana Balawegaya (SBJ), is asking not only for his resignation but also the dissolution of the extremely powerful executive presidency. It is not interested in bailing out the government from a very difficult situation in which the latter has landed itself.
Behind this turmoil is the near-collapse of the economy. There is severe scarcity of essential commodities including food, fuel (petrol, diesel and cooking gas) and medicines. Exams have been postponed for want of ink and paper. Newsprint is not available. Power supply has been reduced to 6-8 hours a day and streetlights have been shut off to conserve power. People have died waiting in queues for food and fuel. Inflation has hit 17.5% from 5.5% last year. At the root of the problem is the steep erosion of foreign exchange reserves, from $6.9 billion in 2018 to $2.3 billion in February 2022. This is not enough to either pay for essential imports or to make $4 billion in debt payments. Sri Lanka’s external debts have grown from 88% of the Gross Domestic Product (GDP) in 2019 to 119% of GDP now. They come from four major sources; international capital markets (47%), multilateral development banks (22%), Japan (10%) and China (10%). Sri Lanka’s downgraded international credit rating has already started marginalising it from international capital markets.
The government is attributing this economic mess to natural and uncontrollable factors. The Easter terror attacks of 2019, followed by the Covid-19 pandemic, eroded Sri Lanka’s forex earnings from the tourism sector, from $7.9 billion in 2019 to $2.8 billion in 2021. The pandemic also dried up the inflow of remittances. The sudden rise in international oil prices and the Russian-Ukraine war adversely affected international supply chains. This government explanation, however, is not adequate. Experts hold that the economic mess is 30% misfortune, 70% mismanagement.
The beginning of the economic mismanagement can be traced back to the first Rajapaksa regime (2005-2014), led by President Mahinda Rajapaksa, who is now prime minister. Huge loans were accessed for infrastructure projects such as Mattala Rajapaksa Airport, Hambantota seaport and Colombo Port City (under construction), none of which have yielded credible revenues. In the second Rajapaksa regime under Gotabaya Rajapaksa starting 2019, deep tax cuts were executed to deliver on campaign promises. An unplanned ban was imposed on imports of chemical fertilisers and essential commodities, like cooking oil, to save foreign exchange. The forced introduction of organic farming by importing organic fertilisers from China did not work. Production of food items like rice and export of items like tea declined substantially. The Gotabaya government ignored consulting agencies such as Bellwether that were suggesting treasury auctions in 2021 to repay debts. Instead, the government printed money, and devalued the rupee, which worsened the debt problem and pushed up inflation.
Ordinary Sri Lankans see the economic mess around them as the result of the inefficient, corrupt and oligarchic rule of the Rajapaksa family. Six of the family members are holding ministerial berths. The government is trying to meet the peoples’ anger through harsh methods such as curfew, emergency and media restrictions. The alienation of minorities, including Muslims, has increased under the Rajapaksa regime. Muslims, Tamils and Christians are all now joining hands with the majority Sinhalese in protests against the government. If the economic situation is not brought under control soon, protests may lead to social violence and political chaos.
The Gotabaya government is reaching out to its two close neighbours, India and China, and also international funding sources like the International Monetary Fund for relief.
India has generously come forward to help the Colombo regime by offering credit lines of $1.5 billion for meeting urgent diesel and essential commodities needs. Earlier in February 2021, India provided a $400 million currency swap facility to Sri Lanka. Sri Lanka has asked for additional $1 billion support.
Indian foreign minister S Jaishankar visited Sri Lanka in the last week of March not only to attend the Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC) summit and sign maritime security agreements but also to assure the Sri Lankan people that India is a dependable neighbour in times of difficulties. All this at a time when India itself is not free from rising inflation and growing petrol prices protests is because New Delhi has strong stakes in Colombo’s political and economic stability as well as in its social harmony. Sri Lanka’s experience also offers insights to developing countries such as India that economic laxity and a casual approach in taking populist postures may prove to be expensive and harmful in the long-run.
China is also offering some $2.5 billion for currency swap and debt restructuring to help Sri Lanka tide over the immediate difficulty. Sri Lanka’s discussions with the IMF are delayed due to political confusion in Colombo. But all this support will not take Sri Lanka too far unless the government can stabilise itself and take strong and efficient measures to bring about economic discipline.